What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-10 · 546 added, 307 removed, 85 unchanged (91% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial

statements and related condensed notes thereto, which are included in Part I of this report and the consolidated financial statements

of the Company and notes thereto for the years ended December 31, 2020 and 2021, included in the Company’s prospectus, dated March

31, 2022, filed with the SEC in accordance with Rule 424(b) of the Securities Act on April 4, 2022 (the “Prospectus”) in

connection with the Company’s initial public offering.

Our future financial condition and results of operations, as well as any

forward-looking statements, are subject to inherent risks and uncertainties that may adversely impact our operations and financial results.

These risks and uncertainties are discussed in the Prospectus.

following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial

statements and related notes thereto, which are included in Part I of this report.

MANAGEMENT’S DISCUSSION

AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited

interim financial statements and related notes for the three months ended March 31, 2023 and 2022 included elsewhere in this Quarterly

Report on Form 10-Q (“Quarterly Report”) as well as our audited financial statements and related notes for the fiscal years

ended December 31, 2022 and 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC

on March 30, 2023 (the “2022 Form 10-K”).

Our future financial condition and results of operations, as well as any forward-looking

statements, are subject to inherent risks and uncertainties that may adversely impact our operations and financial results.

and uncertainties are discussed in this Quarterly Report, including in Item 1A “Risk Factors” of Part II Other Information

and “Cautionary Notice Regarding Forward-Looking Statements” below.

Percentage amounts included in this section have not

in all cases been calculated on the basis of rounded figures, but on the basis of such amounts prior to rounding.

For this reason, percentage

amounts in this section may vary from those obtained by performing the same calculations using the figures in our consolidated financial

statements included elsewhere in this Quarterly Report on Form 10-Q.

Certain other amounts that appear in this section may not sum due

focus on the design, assembly, manufacturing, and sales of lithium iron phosphate (LiFePO4) batteries and supporting accessories for

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applications.

We design, manufacture, and distribute high-powered, lithium battery solutions using ground-breaking concepts with a creative

We design, assemble, and distribute high-powered, lithium battery solutions using ground-breaking concepts with a creative

sales and marketing approach.

Our product offerings include some of the most dense and minimal-footprint batteries in the RV & Marine

We believe that our product offerings include some of the most dense and minimal-footprint batteries in

the RV & Marine industry.

We are developing the e360 Home Energy Storage:

a system that we expect to significantly change the industry in barrier price,

flexibility, and integration.

We are deploying multiple IP strategies with cutting-edge research, manufacturing processes, and unique

products to sustain and scale the business.

We currently have customers consisting of dealers, wholesalers, and original

a system that we expect to significantly change the industry

in barrier price, flexibility, and integration.

We are deploying multiple IP strategies with cutting-edge research and unique products

to sustain and scale the business.

We currently have customers consisting of dealers, wholesalers, private label customers and original

equipment manufacturers who are driving revenue and brand awareness nationally.

corporate headquarters are based in Redmond, Oregon, with assembly in the United States and suppliers based in Asia.

We are currently

in the process of building out manufacturing capacity at our corporate headquarters.

Our long-term target is to onshore the manufacturing

of most of our components and assemblies, including cell manufacturing, to the United States.

main target markets are the RV & Marine industry.

We believe that we are currently well positioned to capitalize on the rapid market

corporate headquarters are based in Redmond, Oregon, with assembly in the United States and suppliers based in Asia and Europe.

currently in the process of building out manufacturing capacity at our corporate headquarters.

Our long-term target is to onshore the

manufacturing of most of our components and assemblies, including cell manufacturing, to the United States.

main target markets are currently the RV & Marine industry.

We believe that we are well positioned to capitalize on the rapid market

conversion from lead-acid to lithium batteries as the primary method of power sourcing in these industries.

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storage markets, we aim to provide additional capacities to the ever-expanding electric forklift and industrial material handling markets.

VPR 4EVER product line, which is manufactured for the RV/Marine industry, was launched in December 2020.

The VPR 4EVER product line,

through its rapid sales growth, has shown to be a preferred conversion solution for lead-acid batteries.

We believe that our e360 Home

Energy Storage system has strong revenue potential with recurring income opportunities for us and our associated sales partners.

e360 product line, which is manufactured for the RV/Marine industry, was launched in December 2020.

The e360 product line, through its

rapid sales growth, has shown to be a preferred conversion solution for lead-acid batteries.

We believe that our e360 Home Energy Storage

system has strong revenue potential with recurring income opportunities for us and our associated sales partners.

products provide numerous advantages for various industries that are looking to migrate to lithium-based energy storage.

