1.     Nature of

Operations

2.     Liquidity

As of June 30, 2011, the Company had an accumulated deficit of approximately $1,943,000. The Company also had negative cash flows from operations of approximately $743,000 for the year ended June 30, 2011. The Company has evaluated the expected cash requirements over the next twelve months, which includes, but is not limited to, investments in additional sales and marketing and product development resources, capital expenditures, and working capital requirements. The Company believes it has sufficient funds for the next twelve months from the balance sheet date, as it expects to cover its anticipated operating expenses through cash on hand, additional customer billings, and borrowings under its stockholder notes payable.

The Company expects to require additional financing in the future. The timing of the Company’s need for additional capital will depend in part on its future operating performance in terms of revenue growth and the level of operating expenses maintained.

A majority shareholder has agreed to support the Company through loan agreements. During October 2011, the Company entered into a new note payable with this majority shareholder for up to $1,000,000, maturing in September 2013. In addition, the Company’s existing debt balances were converted to equity during December 2011. See Note 10. However, there is no guarantee the Company will be able to obtain additional funds in the future or that funds will be available on terms acceptable to the Company.  If such funds are not available, management will be required to curtail its investments in additional sales and marketing and product development resources, and capital expenditures, which may have an adverse effect on the Company’s future cash flows and results of operations, and its ability to fund operations.

3.     Summary of Significant Accounting Policies

Fair value of financial instruments

The carrying values of accounts receivable, accounts payable, notes payable and accrued liabilities approximate fair value due to the short maturity of these instruments.

Use of

estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. The Company has used significant estimates in its determination of the reserve for inventory, sales returns, and warranty claims. Accordingly, actual results could differ from those estimates.

Accounts receivable are carried at their estimated collectible amounts. The Company generally requires advance deposits from its customers prior to shipment of the ordered products.

The Company has not experienced collection issues related to its accounts receivable, and has not recorded an allowance for doubtful accounts at June 30, 2011 and 2010.

Stock- based compensation

Income

taxes

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities. The Company adopted the guidance related to uncertain tax positions during the period ended June 30, 2010. The adoption of this guidance did not result in an adjustment to the financial statements.

Revenue recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, price is fixed or determinable and collectability of the selling price is reasonably assured. Delivery occurs when risk of loss is passed to the customer, as specified by the terms of the applicable customer agreements.

When implied right of return exists, the Company recognizes revenue on the sell through-method. Under this method, revenue is not recognized upon delivery of the inventory components. Instead, the Company records deferred revenue upon delivery and recognizes revenue when the inventory components are sold through to the end user.

The Company evaluates its exposure to sales returns and warranty issues based on historical information. The Company did not record an allowance for sales returns or warranty issues during 2011 and 2010.

Shipping and handling costs

The Company records shipping and handling costs charged to customers as revenue and shipping and handling costs to cost of sales as incurred.

Impairment of long-lived assets 

In accordance with authoritative guidance for the impairment or disposal of long-lived assets, if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows.

If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. The Company believes the future cash flows to be received from the long-lived assets in use will exceed the assets' carrying value, and accordingly the Company has not recognized any impairment losses during the periods ended June 30, 2011 and 2010.

Research and development

The Company is actively engaged in new product development efforts. Research and development costs relating to possible future products are expensed as incurred.

Certain previously reported amounts have been reclassified to conform to the current year’s presentation. The reclassifications had no effect on previously reported net losses.

In May 2011, the FASB amended its authoritative guidance related to fair value measurements to provide a consistent definition and measurement of fair value, as well as similar disclosure requirements between accounting principles generally accepted in the United States of America and International Financial Reporting Standards. This guidance clarifies the application of existing fair value measurement and expands the existing disclosure requirements. This guidance becomes effective for annual periods beginning after December 15, 2011. This guidance is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

New accounting standards, cont’d

5.     Commitments and Contingencies

On July 1, 2010, the Company entered into a cancelable lease for its office space. The lease provides for monthly payments of approximately $13,000, expires on June 30, 2011, and contains a one-year renewal option, which the Company exercised as of July 1, 2011. In July of 2010 the Company entered into a sublease with a related party for approximately $6,600 per month for a portion of this space. The sublease was terminated on January 1, 2012. The Company recorded rent expense, net of sublease income, of approximately $133,000 and $15,000 during the periods ended June 30, 2011 and 2010, respectively.

In March 2011, the Company entered into a brokerage agreement with a management consulting firm to provide investors to the Company. The term of the agreement is for a period of one year. The compensation to the consulting firm includes a monthly fee with additional compensation based on a percentage of the amount raised, and includes an equity component in the form of warrant coverage. The Company recorded expense of approximately $16,000 related to the brokerage agreement during the year ended June 30, 2011.

6.    Stockholders’

Equity

At June 30, 2011, the Company had 100,000,000 shares of common stock authorized for issuance.

