FLUX POWER HOLDINGS, INC. The following discussion provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. The discussion should be read in conjunction with the unaudited interim condensed consolidated Financial Statements and Notes thereto and Part II, Item 7, Management's Discussion and Analysis of Financial condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedJune 30, 2020 . Business Overview We design, develop, manufacture, and sell advanced lithium-ion energy storage solutions for lift trucks, airport ground support equipment (GSE), stationary energy storage, and other industrial and commercial applications. Our "LiFT Pack" battery packs, including our proprietary battery management system ("BMS"), seek to provide a better performing, higher value, and more environmentally friendly energy storage alternatives as compared with traditional lead acid and propane-based solutions. We believe that increasing demand for lithium-ion battery packs in the material handling sector will increase the global market opportunity for lithium-ion energy storage and provide an opportunity for us to grow our business. Our long-term strategy is to meet the growing demand for lithium-ion storage solutions, to be a supplier of choice, to target large fleets as a priority and to build scale to drive efficiencies and improve profit margins. The first step includes investing in research and development (R&D) to expand our product mix to include first-in-class products. We recently filed three new patents on advanced technology related to our lithium-ion battery packs. The technology behind these pending patents are designed to:
? increase battery life by optimizing the charging cycle,
? give users a better understanding of the health of their battery in use, and
? apply artificial intelligence ("AI") to predictively balance the cells for
optimal performance.
To achieve our objective of becoming a supplier of choice, we intend to continue
expanding our infrastructure to support to Fortune 500 fleets and their varied
demands. We intend to expand our product lines to address their needs, add
additional OEM relationships, increase production capacity, and build an
expanded nation-wide service footprint. Our strategy for sales growth places a
high priority on growing relationships with the national account sales forces of
OEMs and solidifying our brand reputation of trust and reliability. Our goal is
to improve our product offering and service levels in order to earn the
confidence of the larger fleets.
We believe energy storage solutions for the material handing sector is a
multi-billion dollar addressable market and provides companies, like ours, with
an opportunity to build scale while improving profitability. To meet our
objectives for "building scale," we intend to focus on expanding our supply
chain, growing our existing customer relationships and identifying new
partnerships and/or acquisitions that provide synergy with our strengths. As
part of our focus on securing our supply chain, we have identified our lead
supplier for cells that are used in our battery packs. However, introducing new
cells in certain packs will require us to seek UL and/or OEM approval for those
packs which may lead to delays in our ability to sell our packs and impact our
operating results. Improving our gross profit margin while growing our business
remains a high priority for us. We aim to continue to improve our gross profit
margin through internal initiatives to reduce production costs, through volume
purchases, design improvements, supplier sourcing and general economies of
scale.
To support our plans for growth, we have improved our financial strength and our
access to capital. Our outstanding debt has been reduced through a combination
of debt service and the conversion of outstanding notes into equity. In August
2020 , we closed an underwritten public offering of our common stock to raise
gross proceeds of approximately $12.4 million and our common stock commenced
trading on The NASDAQ Capital Market under the symbol "FLUX." On October 16,
2020 we filed a shelf registration on Form S-3 for $50 million to support
capital raise for business growth. In connection with the shelf registration
statement, in December 2020 , we entered into a Sales Agreement enabling us to
sell shares of our common stock in "At-The-Market" offerings from time to time.
As of May 10, 2021 , we have issued 579,181 shares of our common stock at an
average price of $14.09 per share for gross proceeds of approximately $8.2
million prior to deducting commissions and offering expenses. In November 2020 ,
we implemented a new revolving line of credit for up to $4 million with Silicon
Valley Bank which matures on November 8, 2021 . In addition, we will continue to
explore a variety of options to access the capital needed to fund our
operations.