They incorporate

detailed-oriented design, engineering, and manufacturing, and strong case materials and internal and structural layouts, and are backed

by responsive customer service.

detailed-oriented design and engineering and strong case materials and internal and structural layouts and are backed by responsive customer

COMPETITIVE STRENGTHS

believe the following strengths differentiate Expion360 and create long-term sustainable competitive advantages.

Capacity to Lead Acid Competitors

Superior Capacity

to Lead Acid Competitors

batteries have always been the standard in RV and marine transportation vehicles.

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at a .1C rate).

Pack Flexibility

Battery Pack Flexibility

battery packs are also highly flexible, designed to be moved and used in various applications seamlessly.

We plan to onshore our semi-automated

pack assembly in Redmond, Oregon beginning in the fourth quarter of 2022.

This should allow us to use a more flexible approach to forming

and creating new battery packs.

By onshoring, we expect to be able to react to market demands at a much quicker pace and increase profit

levels over our competition.

National Retail Customers

have a national presence with several large retail customers, such as Camping World.

RV and Marine Industry Experience and Relationship

Yozamp, Founder of Expion360, pioneered multiple new recreational concepts in the RV industry.

As the founder and previous owner of Zamp

Solar, he has extensive relationships in the RV OEM industry.

Insider Ownership

pack assembly in Redmond, Oregon.

The initial equipment has arrived and subject to market conditions, we are working on the setup and

development of additional equipment to automate the line.

This should allow us to use a more flexible approach to forming and creating

new battery packs.

By onshoring, we expect to be able to react to market demands at a much quicker pace and increase profit levels over

our competition.

Long-time RV and

Marine Industry Experience and Relationship

is managed by a team with a strong track record in the RV and clean energy spaces.

In addition, our company insiders own significant

equity in the company, signaling a strong commitment and personal investment.

into New Markets

John Yozamp, Co-Founder of Expion360, pioneered multiple

new recreational concepts in the RV industry.

As the founder and previous owner of Zamp Solar, he has extensive relationships in the

RV OEM industry.

In addition, our co-founders own significant equity in the Company, signaling a strong commitment and personal investment.

Expansion into New Markets

RV and marine applications currently drive revenue, Expion360 has plans to expand into the home energy market in the coming years.

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outside of it.

Furthermore, Expion360 plans to file for IP protection for Expion360’s “Smart Talk” upon completion

of development.

“Smart Talk” is designed to allow multiple batteries in a bank to communicate as one and be linked to a network.

furtherance of our vision of stored energy, in January 2023, Expion360 introduced two portable power generator products:

the AURA POWERCAP™

600 and AURA POWERCAP™ 800 (together, the “Aura”).

The AURA POWERCAP™

600 is designed to fit and convert any one of Expion360’s group 24 lithium batteries into a 600W mobile power station while the

AURA POWERCAP™ 800 is designed to fit and convert any one of Expion360’s group 27 lithium batteries into an 800W mobile power

The Aura’s proprietary patent pending design allows the AURA POWERCAP™ 600 to join seamlessly to 60Ah, 80Ah, and

95Ah Expion360 batteries and the AURA POWERCAP™ 800 to join to 100Ah and 120Ah Expion360 batteries.

The AURA POWERCAP™ 600

and AURA POWERCAP™ 800 are an exclusive fit to Expion360 batteries and will not fit other brands.

The AURA POWERCAP™ 600

and AURA POWERCAP™ 800 contain beneficial features and functions for a compact portable power unit, including the ability to recharge

the battery from the input charge port using the included 7 Amp household charger and the ability to recharge remotely with Expion360’s

lightweight portable solar panel options, which are sold separately.

Strong National Retail Customers and

Distribution Channels

has sales relationships with many major RV and marine retailers and plans to use what we believe is a strong reputation in the lithium

battery space to create an even stronger distribution channel.

John Yozamp has used his decades of experience in the energy and RV industries

to cultivate relationships with numerous retailers in the space.

Expion360 has already established a sales relationship with Camping

World, the largest RV retailer with sales representing around 25% of all new RVs sold nationwide, as well as Electric World, and NTP-STAG,

a leading distributor of aftermarket RV parts.

DEVELOPMENTS AND TRENDS

addition to the recent developments identified in in the Company’s prospectus, dated March 31, 2022, filed with the SEC in accordance

with Rule 424(b) of the Securities Act on April 4, 2022 (the “Prospectus”) in connection with the Company’s initial

public offering, our business in 2022 has been impacted, and we believe will continue to be impacted by the following recent events and

April 1, 2022, the Company completed an initial public offering.

