UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For
the fiscal year ended June 30, 2023
Commission
File Number: 001-31543
FLUX
POWER HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2685 S. Melrose Drive, Vista, California 92081
(Address of principal executive offices) (Zip Code)
877-505-3589
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share FLUX NASDAQ Capital Market
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☐ No☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐ No☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
(Do not check if a smaller reporting company)
Emerging
growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐ No☒
The
aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of December 31, 2022 (the last
business day of the registrant’s most recently completed second fiscal quarter) was approximately $45,717,000.
As
of September 8, 2023, there were 16,478,237 shares of registrant’s common stock outstanding.
Documents
incorporated by reference:None.
FLUX
POWER HOLDINGS, INC.
FORM
10-K ANNUAL REPORT
For
the Fiscal Year Ended June 30, 2023
Table
of Contents
PART I
ITEM 1. BUSINESS 5
ITEM 1A. RISK FACTORS 12
ITEM 1B. UNRESOLVED STAFF COMMENTS 22
ITEM 2. PROPERTIES 22
ITEM 3. LEGAL PROCEEDINGS 22
ITEM 4. MINE SAFETY DISCLOSURES 22
PART II
ITEM 6. RESERVED 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32
ITEM 9A CONTROLS AND PROCEDURES 32
ITEM 9B. OTHER INFORMATION 33
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTION THAT PREVENTS INSPECTIONS 33
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 34
ITEM 11. EXECUTIVE COMPENSATION 40
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 51
SIGNATURES 53
FINANCIAL STATEMENTS F-1
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Description
of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results, performances or achievements expressed or implied by
the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned
“Risk Factors” below. In some cases, you can identify forward-looking statements by terms such as “anticipates,”
“believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “would,”
and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect
to future events and are based on assumptions and subject to risks and uncertainties. You should read these factors and the other cautionary
statements made in this report and in the documents we incorporate by reference into this report as being applicable to all related forward-looking
statements wherever they appear in this report or the documents we incorporate by reference into this report. If one or more of these
factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially
from any future results, performance or achievements expressed or implied by these forward-looking statements.
Given
these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include,
among other things, statements relating to:
● our ability to manage our working capital requirements efficiently;
● our ability to obtain the necessary funds from our credit facilities;
● our dependence on the growth in demand for our products;
● our ability to retain key members of our senior management;
● our dependence on our major customers.
Also,
forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and
the documents that we reference, and file as exhibits to this report completely and with the understanding that our actual future results
may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements
publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even
if new information becomes available in the future.
Use
of Certain Defined Terms
Except
where the context otherwise requires and for the purposes of this report only:
● “Exchange Act” refers the Securities Exchange Act of 1934, as amended;
● “SEC” refers to the Securities and Exchange Commission; and
● “Securities Act” refers to the Securities Act of 1933, as amended.
PART
I
ITEM
1 – BUSINESS
Overview
We
design, develop, manufacture, and sell a portfolio of advanced lithium-ion energy storage solutions for electrification of a range of
industrial commercial sectors which include material handling, airport ground support equipment (“GSE”), and other commercial
and industrial applications. We believe our mobile and stationary energy storage solutions provide our customers a reliable, high performing,
cost effective, and more environmentally friendly alternative as compared to traditional lead acid and propane-based solutions. Our modular
and scalable design allows different configurations of lithium-ion battery packs to be paired with our proprietary wireless battery management
system to provide the level of energy storage required and “state of the art” real time monitoring of pack performance. We
believe that the increasing demand for lithium-ion battery packs and more environmentally friendly energy storage solutions in the material
handling sector should continue to drive our revenue growth.
Our
Strategy
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 demanding energy storage needs. We have established selling relationships equipment OEMs and 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 continuing our efforts to increase production capacity and
efficiencies. Our research and development efforts will continue to focus on providing adaptable, reliable and cost-effective energy
storage solutions for our customers.