18
Recent Developments
COVID-19 Update
As a result of the COVID-19 pandemic, the state government, California , where
our manufacturing facility is located-had issued orders requiring businesses
that do not conduct essential services to temporarily close their physical
workplaces to employees and customers. We were deemed an essential business and,
as a result, were exempt from those state orders. In March 2020 , we put in place
a number of protective measures in response to the COVID-19 outbreak.
These measures include the cancelling of all non-critical commercial air travel
and all other travel, requesting that employees limit non-essential personal
travel, eliminating all but essential third-party access to our facilities,
enhancing our facilities' janitorial and sanitary procedures, encouraging
employees to work from home to the extent their job function enables them to do
so, encouraging the use of virtual employee meetings, and providing staggered
work hours and social distancing measures for those employees associated with
manufacturing and service operations.
We cannot predict at this time the full extent to which COVID-19 will impact our
business, results and financial condition, which will depend on many factors. We
are staying in close communication with our employees, customers, suppliers and
partners, and acting to mitigate the impact of this dynamic and evolving
situation, but there is no guarantee that we will be able to do so. There are
certain challenges in the supply chain in general due to this ongoing pandemic
that may affect our suppliers to provide and deliver on time adequate amount of
the raw material needed for our planned production or at prices acceptable to
us. Should we be unable to obtain such supplies on a timely basis, our ability
to produce and sell our energy storage solutions will be harmed. Although as of
May 10, 2021 , we have not observed any material impacts to our supply of
components, the situation is fluid and we may be materially and adversely
affected by any negative impacts resulting from COVID-19.
Many of our customers are essential businesses and remain in operation, reflecting the ongoing needs for material handling and contributing to our growth trajectory. We have experience reduced demand from our customers for lithium-ion packs for airport ground support equipment due to reduction in air travel of passengers and cargo.
Future changes in applicable government orders or regulations, or changes in the interpretation of existing orders or regulations, could result in further disruptions to our business that may materially and adversely affect our financial condition and results of operations.
Credit Facility As ofJanuary 1, 2021 , there was approximately$2,403,000 of principal outstanding under the LOC. In January andMarch 2021 , certain lenders holding an aggregate of approximately$2,632,000 in principal and accrued interest outstanding under the LOC elected to convert their notes into an aggregate of 658,103 shares of common stock of which approximately$1,045,000 was held by Esenjay and was converted to 261,133 shares of common stock.
After giving effect to the issuance of such shares, as of
PPP Loan Forgiveness OnFebruary 9, 2021 , the Company was notified that SBA had forgiven repayment of the entire PPP Loan of approximately$1,297,000 in principal, together with all accrued interest of approximately$10,000 . The Company has recorded the entire amount of the forgiven loan totaling approximately$1,307,000 as other income in its statement of operations during the current fiscal quarter. As ofMarch 31, 2021 , the outstanding balance of the PPP Loan was$0 . 19 2021 Equity Incentive Plan OnApril 29, 2021 , at the Company's annual stockholders meeting, the 2021 Equity Incentive Plan ("2021 Plan") was approved by the stockholders of the Company. As ofMay 10, 2021 , there were no awards granted under the 2021 Plan, and 2,000,000 shares of common stock were available for issuance under the 2021 Plan.