6.    Stockholders’

Equity,

Cont’d

Holders of common stock are entitled to receive dividends, when, as, and if declared by the Board of Directors, out of any assets legally available to the Company. Dividends are declared and paid in an equal per-share amount on the outstanding shares of each series of common stock. During the periods ended June 30, 2011 and 2010, the Board of Directors neither declared nor paid common stock dividends to shareholders.

During the period ended June 30, 2010, the Company issued 11,500,000 shares of common stock in exchange for approximately $460,000 in cash, $322,000 in net assets (approximately $236,000 of inventory and prepaid inventory, and approximately $86,000 of fixed assets), $68,000 in services, and $400 in a note receivable. The note was subsequently collected in 2011.

Stock-based compensation

The Company is authorized to issue 2,000,000 shares of Common Stock under the Company’s 2010 Stock Option Plan (the “Plan”). The Plan authorizes the granting of stock options to employees, directors and consultants at exercise prices determined by the Board of Directors.

The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. The fair value of stock options was measured at the grant date using the assumptions in the table below:

Stock-based compensation,

cont’d

Expected Volatility – The result obtained by the expected volatility used is not expected to be materially different than what would be obtained if it were based on a peer group in the industry in which the Company does business.

Risk-free Interest Rate – The Company applies the risk-free interest rate based on the U.S. Treasury yield in effect at the time of the grant.

Forfeitures – Stock-based compensation expense recognized in the statement of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. The authoritative guidance related to the accounting for stock options requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on Management’s expectation of projected forfeitures.

Dividend Yield – The Company has not, and does not, intend to pay dividends.

Expected Term in Years – The expected term is based upon the Company’s consideration of the historical life of options, the vesting period of the option granted and the contractual period of the option granted. The Company calculated the expected term for employee options as the average of the contractual term of the option and the vesting period, consistent with the authoritative guidance. The Company calculated the expected term for non-employee options as the contractual term of the option.

Weighted Average Fair Value of Options Granted – Using the weighted average assumptions described above, the weighted average fair value of options granted to employees and non-employees during 2011 was $0.10 and $0.12, respectively.

Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company under the authoritative guidance.

Stock-based compensation,
cont’d

The Company has a 100% valuation allowance recorded against its deferred tax assets; therefore, the stock-based compensation has no tax effect on the statement of operations.

As of June 30, 2011, there was $9,000 of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the Plan to employees. The cost is expected to be recognized over a weighted-average period of 2.92 years.

During the period ended June 30, 2010, the Company issued 658,329 shares of common stock in exchange for services and recorded approximately $68,000 in related expense.

7.    Income Taxes

As of June 30, 2011 and 2010, a non-current deferred tax asset of approximately $774,000 and $250,000, respectively, had been recognized primarily for the temporary differences related to federal and state net operating loss carry forwards.

There was a fully offsetting valuation allowance against the deferred tax assets recorded as of June 30, 2011 and 2010. The valuation allowance may be reduced at such time as management is able to determine that it is more likely than not that this deferred tax asset will be utilized. The valuation allowance was approximately $774,000 and $250,000 at June 30, 2011 and 2010, respectively.

7.    Income Taxes,

Cont’d

At June 30, 2011, the Company had federal net operating loss carryforwards of approximately $1,645,000 and state tax net operating loss carryforwards of approximately $1,608,000. The federal and state tax loss carryforwards will begin to expire in 2029.

Utilization of the net operating loss ("NOL") carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). These ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders.

The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company's formation due to the complexity and cost associated with such a study, and the fact that there may be additional such ownership changes in the future. If the Company has experienced an ownership change at any time since its formation, utilization of the NOL carryforwards would be subject to an annual limitation. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Further, until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Due to the existence of the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact its effective tax rate. Any carryforwards that will expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance.

During the period ended June 30, 2010, the Company adopted the authoritative guidance for uncertainties in income taxes. As of June 30, 2011, the Company's tax years from inception are subject to examination by the tax authorities. The Company is not currently under examination by U.S. federal or state jurisdictions. The Company does not have any unrecognized tax benefits at June 30, 2011. The Company's policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.

8.    Related Party Transactions

Revolving notes payable - stockholder

The Company has executed another revolving note payable (Operating Capital Loan) in the amount of $1,000,000, due to the same stockholder. The note matures in May 2012 and bears interest at 8% per annum. The purpose of this note is to be used as bridge capital for operating expenses until the next round of financing. Advances on the note are collateralized by substantially all of the assets of the Company. As of June 30, 2011 and 2010, the balance outstanding was $830,000 and $0, respectively.

The outstanding balances were converted to equity during December 2011, and the note payable agreements were terminated. See Note 10.

The Company recorded interest expense of approximately $42,000 related to these loans during the year ended June 30, 2011.

During 2010 the Company entered into an agreement with a stockholder for services related to its battery products. The related party is to provide a component and consulting services to the Company. During the period ended June 30, 2010, the Company issued approximately 580,000 shares of common stock to this stockholder, in exchange for consulting services in the amount of approximately $58,000.