Our
largest sector of penetration thus far has been the material handling sector which we believe is a multi-billion-dollar addressable
market. We believe the sector will provide us with an opportunity to grow our business as we enhance our product mix and service levels
and grow our sales to large fleets of forklifts and GSEs. Applications of our modular packs for other industrial and commercial uses,
such as solar energy storage, are providing additional current growth and further opportunities. We intend to continue to expand our
supply chain and customer partnerships and seek further partnerships and/or acquisitions that provide synergy to meeting our growth and
“building scale” objectives.
Supply
Chain Issues and Higher Procurement Costs
Disruptions from the COVID-19 pandemic over the past several years have largely abated. We addressed supply chain
challenges with improved vendor selection, and improved supply chain internal practices. However, we have experienced
shipment delays of battery packs for some forklift models that have experienced production delays. We have seen recent improvements in
shipment timing. However, there can be no assurance that our price
increases, inventory levels or any future steps we take will be sufficient to offset the rising procurement costs and manage sourcing
of raw materials and component parts effectively.
Strategic
Initiatives
To
support the continued growth of our business and long-term strategy, our highest priority in the coming quarters will be to achieve
“profitability,” specifically, cash flow breakeven. Accordingly, we will continue to pursue supply chain improvements,
gross margin expansion initiatives, and cost reductions. In addition, we are focusing on
business expansion to accelerate gross margins by:
● Capitalize on our leadership position with new offerings.
There
can be no assurance that these initiatives and efforts will be successful.
Recent
Developments
On
July 28, 2023, we entered into a certain Loan and Security Agreement (the “Agreement”) with Gibraltar Business Capital, LLC,
a Delaware limited liability company (“GBC”). The Agreement provides the Company with a senior secured revolving loan facility
(the “GBC Credit 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, the Company 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 is due monthly on the last day of the month. In the
event of default, the amounts due under the Agreement bears interest at a rate per annum equal to three percent (3.0%) above the rate
that is otherwise applicable to such amounts. We paid GBC a non-refundable closing fee for the GBC Credit Facility of $112,500 upon the execution of the Agreement. In addition, 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.
The
loans and other obligations of the Company under the GBC Credit Facility are secured by substantially all of the tangible and intangible
assets of the Company (including, without limitation, intellectual property) pursuant to the terms of the Agreement and the Intellectual
Property Security Agreement entered into by and among the Company and GBC on July 28, 2023.
In
connection with the entry into the Agreement and the repayment in full of the principal amount
outstanding under SVB Credit Facility together with total accrued and unpaid interest and related fees with a portion of the funds from
the GBC Credit Facility on July 28, 2023, we terminated the Loan and Security Agreement, dated as of November 9, 2020, as amended,
by and among SVB and the Company.
DESCRIPTION
OF OUR BUSINESS
Our
Business
We
have leveraged our experience in lithium-ion technology to design and develop a portfolio of industrial and commercial energy storage
packs that we believe provide attractive solutions to customers seeking an alternative to lead acid and propane-based power products.
We believe that the following attributes are significant contributors to our success:
Engineering
and integration experience in lithium-ion for motive applications: Our engineers design, develop, test, and service our advanced
lithium-ion energy storage solutions. We have been developing lithium-ion applications for the advanced energy storage market since 2010,
starting with products for automotive electric vehicle manufacturers. We believe our engineering experience enables us to develop competitive
solutions that meet our customers’ needs currently and in the foreseeable future.
UL
Listing: Our goal is to obtain a UL Listing for all of our Packs, and we recently completed the process for our newest source of battery cells. We believe this UL Listing provides us a significant competitive
advantage and provides assurance to customers that our technology has been rigorously tested by an independent third party and
determined to be safe, durable and reliable.
Original
equipment manufacturer (OEM) approvals: Many of our energy storage packs have been tested and approved for use by Toyota Material
Handling USA, Inc., Crown Equipment Corporation, and The Raymond Corporation, among the top global lift truck manufacturers by revenue
according to Material Handling & Logistics. We also provide a “private label” Class 3 Walkie Pallet Pack to a major forklift
OEM.
