NOTE 6 - STOCKHOLDERS’ EQUITY

At December 31, 2012 the Company had 145,000,000 shares of common stock, par value of $0.001 authorized for issuance.

We may 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

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 (“June 2012 Warrants”) raising approximately $1,126,000 in net proceeds through June 30, 2012, and in July 2012 the Company issued 1,690,063 shares and 338,013 warrants (“July 2012 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 (“August 2012 Warrants”). 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 approximately $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 (“October 2012 Warrants”). 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 2012.

The common stock purchased in the 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.

On October 29, 2012, in connection with the exercise of options by our former employee, we issued 100,000 shares of our common stock for a purchase price of $4,000. The shares of common stock issued have not be registered under the Securities Act and have been issued pursuant to exemption available under Section 4(a)(2) of the Securities Act.

Advisory Agreement – Related Party

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 six months ended December 31, 2012, we recorded expense of approximately $815,000 based on the amortization of the prepaid advisory fees, and as of December 31, 2012 the total remaining balance of the prepaid advisory fees was approximately $2,375,000. Baytree Capital agreed to forego issuance of common stock to them for the first six-month period beginning June 14, 2012.

On December 14, 2012, the commencement of the second six month period, the Company accrued for issuance of the second installment of the shares for services valued at $1.84 per share, price per a share of the Company’s common stock on December 14, 2012, for the total of $184,000 due to Baytree Capital. The Company also recorded $184,000 of prepaid advisory fees to be amortized over the six months. As of the date of this report, the Company has not issued the shares and the accrued balance is included in accrued expenses in the accompanying condensed consolidated balance sheet at December 31, 2012. During the three months ended December 31, 2012, the Company recognized approximately $15,000 of expense, which is recorded in amortization of prepaid advisory fees in the accompanying condensed consolidated statements of operations.

Warrant Activity

Warrant activity during the six months ended December 31, 2012 and related balances outstanding as of that date are reflected below:

Stock-based Compensation

Flux Power has adopted the 2010 Stock Option Plan (“Option Plan”) which reserved 2,000,000 shares of common stock for issuance upon exercise of options. As of June 14, 2012, the number of shares of common stock outstanding under the Option Plan was 1,535,500, and as of June 30, 2011, the number of shares of common stock outstanding under the Option Plan was 710,000 (as adjusted 2,097,841).

As part of the Reverse Acquisition, we adopted the Flux Power Option Plan 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 with 4,536,949 new Company options based on the Share Exchange Ratio. The new options substituted by us shall continue to have, and be subject to, the substantially the same terms and conditions as before, but will be 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 six-month period ended December 31, 2012 and related balances outstanding as of that date are reflected below:

Stock-based compensation expense recognized in our condensed consolidated statements of operations for the three and six months ended December 31, 2012 and 2011 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. Stock-based compensation expense recognized in the unaudited 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 condensed consolidated statements of operations for employee option grants and non-employee option grants as follows:

During the three months ended December 31, 2012, approximately $36,000 of previously recognized stock-based compensation expense had not been earned as of the forfeiture date of the underlying stock options. Therefore, such compensation cost has been reversed during the period of forfeiture.

The remaining amount of unrecognized stock options expense at December 31, 2012 is approximately $195,000. The intrinsic value of outstanding as well as exercisable options at December 31, 2012 was $0, based on the difference between the exercise price and the value of the Company’s stock of $1.00 as December 31, 2012.

The fair value of stock options granted was estimated at the grant date using the following assumptions:

During February 2013, in connection with the exercise of options by our former employee, we issued 400,000 shares of our common stock for a purchase price of $16,000.