Annual report pursuant to Section 13 and 15(d)

STOCKHOLDERS' EQUITY

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STOCKHOLDERS' EQUITY
 12 Months Ended
Jun. 30, 2014
Stockholders' Equity Note [Abstract]  
STOCKHOLDERS' EQUITY
NOTE 7 - STOCKHOLDERS’ EQUITY
 
At June 30, 2014 the Company had 145,000,000 shares of common stock, par value of $0.001 authorized for issuance, of which 93,274,113 shares were issued and outstanding.
 
In addition, at June 30, 2014, the Company is authorized to issue up to 5,000,000 shares of preferred stock, par value of $0.001 in one or more classes or series within a class pursuant to our Articles of Incorporation. There are currently no shares of preferred stock issued and outstanding.
 
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. To date the Board of Directors has neither declared nor paid common stock dividends to shareholders.
 
Common Stock and Warrants
 
Private Placements – 2014 
 
From January to March 2014, the Company conducted a Private Placement Offering of Units (“March Offering”). The Units were offered only to accredited investors and the purchase price of each Unit was $60,000, with each Unit consisting of 1,000,000 shares of common stock and 500,000 warrants. The warrants are exercisable for 5 years and each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.20 per share. On March 12, 2014, the Company completed the March Offering by selling an aggregate of 32.4 Units to 41 accredited investors resulting in the conversion of debt to equity in the amount of $550,000 and cash proceeds of approximately $1,394,000, and issuance of 32,400,000 shares of common stock and warrants to purchase up to 16,200,000 shares of common stock. The March Offering was conducted in three tranches. On January 13, 2014, we completed our first tranche of the March Offering by selling 10 Units to Esenjay for an aggregate purchase price of $600,000, of which (i) $200,000 was paid in cash, and (ii) $400,000 was a conversion of $400,000 of principal amount outstanding under the Revolving Note, as amended (see Note 5). In connection with Esenjay’s purchase of the Units, we issued 10,000,000 shares of our common stock and warrants to purchase up to 5,000,000 shares of our common stock. On February 14, 2014, we completed our second tranche of the March Offering by selling 2.8 Units to five accredited investors for an aggregate purchase price of $168,000, all of which were paid in cash. In connection with the closing of the second tranche, we issued a total of 2,800,000 shares of our common stock and warrants to purchase up to 1,400,000 shares of our common stock. On March 12, 2014, we completed the final tranche, to a cumulative total of 41 accredited investors, of the March Offering by closing on the sale of 19.6 Units for total purchase price of $1,176,000, pursuant to which we issued 19,600,000 shares of common stock and warrants to purchase up to 9,800,000 shares of common stock. Esenjay participated in the final tranche by purchasing a total of 2.5 Units for an aggregate purchase price of $150,000, of which the $150,000 was a conversion of principal amount outstanding under the Revolving Note, as amended (see Note 5).
 
On June 11, 2014, the Company converted all $2,586,000 of outstanding principal and $304,000 of accrued interest related to the Revolving Note, Bridge Note and Line of Credit, into common stock and warrants, eliminating all of Flux’s long-term debt. Flux Power’s largest shareholder, Esenjay Investments LLC, converted all of its long-term debt and accrued interest into 12.1 million shares of Flux Power restricted common stock at a price of $0.24 per share. Esenjay was also granted 3-year warrants to purchase 1.9 million shares of common stock at $0.30 per share, as an incentive for the conversion.
 
All of the above mentioned debt conversions have been accounted for as a capital transaction in accordance with FASB ASC Topic No. 470-50-40, “Debt, Modifications and Extinguishments”. Accordingly, no gain or loss has been recognized.
 
Security Research Associates Inc. (“SRA”) of San Francisco served as Company’s placement agent in connection with the March Offering. The Company engaged SRA for services rendered in conjunction with this March Offering and paid cash compensation in the amount of 9% of the gross proceeds raised and a warrant to purchase the number of shares of common stock equal to 9% of the aggregate gross proceeds from the March Offering received by the Company from all investors placed by SRA divided by $0.06 per share. The Company paid SRA $107,460 and issued a warrant to purchase 1,791,000 shares of our common stock at an exercise price of $0.06 for its services as the Company’s private placement agent in the March Offering. The newly appointed director and executive chairman of the Board of Directors, Timothy Collins, is the Chief Executive Officer, President, director and shareholder of SRA.
 