Broad
product offering and scalable design: We offer energy storage packs for use in a variety of industrial motive applications. We
believe that our modular and scalable design enables us to optimize design, inventory, and part count to accommodate natural product
extensions of our products to meet customer requirements. We have leveraged our Class 3 Walkie Pallet Pack design to develop larger energy
storage packs for larger forklifts, GSE Packs, and other industrial equipment applications. Natural product extensions, based on our
modular, scalable designs, include solar backup power for electric vehicle (“EV”) mobile charging stations and robotic warehouse
equipment.
Significant
advantages over lead acid and propane-based solutions: We believe that lithium-ion battery systems have significant advantages
over existing technologies and will displace lead acid batteries and propane-based solutions, in most applications. Relative to lead
acid batteries, such advantages include environmental benefits, no water maintenance, faster charge times, greater cycle life, longer
run times, and less energy used that provide operational and financial benefits to customers. When compared to lead acid solutions, our
energy storage solutions do not discharge carbon dioxide in the atmosphere due to lithium chemistry efficiencies. In addition, when compared
to propane-based solutions, lithium-ion systems avoid the generation of exhaust emissions and associated odor and environmental contaminates,
and maintenance of an internal combustion engine, which has substantially more parts subject to wear than an electric motor.
Proprietary
Battery Management System: Critical to our success is our innovative and proprietary versatile BMS that optimizes the performance
of our lithium-ion energy solutions and provides a platform for adding new battery pack features, including customized telemetry (pack
data and reports available anytime, anywhere) for customers. The BMS serves as the brain of the battery pack, managing cell balancing,
charging, discharging, monitoring and communication between the pack and the forklift. Our “next generation” versatile BMS
is currently part of our full product lines and provides significant product features for improved customer productivity. Our BMS also
enables ongoing feature development for reduced cost and higher performance. We have included our proprietary telemetry solution, branded
“SkyBMS” which provides real time reports on pack performance, health, and remaining useful life.
Our
Products
We
design, develop, test and sell our energy storage packs for use in a broad range of lift trucks, industrial equipment including airport
GSE, and other commercial applications. Within each of these product segments, we offer a range of power and equipment solutions.
Our
battery pack system design is adaptable with three core design modules used in our entire family of small, medium, and large pack forklift
products. A scalable modular design allows for core modules to be configured to address a variety of unique power and space requirements.
We also have the capability to offer varying chemistries and configurations based on the specific application. Currently, our energy
storage packs use lithium iron phosphate (LiFePO4) battery cells, which we source from a variety of overseas suppliers that meet our
power, reliability, safety and other specifications. Our BMS works with several battery configurations providing the flexibility
to use battery cells developed and manufactured by other suppliers. We believe we can readily adapt our energy storage packs to incorporate
new chemistries as they become available in the future in order to meet changing customer preferences and to reduce the cost of our products.
We
also offer 24-volt onboard chargers for our Class 3 Walkie Pallet Packs, and smart “wall mounted” chargers for larger applications.
Our smart charging solutions are designed to interface with our BMS and integrate easily into most all major chargers in the market.
New
Product Update
During
the second half of the Fiscal 2023, we introduced new product designs to respond to customer requests and to allow for greater operational
efficiencies for us. Some of the improvements included higher capacities for extra-long and demanding shifts, easier servicing, cost
efficiencies, and other features to solve a variety of existing performance challenges of customer operations. We intend to continue
to develop and to introduce new product designs for margin enhancement, part commonality and improved serviceability.
In Fiscal 2023, we introduced
the next generation of Material Handling and GSE products, the G2 line. These seven new products greatly extend the reach of Flux packs
in the Class 1 and 2 forklift market as well as enhancing our offerings for aircraft ground support equipment. Ranging from 36 to 80 volts
and capacities between 210 and 840 amp-hours, the G2 systems deliver power and versatility.
