Expion360 Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Expion360 Inc. Balance Sheets March 31, 2023 (unaudited) December 31, 2022 Assets Current Assets Cash and cash equivalents $ 5,726,195 $ 7,201,244 Accounts receivable, net 628,762 298,035 Inventory 3,926,566 4,530,136 Prepaid/in-transit inventory 1,228,188 141,611 Prepaid expenses and other current assets 238,783 171,791 Total current assets 11,748,494 12,342,817 Property and equipment 1,403,898 1,394,619 Accumulated depreciation ( 298,980 ) ( 250,861 ) Property and equipment, net 1,104,918 1,143,758 Other Assets Operating leases – right-of-use asset 3,035,894 3,148,455 Deposits 58,896 63,901 Total other assets 3,094,790 3,212,356 Total assets $ 15,948,202 $ 16,698,931 Liabilities and stockholders’ equity Current liabilities Accounts payable $ 1,126,095 $ 230,250 Customer deposits 208,611 58 Accrued expenses and other current liabilities 325,802 306,164 Current portion of operating lease liability 475,738 465,055 Current portion of stockholder promissory notes 625,000 500,000 Current portion of long-term debt 53,975 71,426 Total current liabilities 2,815,221 1,572,953 Long-term debt, net of current portion and discount 363,646 439,049 Operating lease liability, net of current portion 2,638,181 2,754,964 Stockholder promissory notes, net of current portion 200,000 325,000 Total liabilities $ 6,017,048 $ 5,091,966 (continued on next page) 5 Expion360 Inc. Balance Sheets – Continued March 31, 2023 (unaudited) December 31, 2022 Stockholders’ equity Preferred stock, par value $ .001 ; 20,000,000 shares authorized; zero shares issued and outstanding — — Common stock, par value $ .001 ; 200,000,000 shares authorized; 6,900,566 and 6,802,464 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively 6,901 6,802 Additional paid-in capital 25,541,022 25,239,654 Accumulated deficit ( 15,616,769 ) ( 13,639,491 ) Total stockholders’ equity 9,931,154 11,606,965 Total liabilities and stockholders’ equity $ 15,948,202 $ 16,698,931 The accompanying notes are an integral part of these financial statements 6 Expion360 Inc. Statements of Operations (Unaudited) For the Three Months Ended March 31, 2023 2022 Sales, net $ 1,507,177 $ 2,155,345 Cost of sales 1,063,730 1,293,490 Gross profit 443,447 861,855 Selling, general and administrative 2,120,894 1,196,376 Loss from operations ( 1,677,447 ) ( 334,521 ) Other (Income) Interest income ( 20,133 ) — Interest expense 38,178 362,114 Settlement expense 281,680 — Other expense 106 68 Total other expense 299,831 362,182 Loss before taxes ( 1,977,278 ) ( 696,703 ) Franchise taxes — 150 Net loss $ ( 1,977,278 ) $ ( 696,853 ) Net loss per share (basic and diluted) $ ( 0.29 ) $ ( 0.16 ) Weighted-average number of common shares outstanding 6,815,002 4,300,000 The accompanying notes are an integral part of these financial statements 7 Expion360 Inc. Statements of Stockholders’ Equity (Deficit) for Three Months ended March 31, 2023 and 2022 (Unaudited) Common Stock Shares Amount Additional Paid-in Capital Accumulated Deficit Total Stock-holders’ Equity (Deficit) Balance at December 31, 2021 4,300,000 $ 4,300 $ 8,355,140 $ ( 6,102,951 ) $ 2,256,489 Net loss — — — ( 696,853 ) ( 696,853 ) Balance at March 31, 2022 4,300,000 $ 4,300 $ 8,355,140 $ ( 6,799,804 ) $ 1,559,636 Balance at December 31, 2022 6,802,464 $ 6,802 $ 25,239,654 $ ( 13,639,491 ) $ 11,606,965 Proceeds received from exercise of warrants 46,102 47 49,740 — 49,787 Stock issued as a result of litigation settlement 52,000 52 251,628 — 251,680 Net loss — — — ( 1,977,278 ) ( 1,977,278 ) Balance at March 31, 2023 6,900,566 $ 6,901 $ 25,541,022 $ ( 15,616,769 ) $ 9,931,154 The accompanying notes are an integral part of these financial statements 8 Expion360 Inc. Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2023 2022 Cash flows from operating activities Net loss $ ( 1,977,278 ) $ ( 696,853 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 48,120 29,026 Amortization of debt discount (sale of future revenues) — 295 Amortization of debt discount - notes — 214,527 Decrease in allowance for doubtful accounts ( 18,804 ) — Stock-based settlement 251,680 — Changes in operating assets and liabilities: (Increase) / Decrease in accounts receivable ( 311,923 ) 195,522 (Increase) / Decrease in inventory 603,570 ( 251,617 ) (Increase) / Decrease in prepaid/in-transit inventory ( 1,086,577 ) 786,379 Increase in prepaid expenses and other current assets ( 66,992 ) ( 23,409 ) Decrease in deposits 5,005 — Increase in accounts payable 895,845 278,520 Increase / (Decrease) in customer deposits 208,553 ( 12,663 ) Increase / (Decrease) in accrued expenses and other current liabilities 19,638 ( 22,088 ) Increase in right-of-use assets and lease liabilities 6,461 8,789 Net cash provided by / (used in) operating activities ( 1,422,702 ) 506,428 Cash flows from investing