A total of 2,466,750 shares of common stock were sold at $7.00 per share

in the IPO, for total gross proceeds of $17,267,250, or net proceeds of $14,772,487 after issuance costs of $2,494,763, which has substantially

improved our working capital position.

The Company also issued 35,714 shares and 148,005 warrants to outside third parties and underwriters

in connection with the IPO.

The total estimated fair value of the shares and warrants was $249,998 and $916,238, respectively.

costs incurred reduced additional paid-in capital and therefore, the issuance of these shares and warrants resulted in no impact to the

financial statements.

the IPO proceeds, in April 2022 the Company paid off working capital loans totaling $550,000 (see Note 6 – Line of Credit and Short-Term

Revolving Loans) and notes payable of $1.7 million, plus related interest totaling $213,895.

experienced overall improvements in sales trends in the nine-month period ended September 30, 2022 as compared to the corresponding period

in the prior year.

new leased distribution center in Elkhart, Indiana became operational in the first quarter of 2022 and our new leased facility in Redmond,

Oregon is under development with roughly $950,000 of proceeds from the IPO earmarked for the construction of a new assembly line and

associated equipment for quality testing and material handling.

Total capital expenditures related to the new assembly line and associated

equipment for the three and nine months ended September 30, 2022 was approximately $85,000 and $460,000, respectively.

Company’s 2021 Incentive Award Plan and 2021 Employee Stock Purchase Plan both became effective upon the initial public offering.

The stock option plans are described in detail in Note 12 – Stockholders’ Equity of the financial statements.

829,500 shares were granted under the 2021 Incentive Award Plan which resulted in a fair value stock-based compensation expense of $2,114,529,

which is included in selling, general, and administrative expenses on the accompanying financial statements.

has sales relationships with many major RV retailers and with marine retailers and plans to use what we believe is a strong reputation

in the lithium battery space to create an even stronger distribution channel.

The Company’s Co-Founder, John Yozamp, has used his

decades of experience in the energy and RV industries to cultivate relationships with numerous retailers in the space.

Expion360 has

already established a sales relationship with several large retail customers, including Camping World, a leading national RV retailer,

as well as NTP-STAG, a leading distributor of aftermarket RV parts.

RECENT DEVELOPMENTS

Warrant Exercises

April 2023, holders of 22,606 warrants previously issued by the Company with an exercise price of $3.32 exercised their warrants on a

cashless basis, which resulted in the issuance of an additional 10,151 shares of the Company’s common stock.

As of the date of

this Quarterly Report on Form 10-Q, the Company had 747,830 outstanding warrants.

Key Factors Affecting Our Operating

Our operating results and financial performance

are significantly dependent on the following factors:

Consumer Demand

most of our current sales are generated through dealers, wholesalers and original equipment manufacturers (“OEM”) focused

on the RV and marine markets, ultimate demand for our products is reliant on demand from consumers.

Our sales are completed on a purchase

order basis, and most are without firm, long-term revenue commitments or sales arrangements, which we expect to continue going forward.

Therefore, our future sales will be subject to risks and uncertainties related to end user demand.

from end users is affected by a number of factors which may include fuel costs, overall macroeconomic conditions, and travel restrictions

(resulting from COVID-19 or otherwise).

During the COVID-19 pandemic, the increased adoption of the RV lifestyle benefited battery suppliers.

However, more recently we have seen a rise in fuel costs and other changes in macroeconomic conditions which has created a decrease in

end user spending decisions which is affecting our markets.

RV and marine applications drive current revenues, Expion360 has plans to expand into the home energy market in the coming years.

e360 Home Energy Storage system is planned to target entry level customers with its modular design that will allow for DIY expansion.

We see the vision of stored energy as a portable, moving concept, where stored energy can be transported from the home to other devices

outside of it.

The success of our strategy requires (1) continued growth of these addressable markets in line with our expectations and

(2) our ability to successfully enter these markets.

We expect to incur significant marketing costs understanding these new markets,

and researching and targeting customers in these end markets, which may not result in sales.

If we fail to execute on this growth strategy

in accordance with our expectations, our sales growth would be limited to the growth of existing products and existing end markets.

Manufacturing

and Supply Chain

batteries are manufactured by multiple third-party manufacturers located in China, who also produce our battery cells.

We then assemble

and package the batteries in the United States for sale to our customers.

While we do not have long-term purchase arrangements with our

third-party manufacturers and our purchases are completed on a purchase order basis, we have had strong relationships with our third-party

manufacturers spanning many years.