Industry
Overview
Historically,
lithium-ion battery solutions were unable to compete with lead acid and propane-based solutions in industrial applications on the basis
of cost. However, the supply of lithium-ion batteries has rapidly expanded, leading to price declines of eighty-five percent (85%) since
2010 according to BloombergNEF. BloombergNEF also estimates that lithium-ion battery prices, which averaged $1,160 per kilowatt hour
in 2010, were $156 per kWh in 2019 and could drop below $100 per kWh in 2024. Lithium metal itself represents well less than 5% cost
of our packs.
The
sharp decline in the price of lithium-ion batteries has made these energy solutions more cost competitive. Affordability has in turn
enabled customers to shift away from lead acid and propane-based solutions for power lift equipment to lithium-ion based solutions with
more favorable environmental and performance characteristics. We believe our position as a pioneer in the field and our extensive experience
providing lithium-ion based energy storage solutions will enable us to take advantage of this shift in customer preferences.
Lift
Equipment - Material Handling Equipment
We
focus on energy storage solutions for industrial equipment and related industrial applications because we believe they represent large
and growing markets that are just beginning to adopt lithium-ion based technology. We apply our scalable, modular designs to natural
product extensions in the industrial equipment market. These markets include not only the sale of lithium-ion battery solutions for new
equipment but also a replacement market for existing lead acid battery packs.
According
to Modern Materials Handling, worldwide new lift truck orders reached approximately 1.4 million units in 2017. The Industrial Truck Association
(“ITA”) has estimated that approximately 200,000 lift trucks had been sold yearly since 2013 in North America (Canada, the
United States and Mexico), with sales relatively evenly distributed between electric rider (Class 1 and Class 2), motorized hand (Class
3), and internal combustion engine powered lift trucks (Class 4 and Class 5). The ITA estimates that electric products represented approximately
sixty-nine percent (69%) of the North American shipments in 2020, reflecting the long-term trend of increasing mix of electric products
versus internal combustion (propane) engines. Driven by growth in global manufacturing, e-commerce and construction, Research and Markets
expects that the global lift truck market will grow at a compound annual growth rate of six and four-tenths percent (6.4%) through 2024.
Customers
Our
customers include OEMs, lift equipment dealers, battery distributors and end users. Our customers vary from small companies to Fortune
500 companies.
During
the year ended June 30, 2023, we had two (2) major customers that each represented more than 10% of our revenues on an individual basis,
and together represented approximately $38,035,000 or 57% of our total revenues. During the year ended June 30, 2022, we had four (4)
major customers that each represented more than 10% of our revenues on an individual basis, and together represented approximately $29,254,000
or 69% of our total revenues.
Shift
Toward Lithium-ion Battery Technologies
The
lithium-ion battery value proposition of higher performance, environmental benefit, and lower life cycle cost is driving an increase
in demand for safe and efficient alternatives to lead acid and propane-based power products. The lithium-ion value proposition includes
a number of factors impacting customer preferences:
Duration
of Charge/Run Times: Lithium-based energy storage systems can perform for a longer duration compared to lead acid batteries.
Lithium-ion batteries provide up to 50% longer run times than lead acid batteries of comparable capacity, or amps-per-hour rating, allowing
equipment to be operated over a long period of time between charges.
High/Sustained
Power: Lithium-ion batteries are better suited to deliver high power versus legacy lead acid. For example, a 100Ah lead acid
battery will only deliver 80Ah if discharged over a four-hour period. In contrast, a 100Ah lithium-ion system will achieve over 92Ah
even during a 30-minute discharge. Additionally, during discharge, the energy storage pack sustains its initial voltage, maximizing the
performance of the forklift truck, whereas, lead acid voltages, and hence power, decline over the working shift.