activities Purchases of property and equipment ( 9,280 ) ( 32,938 ) Net cash used in investing activities ( 9,280 ) ( 32,938 ) Cash flows from financing activities Increase in deferred IPO costs — ( 423,634 ) Payments on liability for sale of future revenues — ( 11,797 ) Principal payments on long-term debt ( 92,854 ) ( 11,948 ) Net proceeds from exercise of warrants 49,787 — Net cash used in financing activities ( 43,067 ) ( 447,379 ) Net change in cash and cash equivalents ( 1,475,049 ) 26,111 Cash and cash equivalents, beginning 7,201,244 773,238 Cash and cash equivalents, ending 5,726,195 799,349 The accompanying notes are an integral part of these financial statements 9 Expion360 Inc. Statements of Cash Flows (Unaudited) - Continued For the Three Months Ended March 31, Supplemental disclosure of cash flow information: 2023 2022 Cash paid for interest $ 38,399 $ 119,854 Cash paid for franchise taxes $ — $ 150 Non-cash financing activities: Purchased of property and equipment in exchange for accrued expenses and other current liability $ — $ 148,170 Acquisition/modification of operating lease right-of-use asset and lease liability $ 13,993 $ 2,348,509 The accompanying notes are an integral part of these financial statements 10 1. Organization and Nature of Operations Expion360 Inc. (formerly Yozamp Products Company, LLC dba Expion360) (“the Company”) was incorporated in the state of Nevada in November 2021. Effective November 1, 2021, the Company converted to a C corporation. Prior to conversion, the Company was a limited liability company (LLC) with an indefinite life organized in the State of Oregon in June 2016. The LLC elected to be treated as a Subchapter S corporation effective January 1, 2017. Net profits and losses of the LLC and all distributions were allocated among the members in proportion to the ownership units held. The Original LLC Agreement was amended and restated on January 1, 2021 to add additional members and a non-voting class of member units. Upon conversion to a C corporation, all existing LLC members at the time of conversion were issued shares of common stock and became shareholders of the Company. The Company designs, assembles, and distributes premium lithium batteries for RV, Marine, Golf, Industrial, Residential, and Off-The-Grid needs. The Company uses lithium iron phosphate (LiFePO4) batteries. LiFePO4 batteries are considered a top choice for high energy density, dependability, longevity, and safety, providing the ability to power anything, anywhere. Beginning in March 2020, the COVID-19 pandemic and the measures imposed to contain this pandemic disrupted and may continue to impact the Company’s business. While certain restrictions have eased recently, the magnitude of the impact of any new measures from a resurgence in the COVID-19 pandemic on the Company’s productivity, results of operations, and financial position, and its disruption to the Company’s business and battery development and timeline will depend in part on the length and severity of these restrictions and on the Company’s ability to conduct business in the ordinary course. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statement presentation. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month periods ended March 31, 2023 and 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The unaudited interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 30, 2023. Unless otherwise noted, all references to shares and shareholders in the accompanying financial statements have been restated retrospectively, to reflect the equity structure of the C corporation as of the beginning of the first period presented. Reclassification of Prior Year Presentation Certain prior year amounts have been reclassified for consistency with current year presentation. These reclassifications had no effect on the reported results of operations. Going Concern, Liquidity and Capital Resources The 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. There can be no assurance as to the availability or terms upon which such financing and capital might be available. 11 As presented in the accompanying financial statements, the Company has sustained recurring losses and negative cash flows from operations. These 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 three months 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. Historically, the Company’s growth has been funded through a combination of sales of equity interests, third party debt, and working capital loans. The Company’s sales for the three months ended March 31, 2023 decreased 30.1% compared to the same period in 2022. Through March 31, 2023, we received net proceeds of $49,787 from warrant exercises. On April 1, 2022, the Company completed an initial public offering and listing of its shares on the Nasdaq Stock Market (IPO). Proceeds from the