Executive Employment Agreements
OnFebruary 12, 2021 , the Company entered into an Amended and Restated Employment Agreement with the Company's president and chief executive officer,Ronald F. Dutt (the "Dutt Employment Agreement"), which amends and restates the Employment Agreement between the Company andMr. Dutt effectiveDecember 11, 2012 , as amended. In addition to the inclusion of terms relating to change in control, termination, severance, benefits and the acceleration of vesting of options and restricted stock units upon certain events, the Dutt Employment Agreement memorializedMr. Dutt's continued services as the president and chief executive officer of the Company and its wholly-owned subsidiary,Flux Power, Inc. ("Flux Power "), and the terms pursuant to which he would provide such services. Pursuant to the terms of the Dutt Employment Agreement,Mr. Dutt's annual base salary is$250,000 . OnFebruary 12, 2021 , the Company entered into an Employment Agreement with the Company's chief financial officer, treasurer and secretary,Charles A. Scheiwe (the "Scheiwe Employment Agreement"). In addition to the inclusion of terms relating to change in control, termination, severance, benefits and the acceleration of vesting of options and restricted stock units upon certain events, the Employment Agreement memorializedMr. Scheiwe's continued services as the chief financial officer and secretary of the Company, and as chief financial officer/treasurer and secretary ofFlux Power . Pursuant to the terms of the Scheiwe Employment Agreement,Mr. Scheiwe's annual base salary of$190,000 . OnFebruary 12, 2021 ,Flux Power entered into an Employment Agreement with its chief operating officer,Jonathan Berry (the "Berry Employment Agreement"). In addition to the inclusion of terms relating to change in control, termination, severance, benefits and the acceleration of vesting of options and restricted stock units upon certain events, the Berry Employment Agreement memorializedMr. Berry's continued services as the chief operating officer ofFlux Power . Pursuant to the terms of the Berry Employment Agreement,Mr. Berry's annual
base salary is$190,000 . Under their respective employment agreement, Messrs. Dutt, Scheiwe and Berry, among other things, are (i) eligible for an annual target cash bonus and awards of restricted stock units or other equity-based incentive compensation consistent with his position as determined by the Board of Directors (the "Board") and the Compensation Committee; (ii) entitled to reimbursement for all reasonable business expenses incurred in performing services; and (iii) entitled to certain severance and change of control benefits contingent upon such employee's agreement to a general release of claims in favor of the company following termination of employment. Messrs. Dutt, Scheiwe and Berry are also eligible to participate in all customary employee benefit plans or programs generally made available to the senior executive officers. Messrs. Dutt, Scheiwe and Berry have each agreed to observe the terms of a standard confidentiality and non-compete agreement. Messrs. Dutt, Scheiwe and Berry employment is "at-will" and may be terminated at any time for any reason. Director Compensation
On
Independent
Non-Executive Committee Total
Director Position Base Retainer Chair Fee Member Comp
Lisa Walters X Audit Chair $ 50,000 $ 7,500 $ - $ 57,500
Dale Compensation
Robinette X Chair $ 50,000 $ 5,000 $ - $ 55,000
John A. Governance
Cosentino Jr. X Chair $ 50,000 $ 5,000 $ - $ 55,000
Michael
Johnson Board Member $ 50,000 $ - $ - $ 50,000
20
Grant of Restricted Stock Units to Non-Executive Directors
OnApril 29, 2021 , the Company's four non-executive directors were awarded RSUs covering a total of 18,312 shares of common stock under the 2014 Plan. The RSUs vest annually over a three-year vesting period with the first one third of the RSUs to be vested onApril 29, 2022 . The awards are subject to the terms and conditions of the 2014 Plan and the terms and conditions of an applicable award agreement covering each grant. The awards were approved by the Compensation committee of the Company and the Board of Directors prior to being granted.
Segment and Related Information
We operate as a single reportable segment.
Results of Operations and Financial Condition
The following table represents our unaudited condensed consolidated statement of
operations for the three months ended
Three Months Ended March 31,
2021 2020
% of % of
$ Revenues $ Revenues
Revenues $ 6,964,000 100 % $ 5,051,000 100 %
Cost of sales 5,287,000 76 % 4,402,000 87 %
Gross profit 1,677,000 24 % 649,000 13 %
Operating expenses:
Selling and administrative 3,122,000 45 % 2,584,000 51 %
Research and development 1,523,000 22 % 1,527,000 30 %
Total operating expenses 4,645,000 67 % 4,111,000 81 %
Operating loss (2,968,000 ) -43 % (3,462,000 ) -68 %
Other income (expense):
Other income 1,307,000 19 % - -
Interest expense (64,000 ) -1 % (503,000 ) -10 %
Net loss $ (1,725,000 ) -25 % $ (3,965,000 ) -78 %
Revenues
Revenues for the quarter ended March 31, 2021 , increased by $1,913,000 or 38% to
$6,964,000 , compared to $5,051,000 for the quarter ended March 31, 2020 . This
increase in revenue was directly attributable to the increase in battery pack
sales across several different series of batteries, notably M36 battery, and X
Series. The increase in revenues included sales growth of existing customers as
well as the addition of new customers.