Charging
Time: Lead acid batteries are limited to one shift a day, as they discharge for eight hours, need eight hours for charging, and
another eight hours for cooling. For multi-shift operations, this typically requires battery changeout for the equipment. Because lithium
batteries can be recharged in as little as one hour and do not degrade when subjected to opportunity charging, hence, battery changeout
is unnecessary.
Safe
Operation: The toxic nature of lead acid batteries presents significant safety and environmental issues in the event of a cell
breach. During charging, lead acid batteries emit combustible gases and increase in temperature. Lithium-ion (particularly LFP) batteries
do not get as hot and avoid many of the safety and environmental issues associated with lead acid batteries.
Extended
Life: The performance of lead acid batteries degrades after approximately 500 charging cycles in industrial equipment applications.
In comparison, lithium-ion batteries last up to five times longer in the same application.
Size
and Weight: Lithium is about one-third the weight of lead acid for comparable power ratings. Lower weight enables forklift OEMs
the ability to optimize the design of the truck based on a smaller footprint for lithium-ion instead of lead acid.
Lower
Cost: Lithium-ion batteries provide power dense solutions with extended cycle life, reduced maintenance and improved operational
performance, resulting in lower total cost of ownership.
Less
Energy Used: we believe our lithium-ion batteries use 20-50% less energy based on our internal studies comparing lithium-ion
to lead acid.
Marketing
and Sales
We
sell our products through several different channels including OEMs, lift equipment dealers and battery distributors as well as directly
to end users. In the industrial motive market, OEMs sell their lift products through dealer networks and directly to end customers. Because
of environmental issues associated with lead acid batteries and to preserve customer choice, industrial lift products are typically sold
without a battery pack. Equipment dealers source battery packs from battery distributors and battery pack suppliers based on demand or
in response to customer specifications. End customers may specify a specific type and manufacturer of battery pack to the equipment dealer
or may purchase battery packs from battery distributors or directly from battery suppliers.
Our
direct sales staff is assigned to major geographies throughout North America to collaborate with our sales partners who have an established
customer base. We plan to hire additional sales staff to support our expected sales growth. In addition, we have developed a nation-wide
sales network of relationships with equipment OEMs, their dealers, and battery distributors. To support our products, we have a nation-wide
network of service providers, typically forklift equipment dealers and battery distributors, who provide local customer service to large
customers. We also maintain a customer support center and provide Tech Bulletins and training to our service and sales network out of
our corporate headquarters. We have partnered with an experienced GSE distributor, to market our lithium-ion battery packs for airport
GSE.
Manufacturing
and Assembly
Rather
than manufacture our own battery cells and be limited to a single chemistry, our battery cells are sourced from a limited number of
manufacturers located in China. We source the remainder of the components primarily from vendors in the United States. We developed
our BMS to be agnostic to a battery’s lithium-ion chemistry and cell manufacturer. Despite such flexibility, we have
experienced occasional supply interruptions in the past, and more recently, we have been forced to navigate supply chain and
transportation issues stemming from the global pandemic. We have made great strides in sourcing alternate suppliers and parts to
minimize future global supply chain disruptions. We are continuing to monitor and test potential new cell technologies on an ongoing
basis to help mitigate our supply chain risks. Using Lean Manufacturing principles our final assembly, testing and shipping of our products are completed within our ISO 9001
certified facility in Vista, California, which includes six assembly lines.
We
buy chargers from several sources, including a U.S. based supplier. Additionally, we are a qualified dealer for a well-known manufacturer
of “high capacity, modular, smart chargers” which support our larger packs.
Research
and Development
Our
engineers design, develop, test, and service our advanced lithium-ion energy storage solutions at our company headquarters in Vista,
California. We believe our strengths include our core competencies and capabilities in designing and developing proprietary technology
for our BMS, lean manufacturing processes, systems engineering, engineering application, and software engineering for both battery packs
and telemetry. We believe that our ability to develop new features and technology for our BMS is essential to our growth strategy.