IPO, net of costs, totaled $14,772,487, of which approximately $2,464,000 was used to pay down principal and accrued interest on high interest-bearing debt. The remaining proceeds will be used, in part, to stock inventory to keep up with demand and to build in-house assembly lines to improve the cash-flow cycle and help reduce the four-month turnaround that the Company currently experiences from suppliers in China. In the first half of 2022, a distribution warehouse was set up in Indiana to better service customers throughout the U.S. and an assembly facility was leased in Redmond, Oregon for future expansion of the in-house assembly lines. Additionally, management has secured a secondary source for lithium iron phosphate cells used in its batteries that is based in Denmark, should supply disruption issues with China arise. Management believes that these factors will contribute to achieving operating efficiency and profitability. However, there can be no assurance that the Company will be successful in achieving its objectives, including achieving operating efficiency and profitability. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business; however, the above conditions raise substantial doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary materially from the estimates that were used. The Company’s significant accounting estimates include the carrying value of accounts receivable and inventory, the depreciable lives of fixed assets, and stock-based compensation. Future events, including the extent and the duration of the COVID-19-related economic impacts and their effects, cannot be predicted with certainty and, accordingly, the Company’s accounting estimates require the exercise of judgment. Cash and Cash Equivalents The Company considers all cash amounts which are not subject to withdrawal restrictions or penalties and all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. The Company maintains its cash balances with high-quality financial institutions located in the United States. Cash accounts are secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per institution. At times, balances may exceed federally insured limits. Investment accounts are placed in funds consisting of US Treasury related ultra-short paper. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents. As of March 31, 2023, cash balances exceeded FDIC limits by $ 388,011 and investment accounts totaling $ 5,019,907 are invested in US Treasury related ultra-short paper. 12 The Company has two accounts at Silicon Valley Bank (SVB). As of March 31, 2023 all funds were transferred to another banking institution and no exposure currently exists. Accounts Receivable Accounts receivable are recorded at the invoiced amount, are due within a year or less, and generally do not bear any interest. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. An allowance for uncollectible accounts is recorded to reduce accounts receivable to the estimated amount that will be collected. The allowance is based upon management’s review of the accounts receivable aging and specific identification of potentially uncollectible balances. Recoveries of accounts previously written off and adjustments to the allowance for uncollectible accounts are recorded as adjustments to bad debt expense. For the three months ended March 31, 2023 the Company wrote off $18,804. There was no allowance for doubtful accounts as of March 31, 2023 or December 31, 2022, as management believed all outstanding amounts to be fully collectible. Customer Deposits As of March 31, 2023 and December 31, 2022, the Company had customer deposits totaling $ 208,611 and $ 58 , respectively. Inventory Inventory is stated at the lower of cost (first in, first out) or net realizable value and consists of batteries and accessories, resale items, components, and related landing costs. As of March 31, 2023 and December 31, 2022, the Company had inventory that consisted of finished assemblies totaling $ 2,153,057 and $ 2,722,765 , respectively, and raw materials (inventory components, parts, and packaging) totaling $ 1,773,509 and $ 1,807,371 , respectively. The valuation of inventory includes fixed production overhead costs based on normal capacity of the assembly warehouse. The Company periodically reviews its inventory for evidence of slow-moving or obsolete inventory and provides for an allowance when considered necessary. The Company determined that no such reserve was necessary as of March 31, 2023 or December 31, 2022. The Company prepays for inventory purchases from foreign suppliers. Prepaid inventory totaled $1,228,188 and $141,611 at March 31, 2023 and December 31, 2022, respectively, and included inventory in transit where title had passed to the Company but had not yet been physically received. Vendor and Foreign Concentrations of Inventory Suppliers During