In connection with the March Offering, the Company inadvertently in error issued duplicate stock certificates representing an aggregate of 600,000 shares of common stock of the Company. As a result, there was an additional 600,000 shares of common stock issued and outstanding on the records of the Company’s transfer agent as of June 30, 2014. The Company has already corrected this error. The number of shares of common stock issued and outstanding reflected in the financial statements and these notes exclude 600,000 shares of common stock which were inadvertently issued in error. All such common share certificates have been returned as of July 2014.
 
The securities offered and sold in the Offering have not been registered under the Securities Act of 1933, as amended (“Securities Act”). The Securities were offered and sold to accredited investors in reliance upon exemptions from registration pursuant to Rule 506 promulgated thereunder.
 
Private Placements - 2013
 
During the fiscal year ended June 30, 2013, the Company issued an aggregate of 2,353,093 shares of common stock and 507,019 five (5) year warrants to purchase shares of our common stock at an exercise price of $0.41 per share, resulting in aggregate proceeds of approximately $980,000, pursuant to private placement transactions.
 
In June 2012, we initiated a private placement of our common stock and warrants to accredited investors to purchase up to 8 Units, at a price of $500,000 per Unit, with each Unit consisting of 1,207,185 shares of our common stock and 241,437 five (5) year warrants to purchase one share of our common stock at an exercise price of $0.41 per share. The Company issued 2,813,000 shares and 562,551 warrants raising approximately $1,126,000 in net proceeds through June 30, 2012, and in July 2012 of fiscal 2013 the Company issued 1,690,063 shares and 338,013 warrants raising net proceeds of approximately $672,000.
 
In August 2012, the Company commenced a private placement of its common stock and warrants to accredited investors to purchase up to 8 Units for a purchase price of $250,000 per Unit, with each Unit consisting of 603,594 shares of our common stock and 120,719 five (5) year warrants to purchase one share of common stock at an exercise price of $0.41 per share. In connection with this private placement, on August 31, 2012, we sold an aggregate of 603,594 shares of common stock and issued 120,719 warrants, raising net proceeds of $231,000.
 
In October 2012, the Company continued the private placement of its common stock and warrants to an accredited investor to purchase up to 8 Units for a purchase price of $250,000 per Unit, with each Unit consisting of 603,592 shares of our common stock and 120,718 five (5) year warrants to purchase one share of common stock at an exercise price of $0.41 per share. In connection with this private placement, on October 30, 2012, we sold an aggregate of 241,436 shares of common stock and issued 48,287 warrants raising net proceeds of approximately $77,000. The October private placement closed out the round of financing which began in June.
 
The common stock purchased in the above referenced private placements and the common stock issuable upon exercise of warrants have piggyback registration rights. The securities offered and sold in the private placement have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act.
 
Repricing of Warrants.
 
The Offering (see above) included warrants issued at a price of $0.20, which triggered an anti-dilution protection for Company’s warrant holders issued under our 2012 Private Placements that were issued for an offering price of our common stock at $0.41. As a result, the Board of Directors gave approval to amend the exercise price of 2,907,347 common share purchase warrants issued by way of our completed 2012 Private Placements, which included the July, August and October 2012 closings of 507,019, our June 2012 closing of 562,551 and the Baytree advisory agreement warrants of 1,837,777. The exercise price of the 2,907,347 common share purchase warrants was reduced to $0.27 from $0.41 per warrant share and applies to all warrants issued in our 2012 Private Placements. On April 2, 2014, the Company provided notice of adjustment to the Warrant Holders in accordance with the applicable section of the warrant certificate. The remaining terms, including expiration dates, of all warrants remain unchanged. The modified exercise price of the warrants to $0.27 resulted in a repricing modification charge of $98,000 that was recorded as a cost of capital raised in connection with the offering.
 
Option Exercise
 
In connection with a cashless exercise by one of the Company’s option holder, on April 28, 2014, the Company issued 258,536 shares of common stock, based on per share price of $0.32. The shares of common stock issued have not been registered under the Securities Act and have been issued pursuant to exemption available under Section 4(a)(2) of the Securities Act.
 