As
we continue to develop and expand our product offerings, we anticipate that research and development will continue to be a substantial
part of our strategic priorities in the future. We seek to develop innovative, new and improved products for cell and system management
along with associated communication, display, current sensing and charging tools. Our research and development efforts are focused on
improving performance, reliability and durability of our energy storage solutions for our customers and on lowering our costs of production.
Competition
Our
competitors in the lift equipment market in years past have been primarily major lead acid battery manufacturers, including Stryten
Energy, East Penn Manufacturing Company, EnerSys Corporation, and Crown Battery Corporation. However, more recently our potential
customer base has become increasingly aware of the performance, lifetime cost, and environmental advantages of lithium-ion
solutions. At the same time, our competitor base offering lithium-ion solutions has grown from a number of early-stage businesses to
now include several larger companies. The increasing market activity reflects the double-digit growth of lithium-ion battery pack
adoption and sales. The sales channel includes. equipment dealers, OEMs and battery distributors.
The
key competitive factors in this market are performance, reliability, durability, safety and price. We believe we compete effectively
in all of these categories in light of our experience with lithium-ion technology, including our development capabilities and the performance
of our proprietary BMS. We believe that the UL Listing covering many of our core products is a significant differentiating competitive
advantage, and we intend to extend that advantage by seeking to obtain UL Listings for our other energy storage pack products in the coming
months. In addition, because our BMS is not reliant on any specific battery cell chemistry, we believe we can adapt rapidly to changes
in advanced battery technology or customer preferences.
Intellectual
Property
Our
success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely
on a combination of patents pending, patent applications, trade secrets, including know-how, employee and third-party nondisclosure agreements,
copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights
in our technology. In addition to such factors as innovation, technological expertise and experienced personnel, we believe that a strong
patent position is important to remain competitive.
As of June 30, 2023, we have two issued U.S. patents. We have filed three (3)
new U.S. patent applications on advanced technology related to lithium-ion battery packs. The technology behind these three (3) 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
We
do not know whether any of our efforts will result in the issuance of patents or whether the examination process will require us to narrow
our claims. Even if granted, there can be no assurance that these pending patent applications will provide us with protection.
We have obtained U.S. federal trademark registrations for Flux, Flux Power, Flux Power logo. and Lift. We have pending
applications to register SkyBMS. We also believe that we have common law trademark rights to certain marks in addition to those which
we have registered.
Suppliers
We
obtain a limited number of components and supplies included in our products from a small group of suppliers. During the year ended June 30, 2023, we had one (1) supplier who accounted for more than 10% of our total purchases,
which represented approximately $17,022,000 or 31% of our total purchases.
During the year ended June
30, 2022, we had one (1) supplier who accounted for more than 10% of our total purchases, which represented approximately $13,884,000
or 28% of our total purchases.
Government
Regulations
Product
Safety Regulations. Our products are subject to product safety regulations by Federal, state, and local organizations. Accordingly,
we may be required, or may voluntarily determine to obtain approval of our products from one or more of the organizations engaged in
regulating product safety. These approvals could require significant time and resources from our technical staff and, if redesign were
necessary, could result in a delay in the introduction of our products in various markets and applications.
Environmental
Regulations. Federal, state, and local regulations impose significant environmental requirements on the manufacture, storage,
transportation, and disposal of various components of advanced energy storage systems. Although we believe that our operations are in
material compliance with current applicable environmental regulations, there can be no assurance that changes in such laws and regulations
will not impose costly compliance requirements on us or otherwise subject us to future liabilities.
Moreover,
Federal, state, and local governments may enact additional regulations relating to the manufacture, storage, transportation, and disposal
of components of advanced energy storage systems. Compliance with such additional regulations could require us to devote significant
time and resources and could adversely affect demand for our products. There can be no assurance that additional or modified regulations
relating to the manufacture, storage, transportation, and disposal of components of advanced energy systems will not be imposed.