Our close working relationships with our China-based third-party manufacturers and cell suppliers,

reflected in our ability to increase our purchase order volumes (qualifying us for related volume-based discounts) and to order and receive

delivery of cells in anticipation of required demand, has helped us moderate increased supply-related costs associated with inflation,

currency fluctuations, and U.S.

government tariffs imposed on our imports and to avoid potential shipment delays.

We aim to maintain

an appropriate level of inventory to satisfy our expected supply requirements.

We believe that we could locate alternative third-party

manufacturers to fulfill our needs.

third-party manufacturers source the raw materials and battery components required for the production of our batteries directly from

third party suppliers that meet our approval and quality standards, and as a result, we may have limited control over the agreed pricing

for these raw materials and battery components.

We estimate that raw material costs account for over half of our cost of goods sold.

The costs of these raw materials, particularly lithium-ion batteries, are volatile and beyond our control.

Additionally, availability

of the raw materials used to manufacture our products may be limited at times, resulting in higher prices and/or the need to find alternative

For example, a global shortage and component supply disruptions of electronic battery components are currently being reported,

and the full impact to us is yet unknown.

Our battery cell manufacturers also have joint venture factories outside of China and have

secured sourcing contracts from lithium suppliers in South America and Australia.

In addition, the Company has secured a secondary source

for lithium iron phosphate cells used in its batteries from a supplier in Denmark, enabling the Company to source materials outside of

China in the event it becomes necessary to do so.

Product and Customer Mix

sell six models of LiFEPO4 batteries, the AURA POWERCAP, and individual or bundled accessories for battery systems.

Our products are

sold to different customers (i.e., dealers, wholesalers, OEMs, etc.) at differing prices and have varying costs.

The average selling

price and costs of goods sold for a particular product, will vary with changes in the sales channel mix, volume of products sold, and

the prices of such products sold relative to other products.

While we work with our suppliers to limit price and supply cost increases,

our products may see price increases resulting from a rise in supply costs due to currency fluctuations, inflation, and tariffs.

and OEM sales typically have lower average selling prices and resulting margins which could decrease our margins and therefore negatively

affect our growth or require us to increase the prices of our products.

However, the benefits of increased sales volumes typically offset

these reductions.

The relative margins of products sold also impact our results of operation.

As we introduce new products, we may see

a change in product and sales channel mix which could result in period-to-period fluctuations in our overall gross margin.

compete with both traditional lead-acid and lithium-ion battery manufacturers that primarily either import their products or components

or manufacture products under a private label.

As we develop new products and expand into new markets, we may experience competition

with a broader range of companies.

These companies may have more resources than us and be able to allocate more resources to their current

and future products.

Our competitors may source products or components at a lower cost than us which may require us to evaluate our own

costs, lower our product prices, or increase our sales volume to maintain our expected profitability levels.

Research and Development

anticipate that additional investments in our infrastructure and research and development spending will be required to scale our operations

and increase productivity, to address the needs of our customers, to further develop and enhance our service, and to expand into new

geographic areas and market segments.

technologies are rapidly emerging in the markets where we conduct business and many new energy storage technologies have been introduced

over the past several years.

Our ability to achieve significant and sustained penetration of key developing markets, including the RV

and marine markets, will depend upon our success in developing these and other technologies, either independently, through joint ventures,

or through acquisitions, which in each case may require significant capital and commitment of resources to research and development.

As a result, we may need to raise additional funds for these research and development efforts.

KEY LINE ITEMS

Company’s revenue is generated from the sale of products consisting primarily of batteries and accessories.

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Materially, all of our sales are within the United States.

Cost of Sales

primary cost of sales is related to our direct product and landing costs.

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and benefits) of employees directly engaged in assembly activities.

Overhead consists primarily of warehouse rent and utilities.

costs can increase or decrease based on costs of product and assembly parts, purchased at market pricing, customer supply requirements,

and the amount of labor required to assemble a product, along with the allocation of fixed overhead.

General and Administrative Expenses

Per full absorption cost accounting, overhead related to our cost

of sales is added, consisting primarily of warehouse rent and utilities.

The costs can increase or decrease based on costs of product

and assembly parts (purchased at market pricing), customer supply requirements, and the amount of labor required to assemble a product,

along with the allocation of fixed overhead.

Selling, General and

Administrative Expenses

general and administrative expenses consist primarily of salaries, benefits, and sales and marketing costs.