Advisory Agreements
 
Baytree Capital On June 14, 2012, the Company entered into an Advisory Agreement (“Advisory Agreement”) with Baytree Capital, a significant shareholder of the Company, pursuant to which Baytree Capital agreed to provide business and advisory services for 24 months in exchange for 100,000 restricted shares of our newly issued common stock at the commencement of each six (6) month period in return for its services, and a warrant to purchase 1,837,777 restricted shares of our common stock for a period of five (5) years at an exercise price of $0.41 per share (“Advisory Agreement Warrants”). In connection with this agreement, the estimated fair value of the warrants issued in the approximate amount of $3,258,000 was recorded as prepaid advisory fees, which is expected to be amortized on a pro-rata basis over the term of the agreement. During the twelve months ended June 30, 2014 and 2013, we recorded expense of approximately $1,561,000 and $1,629,000, respectively, based on the amortization of the prepaid advisory fees. As of June 30, 2014 there was no remaining unamortized balance of the prepaid advisory fees.
 
In accordance with the Advisory Agreement, on December 14, 2012 which was the beginning of the second six-month period, a liability was recorded based on that day’s stock price for the anticipated issuance of 100,000 shares of common stock. On February 25, 2013 we issued Baytree Capital 100,000 restricted shares of our newly issued common stock as previously accrued, for the second six-month period beginning June 14, 2012. These shares were valued at $0.90 per share, based on the price per share of the Company’s common stock on February 25, 2013, for the total of $90,000 due to Baytree Capital. The Company recorded $90,000 of prepaid advisory fees that were amortized through June 14, 2013, when the next 100,000 common shares were due to be issued to Baytree Capital. The prepaid advisory fees were adjusted for amortization already recognized from the original issuance due date of December 14, 2012.
 
In accordance with the Advisory Agreement, on June 14, 2013 which was the beginning of the third six-month period, a liability was recorded based on that day’s stock price for the anticipated issuance of 100,000 shares of common stock. These shares were valued at $0.60 per share, based on the price per share of the Company’s common stock on June 14, 2013, for the total of $60,000, which is recorded on the Company’s balance sheet and was included in accrued expenses. On July 9, 2013 we issued Baytree Capital 100,000 restricted shares of our newly issued common stock as accrued for as of June 30, 2013, for the third six-month period.
 
On December 14, 2013, the commencement of the fourth and final six-month period, the Company accrued for the fourth installment of the shares for services valued at $0.05 per share, the price per share of the Company’s common stock on December 14, 2013, for the total of the $5,000 due to Baytree Capital. The Company also recorded $5,000 of prepaid advisory fees to be amortized over six months. On January 21, 2014, we issued Baytree Capital 100,000 restricted shares of our newly issued common stock at $0.07 per share. As of June 30, 2014, $0 remains in prepaid expense and $19,000 has been recognized as consulting expense during the year ended June 30, 2014. 
 
Caro Capital, LLC. On April 4, 2013, the Company entered into an Advisory Agreement (“Agreement”) with Caro Capital, LLC (“Caro Capital”), pursuant to which Caro Capital agreed to provide business and advisory services, management consulting, shareholder information, and public relations for six (6) months in exchange for 500,000 restricted shares of our newly issued common stock. Upon execution of the Agreement, Caro Capital was issued 100,000 shares of restricted stock per the contract terms, which were valued at $44,000 based on the closing price of our common stock on the issuance date. The contract calls for subsequent issuance of 100,000 shares at 30-day increments to the first tranche. Per the terms of the Agreement, Caro Capital is entitled to the second and third tranche issuance of 100,000 shares of restricted stock each.
 
The second tranche shares were valued at $0.50 per share, based on the price per share of the Company’s common stock on May 4, 2013, when the second tranche shares were due to be issued, for the total of $50,000. The costs associated with the 100,000 shares to be issued of approximately $50,000 were recorded as consulting expense during the fourth quarter ended June 30, 2013. On August 13, 2013, the Company issued 100,000 restricted shares of our newly issued common stock at $0.08 per share.
 