Occupational
Safety and Health Regulations. The California Division of Occupational Safety and Health (Cal/OSHA) and other regulatory agencies
have jurisdiction over the operations of our Vista, California facility. Because of the risks generally associated with the assembly
of advanced energy storage systems we expect rigorous enforcement of applicable health and safety regulations. Frequent audits by, or
changes, in the regulations issued by Cal/OSHA, or other regulatory agencies with jurisdiction over our operations, may cause unforeseen
delays and require significant time and resources from our technical staff.
Human
Capital Resources
As
of June 30, 2023, we had 133 employees. We engage outside consultants for business development, operations and other functions from time
to time. None of our employees is currently represented by a trade union.
Corporate
Office
Our
corporate headquarters and production facility totals approximately 63,200 square feet and is located in Vista, California. Our production
facility is ISO 9001 certified. The telephone number at our principal executive office is (760)-741-FLUX or (760)-741-3589.
Other
Information
Our
Internet address is www.fluxpower.com. We make available on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission
(“SEC”). Other than the information expressly set forth in this annual report, the information contained, or referred to,
on our website is not part of this annual report.
The
SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding
issuers, such as us, that file electronically with the SEC.
ITEM
1A - RISK FACTORS
An
investment in our common stock involves a high degree of risk. You should carefully consider the summary of risk factors described below,
together with all of the other information included in this report, before making an investment decision. If any of the following risks
actually occur, our business, financial condition or results of operations could suffer. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You also should read the section entitled “Special Note Regarding
Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance
of such statements in the context of this report. The risk factors below do not address all the risks relating to securities, business
and operations, and financial condition.
Risk
Factors Relating to Our Business
We
have a history of losses and negative working capital.
For
the fiscal years ended June 30, 2023 and 2022, we had net losses of $6.7 million and $15.6 million, respectively. We have historically
experienced net losses and until we generate sufficient revenue, we anticipate that we will continue to experience losses in the near
future.
As
of June 30, 2023 and 2022, we had a cash balance of $2.4 million and $485,000, respectively. We expect that our existing cash balances,
credit facilities, and cash resources from operations will be sufficient to fund our existing and planned operations for the next twelve
months. Until such time as we generate sufficient cash to fund our operations, we will need additional capital to continue our operations
thereafter.
We
have relied on equity financings, borrowings under short-term loans with related parties, our credit facilities and/or cash resources
from operating activities to fund our operations. However, there is no guarantee that we will be able to obtain additional funds in the
future or that funds will be available on terms acceptable to us, if at all. Any future financing may result in dilution of the ownership
interests of our stockholders. If such funds are not available on acceptable terms, we may be required to curtail our operations or take
other actions to preserve our cash, which may have a material adverse effect on our future cash flows and results of operations.
We
will need to raise additional capital or financing to continue to execute and expand our business.
While
we expect that our existing cash and additional funding available under our GBC Credit Facility, combined with funds available to us under
our subordinated line of credit and the potential net proceeds from our At-The-Market offering will be sufficient to meet our anticipated
capital resources and to fund our planned operations for the next twelve months, such sources of funding are subject to certain restrictions
and covenants and our ability to sell stock will be impacted by market conditions. If we are unable to meet the conditions provided in
the loan documents, the funds will not be available to us. In addition, should there be any delays in the receipts of key component parts,
due in part to supply chain disruptions, our ability to fulfil 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 capital to support our expanded
operations and execute on our business plan by issuing equity or convertible debt securities. In the event we are required to obtain
additional funds, there is no guarantee that additional funds will be available on a timely basis or on acceptable terms. To the extent
that we raise additional funds by issuing equity or convertible debt securities, our stockholders may experience additional dilution
and such financing may involve restrictive covenants. Newly issued securities may include preferences, superior voting rights, and the
issuance of warrants or other convertible securities that will have additional dilutive effects. We cannot assure that additional funds
will be available when needed from any source or, if available, will be available on terms that are acceptable to us. Further, we may
incur substantial costs in pursuing future capital and/or financing. We may also be required to recognize non-cash expenses in connection
with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and
results of operations. Our ability to obtain needed financing may be impaired by such factors as the weakness of capital markets, and
the fact that we have not been profitable, which could impact the availability and cost of future financings. If such funds are not available
when required, management will be required to curtail investments in additional sales and marketing and product development, which may
have a material adverse effect on future cash flows and results of operations.