Cost of Sales
Cost of sales for the quarter endedMarch 31, 2021 , increased by$885,000 , or 20%, to$5,287,000 compared to$4,402,000 for the quarter endedMarch 31, 2020 . The 20% increase in cost of sales is due to 38% increase in revenues, partially offset by cost reductions note below. Cost of sales as a percentage of revenues for the quarter endedMarch 31, 2021 was 76% compared to 87% for the quarter endedMarch 31, 2020 . The principal drivers of cost reductions as a percentage of revenues were simplified component designs, reduced material costs, and
lower personnel related costs. 21 Gross Profit Gross profit for the quarter endedMarch 31, 2021 increased by$1,028,000 or 158%, to$1,677,000 compared to$649,000 for the quarter endedMarch 31, 2020 . Gross profit as a percentage of revenues increased to 24% for the quarter endedMarch 31, 2021 as compared to 13% for the quarter endedMarch 31, 2020 . Improvement in the gross profit margin was primarily attributable to higher sales to both new and existing customers, and cost of sales efficiencies noted above.
Selling and Administrative Expenses
Selling and administrative expenses for the quarter endedMarch 31, 2021 increased by$538,000 or 21%, to$3,122,000 compared to$2,584,000 for the quarter endedMarch 31, 2020 . The increase was primarily attributable to increases in personnel expenses related to additional new hires as well as sales commissions, insurance expenses including professional liability and directors and officers insurance, shipping/freight expenses, and board compensation, partially offset by a decrease in stock-based compensation.
Research and Development Expense
Research and development expenses for the quarter endedMarch 31, 2021 decreased by$4,000 or less than 1%, to$1,523,000 compared to$1,527,000 for the quarter endedMarch 31, 2020 . Such expenses consisted primarily of materials, supplies, salaries and personnel related expenses, product testing, consulting, and other expenses associated with product development. This minor decrease in expenses was primarily due to staff/labor related efficiencies, partially offset by additional research expenses related to new product development including expenses related to UL certification. Interest Expense
Interest expense for the quarter endedMarch 31, 2021 decreased by$439,000 or 87% to$64,000 compared to$503,000 for the quarter endedMarch 31, 2020 . Interest expense has consisted primarily of interest expense related to our outstanding lines of credit and convertible promissory note. Interest expense decreased due to a lower average outstanding debt balance during the current quarter as certain note holders elected to convert their notes to equity. Other Income
Other income for the quarter ended
Net Loss Net loss for the quarter endedMarch 31, 2021 decreased by$2,240,000 or 56%, to$1,725,000 as compared to$3,965,000 for the quarter endedMarch 31, 2020 . The decrease was primarily attributable to increased gross profit, other income due to PPP loan forgiveness, and decreased interest expense, partially offset by an increase in operating expenses. 22
The following table represents our unaudited condensed consolidated statement of
operations for the nine months ended
Nine months ended March 31,
2021 2020
% of % of
$ Revenues $ Revenues
Revenues $ 17,932,000 100 % $ 10,585,000 100 %
Cost of sales 13,893,000 77 % 9,494,000 90 %
Gross profit 4,039,000 23 % 1,091,000 10 %
Operating expenses:
Selling and administrative 9,177,000 51 % 7,075,000 67 %
Research and development 4,624,000 26 % 3,888,000 36 %
Total operating expenses 13,801,000 77 % 10,963,000 103 %
Operating loss (9,762,000 ) -54 % (9,872,000 ) -93 %
Other income (expense):
Other income 1,307,000 7 % - -
Interest expense (618,000 ) -4 % (1,214,000 ) -11 %
Net loss $ (9,073,000 ) -51 % $ (11,086,000 ) -104 %
Revenues