Other costs include facility

and related costs, professional fees and other legal expenses, consulting, tax and accounting services, sales and marketing expenses.

and Other Income, net

and related costs, professional fees and other legal expenses, consulting, and tax and accounting services.

Interest and Other

expense consists of interest costs on loans with interest rates ranging from 3.75% to 10.0% and amortization of debt issuance costs.

As of September 30, 2022, all debt issuance costs have been fully amortized.

Sheet Arrangements

As of March 31, 2023, all debt issuance costs have been fully amortized.

Provision for

Company is subject to corporate federal and state income taxes.

Deferred tax assets and liabilities are recognized for the future tax

consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their

respective tax basis.

Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using the enacted

tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment

Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities.

tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all

of the deferred tax assets will not be realized.

Company has adopted the provisions in ASC 740, Income Taxes, related to accounting for uncertain tax positions.

It requires that the

Company recognize the impact of a tax position in the financial statements if the position is more likely than not to be sustained upon

examination and on the technical merits of the position.

Management has concluded that there were no material unrecognized tax benefits

as of March 31, 2023 or December 31, 2022.

Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.

The Company had

no accrual for interest or penalties on the Company’s balance sheet at March 31, 2023 or December 31, 2022 and did not recognize

interest and/or penalties in the statement of operations for the years ended March 31, 2023 and 2022, since there are no material unrecognized

tax benefits.

Management believes no material change to the amount of unrecognized tax benefits will occur within the next twelve months.

Off-Balance Sheet

have no material off-balance sheet arrangements.

OF OPERATIONS

RESULTS OF OPERATIONS

following table sets forth certain operational data as a percentage of sales:

For the Three Months Ended:

March 31, 2023

March 31, 2022

% of Net sales

Cost of sales

Selling, general, and administrative

Selling, general, and administrative expenses

Loss from operations

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Loss before income taxes

for the three months ended September 30, 2022 increased by 3.9%, or approximately $52,000, compared to the corresponding period in 2021.

Sales for the nine months ended September 30, 2022 increased by 78.9%, or approximately $2.53 million, compared to the corresponding

period in 2021.

The increases were primarily attributable to increases in our overall sales volumes as a result of our expanded product

offerings and distribution network.

cost of sales for the three months ended September 30, 2022 increased by 23.0%, or approximately $183,000, compared to the corresponding

period in 2021, and increased as a percentage of sales by 11.0%.

Total cost of sales for the nine months ended September 30, 2022 increased

by 86.2%, or approximately $1.75 million, compared to the corresponding period in 2021, and increased as a percentage of sales by 2.6%.

The increase in the cost of sales during the three and nine months ended September 30, 2022 over the corresponding periods in 2021 were

primarily related to increases in facilities costs and labor as we expanded our operations, and in landed costs, which the Company is

currently monitoring.

gross profit as a percentage of sales decreased to 29.1% for the three months ended September 30, 2022, compared to 40.1% for the three

months ended September 30, 2021.

Our gross profit as a percentage of sales decreased to 34.3% for the nine months ended September 30,

2022, compared to 36.9% for the nine months ended September 30, 2021.

The decrease in gross profit for the nine-month period was primarily

attributable to increases in facilities costs and labor as we expanded our operations, and in landed costs, which the Company is currently

General and Administrative Expenses

general and administrative expenses for the three months ended September 30, 2022 increased by 129.1%, or approximately $936,000, compared

to the corresponding period in 2021.

Selling, general and administrative expenses for the nine months ended September 30, 2022 increased

343.7%, or approximately $5.02 million, compared to the corresponding period in 2021 primarily due to increased costs to support our

growth in sales and business development efforts along with various expenses that were incurred due to planning and preparing for our

initial public offering.

The most substantial increases were in salaries and benefits, of which $2,114,529 was a non-cash expense attributable

to stock-based compensation, legal and professional services incurred in anticipation of our initial public offering, sales and marketing,

and rents and utilities.

net for the three months ended March 31, 2023 decreased by $648,000, or 30.1%, compared to the three months ended March 31, 2022.

were $2.2 million for the three months ended March 31, 2022 and $1.5 million for the three months ended March 31, 2023.

The year over

year decrease was primarily attributable to a large initial stocking order for one of our resellers that was placed in 2022.

Cost of Sales

cost of sales for the three months ended March 31, 2023 decreased by $230,000, or 17.8%, compared to the three months ended March 31,

Cost of sales were $1.3 million for the three months ended March 31, 2022 and $1.1 million for the three months ended March 31,

Cost of sales as a percentage of sales increased by 10.6% in that period.