In
the event of default of the Revolving Note under the GBC Credit Facility, such default could adversely affect our business, financial
condition, results of operations or liquidity.
The loans
and other obligations of the Company 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 a Loan and Security Agreement with GBC dated July 28,
2023 (the “Agreement”) and an Intellectual Property Security Agreement (the “IP Security 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. The holder of the Revolving
Note is entitled to all of the benefits and security provided for in the Agreement. All Revolving Loans shall be repaid by the Borrower
on the Maturity Date, unless payable sooner pursuant to the provisions of the Agreement. As a secured
party, upon an event of default, GBC will have a first priority right to the collateral granted to them under the Agreement and IP Security
Agreement, and we may lose our ownership interest in the assets pledged as security interest. A loss of our collateral will have a material
adverse effect on our operations, our business and financial condition.
Backlog
may not be indicative of future operating results.
Future
revenue for the Company can be influenced by order backlog. Backlog represents the dollar amount of revenues we expect to recognize in
the future from contracts awarded and in progress. Backlog substantially represents new orders. Backlog is not a measure defined by generally
accepted accounting principles and is not a measure of contract profitability. Our methodology for determining backlog may not be comparable
to methodologies used by other companies in determining their backlog amounts. The backlog values we disclose include anticipated revenues
associated with: (1) the original contract amounts; (2) change orders for which we have received written confirmations from the applicable
customers; (3) change orders for which we expect to receive confirmations in the ordinary course of business; and (4) claims that we
have made against customers. In addition, the timing of order placement, size, and customer delivery dates can create unusual fluctuations
in backlog.
We
include unapproved change orders for which we expect to receive confirmations in the ordinary course of business in backlog, generally
to the extent of the lesser of the amount management expects to recover or the associated costs incurred. Any revenue that would represent
profit associated with unapproved change orders is generally excluded from backlog until written confirmation is obtained from the applicable
customer. However, consideration is given to our history with the customer as well as the contractual basis under which we may be operating.
Accordingly, in certain cases based on our historical experience in resolving unapproved change orders with a customer, the associated
profit may be included in backlog. However, if an unapproved change order is under dispute or has been previously rejected by the customer,
the associated amount of revenue is treated as a claim.
For
amounts included in backlog that are attributable to claims, we include unapproved claims in backlog when we have a legal basis to do
so, consider collection to be probable and believe we can reliably estimate the ultimate value. Claims revenue is included in backlog
to the extent of the lesser of the amount management expects to recover or associated costs incurred.
Backlog
may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers.
Our ability to realize revenue from the current backlog is dependent on among other things, the delivery of key parts from our vendors
in a timely manner. We can provide no assurance as to the profitability of our contracts reflected in backlog.
Economic
conditions may adversely affect consumer spending and the overall general health of our customers, which, in turn, may adversely affect
our financial condition, results of operations and cash resources.
Uncertainty
about the current and future global economic conditions may cause our customers to defer purchases or cancel purchase orders for our
products in response to tighter credit, decreased cash availability and weakened consumer confidence. Our financial success is sensitive
to changes in general economic conditions, both globally and nationally. Recessionary economic cycles, higher interest borrowing rates,
higher fuel and other energy costs, inflation, increases in commodity prices, higher levels of unemployment, higher consumer debt levels,
higher tax rates and other changes in tax laws or other economic factors that may affect consumer spending or buying habits could continue
to adversely affect the demand for our products. If credit pressures or other financial difficulties result in insolvency for our customers,
it could adversely impact our financial results. There can be no assurances that government and consumer responses to the disruptions
in the financial markets will restore consumer confidence.