The third tranche shares were valued at $0.32 per share, based on the price per share of the Company’s common stock on June 4, 2013, when the third tranche shares were due to be issued, for the total of $32,000. The costs associated with the 100,000 shares to be issued of approximately $32,000 were recorded as consulting expense during the fourth quarter ended June 30, 2013.  On June 3, 2013, the Company terminated the Agreement with Caro Capital effective July 3, 2013.
 
Catalyst Global LLC. On October 14, 2013, the Company entered into a contract with Catalyst Global LLC (“CGL”), pursuant to which CGL agreed to provide investor relations services for 12 months in exchange for monthly fees of $2,000 per month and 450,000 shares of restricted common stock issued as follows: 180,000 shares upon signing and the balance vesting pro rata upon each of the three-, six-, and nine-month anniversaries of the contract. The initial tranche was valued at $0.05 per share at $9,000 when issued on November 8, 2013. During the twelve months ended June 30, 2014, we recorded expense of approximately $6,000. As of June 30, 2014, the total remaining balance of the prepaid investor relation services is approximately $3,000, and is included in other current assets and will be amortized over the next 12 months.
 
On March 19, 2014, the Company issued the second tranche shares valued at $ 0.38 per share, based on the price per share of the Company’s common stock. The costs associated with the 90,000 shares issued of $34,000 and will be amortized over the 12 months.  During the twelve months ended June 30, 2014, we recorded expense of approximately $18,000. As of June 30, 2014, the total remaining balance of the prepaid investor relation services is approximately $16,000, and is included in other current assets and will be amortized over the next 12 months.
 
On April 23, 2014, the Company issued the third tranche shares valued at $ 0.30 per share, based on the price per share of the Company’s common stock. The costs associated with the 90,000 shares issued of $27,000 and will be amortized over the 12 months. During the twelve months ended June 30, 2014, we recorded expense of approximately $13,000. As of June 30, 2014, the total remaining balance of the prepaid investor relation services is approximately $14,000, and is included in other current assets and will be amortized over the next 12 months.
 
Security Research Associates, Inc. On June 26, 2013, the Company entered into an agreement with Security Research Associates, Inc., (“SRA”), pursuant to which SRA agreed to provide business and advisory services. SRA served as our placement agent in connection with the Company’s 2014 Private Placement Offering (“Offering”) and was paid cash compensation in the amount of 9% of the gross proceeds raised and a warrant to purchase the number of shares of our common stock equal to 9% of the aggregate gross proceeds from the Offering received by the Company from all investors (excluding Esenjay) placed by SRA divided by $0.06 per share. SRA was paid $107,460 in cash and reimbursement for related expenses of approximately $10,000 and issued a warrant to purchase 1,791,000 shares of our common stock at an exercise price of $0.06 for its services as our private placement agent in the Offering. In connection with this agreement, the estimated fair value of the warrants issued in the approximate amount of $107,460 (1,791,000 warrants at $0.06) and related expenses of approximately $10,000 was recorded as an offset to equity related to expense associated with the Offering. The Company’s contract with SRA has been amended to reflect renewal to support the March 2014 placement and the recent August 2014 placement.
 
Institutional Analyst Holdings, Inc. On December 18, 2013, the Company entered into a contract with Institutional Analyst Holdings, Inc. (“IA”), pursuant to which IA agreed to provide investor relations and report writing services for six months in exchange for an initial payment of $2,500 and 400,000 restricted shares of the Company’s common stock upon execution of the contract. An additional 400,000 restricted shares of the Company’s common stock would be issued 60 days from the date of the contract. The initial tranche was valued at $24,000 based on the share price of $.06 per share on the date of issuance, December 18, 2013. During the year ended June 30, 2014, we recorded expense of approximately $24,000. As of June 30, 2014, there was no remaining unamortized balance of the prepaid investor relation services. On February 18, 2014, an agreement was reached between the Company and IA to convert the remaining compensation of 400,000 common stock shares to 400,000 non-qualified stock options at an exercise price of $0.06. These 400,000 options were formally issued on July 14, 2014, and were fully vested upon issuance. An accrual of $76,000 was made at June 30, 2014 to support the anticipated grant of 400,000 options on July 14, 2014. The value of the accrual has been determined by using the Black-Scholes model on the day the options were due to be issued.
  