Revenues for the nine months endedMarch 31, 2021 , increased by$7,347,000 or 69%, to$17,932,000 compared to$10,585,000 for the nine months endedMarch 31, 2020 . This increase in revenues was directly attributable to the increase in battery pack sales across several different series of batteries, notably M36 battery, X Series, G Series, and C Series, and was partially offset by a decrease in S Series battery pack sales. The increase in revenues included sales growth of existing customers as well as the addition of new customers. Cost of Sales Cost of sales for the nine months endedMarch 31, 2021 , increased by$4,399,000 , or 46%, to$13,893,000 compared to$9,494,000 for the nine months endedMarch 31, 2020 . The 46% increase in cost of sales is due to 69% increase in revenues, partially offset by cost reductions note below. Cost of sales as a percentage of revenues for the nine months endedMarch 31, 2021 was 77%, a decrease of 13% compared to 90% for the nine months endedMarch 31, 2020 . The principal drivers of cost reductions as a percentage of revenues were simplified component designs, reduced material costs, reduced warranty related expenses, and lower personnel related costs. Gross Profit Gross profit for the nine months endedMarch 31, 2021 increased by$2,948,000 or 270%, to$4,039,000 compared to$1,091,000 for the nine months endedMarch 31, 2020 . Gross profit as a percentage of revenues increased to 23% for the nine months endedMarch 31, 2021 as compared to 10% for the nine months endedMarch 31, 2020 . Improvement in the gross profit margin was primarily attributable to higher sales to both new and existing customers, and cost of sales efficiencies noted above. 23
Selling and Administrative Expenses
Selling and administrative expenses for the nine months endedMarch 31, 2021 increased by$2,102,000 or 30%, to$9,177,000 compared to$7,075,000 for the nine months endedMarch 31, 2020 . The increase was primarily attributable to increases in personnel expenses related to additional new hires as well as sales commission, insurance expenses including professional liability and directors and officers insurance, board compensation, accounting and legal expenses, and facility related expenses, partially offset by decreases in stock-based compensation, marketing expenses and travel costs.
Research and Development Expense
Research and development expenses for the nine months endedMarch 31, 2021 increased by$736,000 or 19%, to$4,624,000 compared to$3,888,000 for the nine months endedMarch 31, 2020 . Such expenses consisted primarily of materials, supplies, salaries and personnel related expenses, product testing, consulting, and other expenses associated with product development. The increase in expenses was primarily due to additional research expenses related to new product development including expenses related to UL certifications, staff/labor related expenses. Interest Expense Interest expense for the nine months endedMarch 31, 2021 decreased by$596,000 or 49% to$618,000 compared to$1,214,000 for the nine months endedMarch 31, 2020 . Interest expense has consisted primarily of interest expense related to our outstanding lines of credit and convertible promissory note. Also included in interest expense during the nine months endedMarch 31, 2021 was additional interest expense of approximately$174,000 of amortization of debt discount related toCleveland promissory note that was paid off inAugust 2020 . Interest expense decreased due to a lower average outstanding debt balance during the current nine-month period as certain note holders elected to convert their notes to equity, partially offset by$174,000 of debt discount amortization noted
above. Other Income
Other income for the nine months ended
Net Loss Net loss for the nine months endedMarch 31, 2021 decreased by$2,013,000 or 18%, to$9,073,000 as compared to$11,086,000 for the nine months endedMarch 31, 2020 . The decrease was primarily attributable to increased gross profit, other income due to PPP loan forgiveness, and decreased interest expense, partially offset by an increase in operating expenses. 24
Liquidity and Capital Resources
Overview As ofMarch 31, 2021 , we had a cash balance of$2,432,000 and an accumulated deficit of$62,485,000 . We believe our existing cash, combined with additional funding available under our existing LOC under the Third Amended and Restated Credit Facility Agreement and under our revolving line of credit for up to$4.0 million withSilicon Valley Bank , together with potential sales of our common stock under the Sales Agreement withH.C. Wainwright & Co., LLC providing for at-the-market sales of stock under the ATM Offering will be sufficient to meet our anticipated capital resources to fund planned operations for the next twelve months. See "Future Liquidity Needs" below. Cash Flow Summary Nine Months EndedMarch 31, 2021 2020