The percentage increase in cost of sales was primarily

related to increases in fixed facilities costs and labor, changes in product mix related to sales, discount levels related to specific

customer groups, and supplier and shipping costs, which the Company is currently monitoring.

gross profit for the three months ended March 31, 2023 decreased by $418,000, or 17.8%, compared to the three months ended March 31,

Gross profit was $862,000 for the three months ended March 31, 2022 and $443,000 for the three months ended March 31, 2023.

profit as a percentage of sales decreased by 10.6% for that period, from 40.0% for the three months ended March 31, 2022 to 29.4% for

the three months ended March 31, 2023.

The decrease in gross profit for the three months ended March 31, 2023 was primarily attributable

to increases in fixed facilities costs and labor, changes in product mix related to sales, discount levels related to specific customer

groups, and supplier and shipping costs, which the Company is currently monitoring.

Selling, General and

Administrative Expenses

general and administrative expenses increased by $925,000, or 77.3%, to $2.1 million for the three months ended March 31, 2023 compared

to $1.2 million for the three months ended March 31, 2022, primarily due to legal and professional costs related to changes in management,

enhancement of key legal documents, litigation expenses, and payment of key advisory services.

The most substantial increases were in

legal and professional services, salaries and benefits, and research and development.

in the table below is the composition of selling, general and administrative expenses:

Months Ended September 30,

Rents, maintenance,

Three Months Ended 3/31/23

Three Months Ended 3/31/22

Salaries and benefits

Legal and professional

Sales and marketing

Rents, maintenance, utilities

Research and development

Travel expenses

and development

other expense for the three months ended September 30, 2022 and 2021 was approximately $20,000 and $162,000, respectively.

expense for the nine months ended September 30, 2022 and 2021 was approximately $1.56 million and $455,000, respectively.

Software, fees, tech support

Supplies, office

Other Expense

for the three and nine months ended September 30, 2022 was made up almost entirely of interest expense, except that during the three

months ended September 30, 2022, a gain on sale of property and equipment of approximately $13,000 reduced other expense.

For the three

months ended September 30, 2022 and 2021, interest expense attributable to non-cash amortization of debt discount totaled $0 and $16,383,

respectively.

During the nine months ended September 30, 2022 and 2021, non-cash amortization of debt discount totaled $1,196,843 and

$21,104, respectively.

However, during the three months ended September, 2021, non-cash interest expense of $112,133 was also recognized

in connection with an induced conversion that occurred on January 1, 2021.

Interest expense attributable to debt obligations totaled

$34,016 and $145,418 during the three months ended September 30, 2022 and 2021, respectively, and $375,005 and $322,800 during the nine

months ended September 30, 2022 and 2021, respectively.

In April 2022, with the use of proceeds from the IPO, the Company paid off approximately

$2.46 million in debt with interest rates ranging from 10 to 15%.

net loss for the three months ended September 30, 2022 and 2021 was approximately $1.28 million and $353,000, respectively.

for the nine months ended September 30, 2022 and 2021 was approximately $6.07 million and $730,000, respectively.

The increase in net

loss was primarily the result of increased selling, general, and administrative expenses as we invested in human resources, facilities,

and business development in preparation of our expanded growth objectives along with an increase in legal and professional costs in connection

with of our initial public offering.

Additionally, for the nine months ended September 30, 2022, the Company recognized approximately

$2.1 million in non-cash expenses related to stock-based compensation, which was non-existent in the corresponding period in 2021.

and as noted above, for the nine months ended September 30, 2022, the company recognized non-cash interest expense of approximately $1.2

Therefore, of the $6.07 million net loss for the nine months ended September 30, 2022, a total of $3.3 million was non-cash

AND CAPITAL RESOURCES

of September 30, 2022 and December 31, 2021, our current assets exceeded current liabilities by approximately $12.82 million and $3.18

million respectively, and we had cash and cash equivalents of approximately $8.12 million and $773,000, respectively.

On April 1, 2022,

we closed our initial public offering which resulted in approximately $14.7 million of net proceeds.

liquidity requirements

other expense for the three months ended March 31, 2023 and 2022 was $300,000 and $362,000, respectively.

Other expense for the three

months ended March 31, 2023 was made up almost entirely of settlement expense.

Other expense for the three months ended March 31, 2022

was primarily attributable to interest expense of debt obligations and the amortization of debt discount.

the three months ended March 31, 2023 and 2022, non-cash amortization of debt discount totaled $0 and $215,000, respectively.

expense attributable to debt obligations totaled $38,000 and $148,000 during the three months ended March 31, 2023 and 2022, respectively.