the three months ended March 31, 2023 and 2022, respectively, approximately 86% and 60%, respectively, of inventory purchases were made from foreign suppliers in China and Hong Kong. Any adverse change in either the economic or political conditions abroad could negatively impact the Company’s supply chain. The inability to obtain product to meet sales demand could adversely affect results of operations. However, 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. Property and Equipment Property and equipment are stated at cost less depreciation calculated on the straight-line basis over the estimated useful lives of the related assets as follows: Schedule of estimated useful lives Vehicles and transportation equipment 5 - 7 years Office furniture and equipment 3 - 7 years Manufacturing equipment 3 - 10 years Warehouse equipment 3 - 10 years QA equipment 3 - 10 years Tooling and molds 5 - 10 years 13 Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives. Betterments, renewals, and extraordinary repairs that extend the lives of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to assets retired are removed from the accounts, and the gain or loss on disposition is recognized in the Statements of Operations. Leases The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on the Company’s Balance Sheets. The Company does not have any finance leases. Lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the Company’s Balance Sheet. The Company’s leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company accounts for lease and non-lease components as a single lease component for all its leases. Impairment of Long-Lived Assets Long-lived assets consist primarily of property and equipment. When events or circumstances indicate the carrying value of a long-lived asset may be impaired, the Company estimates the future undiscounted cash flows to be derived from the use and eventual disposition of the asset to assess whether or not a potential impairment exists. If the carrying value exceeds the estimate of future undiscounted cash flows, the impairment is calculated as the excess of the carrying value of the asset over the estimate of its fair value. Fair value is determined primarily using the estimated cash flows discounted at a rate commensurate with the risk involved. No long-lived asset impairment was recognized during the three months ended March 31, 2023 or 2022. Product Warranties The Company sells the majority of its products to customers along with conditional repair or replacement warranties. The Company’s branded DC mobile chargers are warrantied for two years from the date of sale and its branded VPR 4EVER Classic and Platinum batteries are warrantied at gradually lesser levels over a twelve-year period from date of sale. The Company determines its estimated liability for warranty claims based on the Company’s experience of the amount of claims actually made. Management estimates no liability as of March 31, 2023 and December 31, 2022 because, historically, there have been very few claims and costs for repairs or replacement parts have been nominal. It is possible that the Company’s estimate of liability for product liability claims will change in the near term. Liability for Refunds The Company does not have a formal return policy but does accept returns under its warranty policies. Returns have historically been minimal. Revenue Recognition The Company’s revenue is generated from the sale of products consisting primarily of batteries and accessories. The Company recognizes revenue when control of goods or services is transferred to its customers in an amount that reflects the consideration it is expected to be entitled to in exchange for those goods or services. To determine revenue recognition, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the performance obligation(s) are satisfied. Revenue is recognized upon shipment or delivery to the customer, as that is when the customer obtains control of the promised goods and the Company’s performance obligation is considered satisfied. As such, accounts receivable is recorded at the time of shipment or will call, when the Company’s right to the consideration becomes unconditional and the Company determines there are no uncertainties regarding payment terms or transfer of control. 