Company owned by officer

Flux had various transactions in 2011 and 2010 with a company owned by its Chief Executive Officer and one of the Company’s majority shareholders.

During 2011 and 2010, Flux sold approximately $149,000 and $39,000, respectively, of product to this company. The customer deposits balance received from this company at June 30, 2011 and 2010, is approximately $367,000 and $159,000, respectively. Receivables outstanding from this company as of June 30, 2011 and 2010 were $29,000 and $0, respectively. This receivable was subsequently collected in 2012.

Company owned by officer,

cont’d

In July of 2010 the Company entered into a sublease with this company for approximately $6,600 per month for a portion of this space. The sublease was terminated on January 1, 2012. During 2011 this company reimbursed $31,000 to Flux for its portion of shared expenses.

During 2010 Flux leased office space from this company and paid approximately $21,000 related to this lease. The lease ended on June 30, 2010 and was not renewed.

During 2011 and 2010 the Company sold approximately $39,000 and $7,000, respectively, of product to a company owned by another one of the Company’s major shareholders who is the Company’s former Chief Technology Officer. There were no receivables outstanding from this customer as of June 30, 2011 and 2010.

Vendor

During 2009, the Company entered into a cancelable Term Sheet agreement (the “Term Sheet Agreement”) with a company owned by another one of the Company’s major shareholders. Pursuant to the Term Sheet Agreement, the Company was appointed as a distributor of this company’s battery charging products allowing the Company to sell the products either separately or as part of an energy storage solution.  Additionally, the Company was required to develop software to enable communication between the parties’ respective products which entitles the Company to royalties for any such units sold by the related entity. During the term of the Term Sheet Agreement the Company may purchase the products at the then current price list for distributors.  Further, under the terms of the Term Sheet Agreement, if the company sells its products to a different distributor Flux Power Inc. is entitled to a distribution fee equal to 20% of the company’s gross profits on such sale.  This distribution fee and royalties are capped at a total of $200,000.  The Term Sheet Agreement expired pursuant to its terms on April 1, 2011 and the products defined in the term sheet were assigned to a different company that is owned by the same major shareholder, on September 1, 2010.  During 2011 and 2010, the Company purchased approximately $33,000 and $26,000 of prototype products that are not subject to the distribution fee or royalties pursuant to the Term Sheet Agreement.

During 2010 the Company entered into a cancelable Manufacturing Implementation Agreement (the “Manufacturing Agreement”) with the same company.  Pursuant to the terms of the Manufacturing Agreement, this company has been granted a right of first refusal to manufacture our battery management system.  The Manufacturing Agreement expires on August 1, 2014.  During 2011 and 2010, the Company paid approximately $131,000 and $1,000, respectively, to this company pursuant to the Manufacturing Agreement.

9.   Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and unsecured trade accounts receivable. The Company maintains cash balances at a financial institution in San Diego, California. Accounts at this institution are secured by the Federal Deposit Insurance Corporation. At times, balances may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes that the Company is not exposed to any significant credit risk with respect to its cash.

During 2010 the Company had one related party major customer that accounted for 31% of the Company’s total sales. No receivables were outstanding from this customer as of June 30, 2010.

During 2011 the Company had one major customer that accounted for 19% of the Company’s total sales. During 2010 the Company had four other major customers that combined accounted for 79% of the Company’s total sales. No receivables were outstanding from the major customers as of June 30, 2011 and 2010.

Based on the current financial condition of the Company’s major customer, Management believes the revenues earned during 2011 and 2010 are likely to be non-recurring in future years.

Vendor

10. Subsequent

Events

In August 2011, the Company entered into an agreement and term sheet with an entity that provides for the entity to assist the Company in its merger efforts with a public company. The agreement and term sheet expired during February 2012, and it obligated the Company to pay legal expenses of the investors not to exceed $25,000 and due diligence expenses of the entity of $15,000.

In August 2011, the Company amended the terms of its stockholder notes payable to provide for conversion of the notes payable into shares of the Company’s common stock based on the Company’s next open round of financing.

In September 2011, the Company entered into an additional note payable (Short-Term Loan) agreement with the same stockholder for $150,000. The note payable bears interest at 8% as amended, is due May 30, 2012, and is convertible into the Company’s equity securities upon completion of the Company’s next round of financing.

In October 2011, the Company entered into a revolving promissory note (Secondary Operating Capital) agreement with the same stockholder for $1,000,000. The revolving promissory note bears interest at 8%, is due September 30, 2013, as amended, and is secured by substantially all of the assets of the Company.

In December 2011, the full outstanding balance of $1,180,000 of principal on the Inventory Funding, Operating Capital and Short-Term notes payable and $84,228 of accrued interest on these notes were converted into 1,264,228 shares of common stock at a conversion price of $1.00 per share.

In March 2012, the Company entered into an additional note payable (Bridge Loan) agreement, with the same stockholder for $250,000. The note payable bears interest at 8% and is due March 7, 2014.