In April 2022, with the use of proceeds from the IPO, the Company paid off approximately $2.46 million in debt with interest rates ranging

from 10 to 15%.

net loss for the three months ended March 31, 2023 and 2022 was $2.0 million and $697,000, respectively.

The increase in net loss was

primarily the result of increased selling, general, and administrative expenses as we incurred higher legal and professional costs.

Additionally,

for the period ended March 31, 2023, the Company recognized $251,680 in non-cash stock-based settlement expenses, compared to $0 for

the period ended March 31, 2022.

See Item 1 “Legal Proceedings” of Part II Other Information.

LIQUIDITY AND

CAPITAL RESOURCES

operations have been financed primarily through net proceeds from the sale of securities and from borrowings.

As of March 31, 2023 and

December 31, 2022, our current assets exceeded current liabilities by $8.9 million and $10.8 million, respectively, and we had cash and

cash equivalents of $5.7 million and $7.2 million, respectively.

On April 1, 2022, we closed our initial public offering which resulted

in approximately $14.8 million of net proceeds.

generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred within the next twelve

1 unchanged sentence

on our debt, and capital expenditures related to assembly line expansion.

As of September 30, 2022, we expect our short-term liquidity

requirements to include (a) approximately $490,000 of capital additions;

(b) principal debt payments totaling approximately $70,000;

of March 31, 2023, we expect our short-term liquidity requirements to include (a) approximately $379,000 of capital additions;

(b) principal

debt payments totaling approximately $679,000;

and (c) lease obligation payments of approximately $721,000, including imputed interest.

liquidity requirements

generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next twelve

months and believe these requirements consist primarily of funds necessary for eighteen months.

on our current business plan, we believe that cash flows from operations, together with the proceeds from the initial public offering

will be sufficient to meet our anticipated cash needs for working capital, capital expenditures, and debt service for at least the next

twelve months.

Our ability to make scheduled principal and interest payments, or to refinance our indebtedness, or to fund planned capital

expenditures, will depend on future performance, which is subject to general economic conditions, the competitive environment, and other

factors, including those outlined in the “Risk Factors” section of this prospectus.

If our estimates of revenues, expenses,

capital, or liquidity requirements change or are inadequate to support our growth or if cash generated from operations is insufficient

to satisfy our liquidity requirements, we may seek to sell additional equity and/or arrange additional debt financing.

We may also seek

to raise additional equity and/or arrange debt financing to give us the financial flexibility to pursue attractive opportunities that

may arise in the future.

flows used in operating activities

generated negative cash flows from operating activities of approximately $4.70 million for the nine months ended September 30, 2022,

compared to negative cash flows of approximately $2.77 million for the corresponding period in 2021.

Significant factors affecting operating

cash flows during the periods included:

the nine months ended September 30, 2022, our loss of $6,067,193 was adjusted and reduced by non-cash transactions including stock-based

compensation of approximately of $2.1 million, amortization of debt discount on convertible notes of approximately $1.2 million and depreciation

of approximately $116,000.

For the nine months ended September 30, 2021, our loss of $730,403 was adjusted and reduced by non-cash transactions

including amortization of debt discount on convertible notes of approximately $21,000, a debt conversion expense on induced conversion

of approximately $112,000 and depreciation of approximately $38,000.

provided/(used) by accounts receivable was approximately $475,000 and ($532,000), representing

a decrease in accounts receivable for the nine months ended September 30, 2022 and an increase

in accounts receivable for the nine months ended September 30, 2021, respectively.

are generally collected within 30 to 45 days.

The decrease during the nine months ended September

30, 2022 is primarily attributed to a decline in September sales compared to sales in December

The increase during the nine months ended September 30, 2001 correspond with increases

payable and accrued expenses increased by approximately $20,000 during the nine months ended

September 30, 2022 compared to approximately $8,000 for the corresponding period in 2021.

This is primarily attributed to increased costs and expenses.

significant changes include a decrease in customer deposits of approximately $275,000 during

the nine months ended September 30, 2022, representing a use of cash that did not exist in

the corresponding period in 2021.

Additionally, long-term deposits increased by approximately

$11,000 during the nine months ended September 30, 2022 compared to $48,000 for the corresponding

period in 2021, primarily due to new leases in 2021 and deposits on capital purchases in

used for inventory and prepaid inventories was approximately $2.17 million and $1.70 million

for the nine months ended September 30, 2022 and 2021, respectively.

These increases are

primarily due to significant purchases and prepayments of inventory to Chinese suppliers

that were made in the 3rd quarter of 2022 in order to have sufficient inventory for projected

sales in 2022 and 2023.