Warrant Activity
 
Warrant activity during the twelve months ended June 30, 2014 and related balances outstanding as of that date are reflected below:
 
 
 
Number
 
Weighted
Average
Exercise
Price Per
Share
 
Remaining
Contract
Term (#
years)
 
Shares purchasable under outstanding warrants at June 30, 2013, re-priced
 
 
2,907,347
 
$
0.27
 
 
2.96 - 3.34
 
Stock purchase warrants issued
 
 
19,891,000
 
 
0.20
 
 
2.95-4.70
 
Stock purchase warrants exercised
 
 
-
 
 
-
 
 
 
 
Shares purchasable under outstanding warrants at June 30, 2014
 
 
22,798,347
 
$
0.21
 
 
2.95 - 4.70
 
 
Stock-based Compensation
 
We adopted the Flux Power Option Plan in June 2012, under which 2,000,000 shares of common stock were reserved for issuance, and all stock options of Flux’s outstanding as of June 14, 2012, whether or not exercised and whether or not vested were substituted by us at that time, with 4,536,949 new Company options based on the Share Exchange Ratio. The substituted options continue to have, and are subject to, the substantially the same terms and conditions as before, but are convertible into shares of our common stock, as adjusted given effect to the Share Exchange Ratio. However, we will not be able to grant additional options under the Option Plan.
 
Activity in options during the twelve months ended June 30, 2014 and related balances outstanding as of that date are reflected below:
 
 
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contract
Term (# years)
 
Outstanding at June 30, 2013
 
 
2,527,388
 
$
0.15
 
 
5.85
 
Granted
 
 
4,910,973
 
 
 
 
 
 
 
Exercised
 
 
(295,470)
 
 
 
 
 
 
 
Forfeited and cancelled
 
 
(807,196)
 
 
 
 
 
 
 
Outstanding at June 30, 2014
 
 
6,335,695
 
$
0.19
 
 
8.04
 
Exercisable at June 30, 2014
 
 
3,272,169
 
$
0.16
 
 
6.98
 
 
Stock-based compensation expense recognized in our consolidated statements of operations for the twelve months ended June 30, 2014 and 2013 includes compensation expense for stock-based options and awards granted, based on the grant date fair value. For options and awards granted, expenses are amortized under the straight-line method over the expected vesting period. Stock-based compensation expense recognized in the condensed consolidated statements of operations has been reduced for estimated forfeitures of options that are subject to vesting. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
 
We allocated stock-based compensation expense included in the consolidated statements of operations for employee option grants and non-employee option grants as follows:
 
Years ended June 30,
 
2014
 
2013
 
Research and development
 
$
9,000
 
$
10,000
 
General and administration
 
 
230,000
 
 
84,000
 
Total stock-based compensation expense
 
$
239,000
 
$
94,000
 
 
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 (annualized percentages) in the table below:
 
 
 
2014
 
 
2013
 
Expected volatility
 
 
100
%
 
 
100
%
Risk free interest rate
 
 
1.7% to 1.8
%
 
 
0.8% to 3.0
%
Forfeiture rate
 
 
17
%
 
 
5
%
Dividend yield
 
 
0
%
 
 
0
%
Expected term
 
 
5 years
 
 
 
5-10 years
 
 
The remaining amount of unrecognized stock-based compensation expense at June 30, 2014 is approximately $418,000.
 
The following table summarizes by price range the number, weighted average exercise price and weighted average life (in years) of options outstanding and the number and weighted average exercise price of exercisable options as of June 30, 2014.
 
Price Range
 
Total Outstanding
 
Total Exercisable
 
 
 
Number
of
Shares
 
Weighted
Average
 
Number
of
Shares
 
Weighted
Average
Exercise
Price
 
 
 
 
 
 
Exercise
Price
 
Life
 
 
 
 
 
 
 
$0.04 - $0.41
 
 
6,335,695
 
$
0.19
 
 
8.04
 
 
3,272,169
 
$
0.16
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
6,335,695
 
$
0.19
 
 
8.04
 
 
3,272,169
 
$
0.16
 
 
The intrinsic value of exercisable options at June 30, 2014 was approximately $519,000.