Net cash used in operating activities
(692,000 ) (145,000 )
Net cash provided by financing activities 16,398,000 5,893,000
Net change in cash $ 1,706,000 $ 4,000
Operating Activities
Net cash used in operating activities was $14,000,000 for the nine months ended
March 31, 2021 , compared to net cash used in operating activities of $5,744,000
for the nine months ended March 31, 2020 . The net cash used in operating
activities for the nine months ended March 31, 2021 reflects the net loss of
$9,073,000 for the period offset primarily by non-cash items including
depreciation, stock-based compensation, PPP loan forgiveness, non-cash interest
expense, non-cash facility lease expense, amortization of prepaid offering
costs, as well as, increases in accounts payable, accrued expenses, and deferred
revenue, partially offset by increases in accounts receivable, inventory, other
current assets, and decreases in customer deposits, drawdowns from factoring
facility, accrued interest, office lease payable. We continue our efforts to
improve our working capital efficiency by improving vendor terms and inventory
levels and decreasing our receivables days outstanding.
Net cash used in operating activities for the nine months ended March 31, 2020
reflects the net loss of $11,086,000 for the period offset primarily by non-cash
items including depreciation, stock-based compensation, non-cash interest
expense, non-cash facility lease expense, as well as increases in accounts
payable, drawdowns from factoring facility, and customer deposits, partially
offset by increases in accounts receivable, inventory, and other current assets.
Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was$145,000 for the nine months endedMarch 31, 2020 and consisted primarily of the purchase of leasehold improvements and warehouse equipment. Financing Activities Net cash provided by financing activities was$16,398,000 for the nine months endedMarch 31, 2021 , which primarily consisted of$19,006,000 in net proceeds from the issuance of common stock in a public offering, a private placement, and at-the-market sales of common stock under our ATM Offering which were partially offset by$2,580,000 in payments of outstanding related party borrowings, and$28,000 in payment of financing lease payable. 25
Net cash provided by financing activities was
As of
Future Liquidity Needs We have evaluated our expected cash requirements over the next twelve months, which include, but are not limited to, investments in additional sales and marketing and product development resources, capital expenditures, and working capital requirements. We believe that our existing cash, combined with additional funding available to us under our existing Third Amended and Restated Credit Facility Agreement, our existing revolving working capital line of credit withSilicon Valley Bank for$4.0 million and potential at-the-market sales of our common stock under our ATM Offering will be sufficient to meet our anticipated capital resources to fund planned operations for the next twelve months. As ofMay 10, 2021 , there is$12.0 million available for future draws under the LOC. In addition, to support our operations and anticipated growth, we intend on continue our efforts to secure additional capital from a variety of current and new sources including, but not limited to, a working capital line of credit facility, and sales of our equity securities. To the extent that we raise additional funds by issuing equity or convertible debt securities, our shareholders may experience additional dilution and such financing may involve restrictive covenants. In the event the Company required to obtain additional funds, there is no guarantee that the Company will be able to raise or obtain the additional funds or that the funds will be available on favorable terms to the Company.
Off-Balance Sheet Arrangements
None. Critical Accounting Policies
The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the unaudited financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year endedJune 30, 2020 .
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