Turnaround time for receiving inventory from foreign sources can

take up to 120 days, with prepayments required.

Sales for the nine months ended September

30, 2022 increased over sales for the nine months ended September 30, 2021 by approximately

$2.53 million.

flows used in investing activities

used cash in investing activities of approximately $383,000 and $94,000 for the nine months ended September 30, 2022 and 2021, respectively.

Cash used for capital purchases of property and equipment related to expanding and improving our facilities and infrastructure was approximately

$434,000 and $94,000, respectively, during the nine months ended September 30, 2022.

Net proceeds of approximately $51,000 was received

for the sale of property and equipment during the nine months ended September 30, 2022.

We anticipate that we will spend up to $950,000

in 2022 as we expand our production facilities and build new assembly lines.

flows provided by financing activities

provided by financing activities was approximately $12.4 million and $2.9 million for the nine months ended September 30, 2022 and 2021,

respectively.

For the nine months ended September 30, 2022 we paid down debt principal of approximately $2.3 million compared to $498,000

for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, the Company issued no new debt resulting

in cash proceeds, whereas during the nine months ended September 30, 2021, we obtained working capital financing of $125,000 and received

proceeds from the issuance of convertible notes of $2.78 million.

During the nine months ended September 30, 2022, we received net cash

proceeds of $14.77 million from the sale of common stock compared to $522,000 during the nine months ended September 30, 2021.

Sheet Arrangements

have no material off-balance sheet arrangements.

ACCOUNTING POLICIES AND ESTIMATES

financial results are affected by the selection and application of accounting policies and methods.

Critical accounting policies are

those that we consider to be the most important in portraying our financial condition and results of operations and require the greatest

number of judgments by management.

Judgments or uncertainties regarding the application of these policies may result in materially different

amounts being reported under different conditions or using different assumptions.

In the nine months ended September 30, 2022, there

were no changes to the application of critical accounting policies previously disclosed in the Company’s prospectus, dated March

31, 2022, filed with the SEC in accordance with Rule 424(b) of the Securities Act on April 4, 2022 (the “Prospectus”) in

connection with the Company’s initial public offering, other than the following:

Company accounts for stock-based compensation in accordance with ASXC 718, “Compensation – Stock Compensation,” which

requires compensation costs to be recognized at grant fair date value over the requisite service period of each of the awards.

recognizes forfeitures of awards as they occur.

fair value of stock options is determined using the Black-Scholes-Merton option pricing model.

In order to calculate the fair value of

the options, certain assumptions are made regarding the components of the mode3l, including risk-free interest rate, volatility, expected

dividend yield, and expected life.

Changes to assumptions could cause significant adjustments to the valuation.

NOTICE REGARDING FORWARD-LOOKING STATEMENTS

report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended,

and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

All statements in this report, other

than statements of historical fact, are “forward-looking statements” for purposes of these provisions, including, without

limitation, any projections of earnings, revenues or other financial items, any statements of the plans and objectives of our management

for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development,

or commercialization of the business or any assets acquired from other parties, any statements regarding future economic conditions or

performance, and any statements of assumptions underlying any of the foregoing.

All forward-looking statements included in this report

are made as of the date hereof and are based on information available to us as of such date.

We assume no obligation to update any forward-looking

In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,”

“expects,” “plans,” “should,” “anticipates,” “intends,” “seeks,”

“believes,” “estimates,” “potential,” “forecasts,” “continue,” or other forms

of these words or similar words or expressions, or the negative thereof or other comparable terminology.

Although we believe that the

expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations

or any of the forward-looking statements will prove to be correct.

Actual results will likely differ, and could differ materially, from

those projected or assumed in the forward-looking statements.

Prospective investors are cautioned not to unduly rely on any such forward-looking

Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding before

the Company achieves sustainable revenues and profit from operations.

The Company expects to continue to incur additional losses for

the foreseeable future, and the Company may need to raise additional debt or equity financing to expand its presence in the marketplace,

develop new products, achieve operating efficiencies, and accomplish its long-term business plan over the next several years.

be no assurance as to the availability or terms upon which such financing and capital might be available.

For the year ended December

31, 2022 and the three months ended March 31, 2023, the Company sustained recurring losses and negative cash flows from operations.

factors raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date

that the financial statements for the period ended March 31, 2023 are issued.

However, management is working to address its cash flow

challenges, including raising additional capital, alternative supply chain resources, and in-house assembly lines.

What changed 10-Q

Item 2. Management’s Discussion and Analysis