14 Concentration of Major Customers A customer is considered a major customer when net revenue attributable to the customer exceeds 10% of total revenue for the period or outstanding receivable balances exceed 10% of total receivables. During the three months ended March 31, 2023, sales to two customers totaled $381,048, comprising approximately 25% of total sales. These customers represented 43% of total accounts receivable as of March 31, 2023. Accounts receivable from one additional customer totaled $72,184, representing approximately 12% of total accounts receivable as of March 31, 2023. During the three months ended March 31, 2022, sales to one customer totaled $896,984, comprising approximately 42% of total sales. Accounts receivable for this customer totaled $114,674, representing approximately 20% of total accounts receivable as of March 31, 2022. Accounts receivable from two additional customers totaled $151,494 and $73,065, representing in aggregate approximately 39% of total accounts receivable as of March 31, 2022. Shipping and Handling Costs Shipping and handling fees billed to customers are classified on the Statement of Operations as “Sales, net” and totaled $9,532 and $4,151 during the three months ended March 31, 2023 and 2022, respectively. Shipping and handling costs for shipping product to customers totaled $43,208 and $38,724 during the three months ended March 31, 2023 and 2022, respectively, and are classified in selling, general, and administrative expense in the accompanying Statements of Operations. Advertising and Marketing Costs The Company expenses advertising and marketing costs as incurred. Advertising and marketing expense totaled $155,159 and $160,038 for the three months ended March 31, 2023 and 2022, respectively, and is included in selling, general and administrative expense in the accompanying Statements of Operations. Research and Development Research and development costs are expensed as incurred. Research and development costs charged to expense amounted to $ 77,180 and $ 5,316 for the three months ended March 31, 2023 and 2022, and are included in selling, general and administrative expenses in the accompanying Statements of Operations. Income Taxes Effective November 1, 2021, the Company converted from an LLC to a C corporation and, as a result, became 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 exiting 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 date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred 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. 15 On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides sweeping tax changes in response to the COVID-19 pandemic. Some of the more significant provisions are removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. As of March 31, 2023 and December 31, 2022, the Company has not recorded any income tax provision/(benefit) resulting from the CARES Act, mainly due to the Company’s history of net operating losses. On December 27, 2020, the United States enacted the Consolidated Appropriations Act of 2021 (“CAA”). The CAA includes provisions extending certain CARES Act provisions and adds coronavirus relief, tax and health extenders. The Company will continue to evaluate the impact of the CAA and its impact on its financial statements in 2023 and beyond. Fair Value of Financial Instruments The Company accounts for its financial assets and liabilities in accordance with ASC Topic 820, Fair Value Measurement . ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. These inputs include quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in the assessment of fair value. The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, short-term revolving loans, shareholder promissory notes, and long-term debt. The fair value of cash and cash equivalents, accounts receivable, accounts payable, and short-term revolving loans approximates their respective carrying values because of the short-term nature of those instruments. The fair value of the shareholder promissory notes, convertible notes, and long-term debt approximates their respective carrying values because the interest rate approximates market rates available to the Company for similar obligations with the same maturities. Segment Reporting The Company currently operates in one reportable segment. An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”) to evaluate performance and make operating decisions. The Company has identified its CODM as the Chief Executive Officer. Basic and Diluted Net Loss Per Share The basic net loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding during the period. Diluted earnings or loss per share adjusts the basic earnings or loss per share for the potentially dilutive impact of securities (e.g., options and warrants). 16 We calculate basic and diluted net loss per share using the weighted average number of common shares outstanding during the periods presented. In periods of a net loss position, basic and diluted weighted average common shares are the same. For the diluted earnings per share calculation, we adjust the weighted average number of common shares outstanding to include dilutive stock options, warrants, unvested restricted stock units and shares associated with the conversion of any convertible notes or preferred stock, when applicable. We use the if-converted method for calculating any potential dilutive effect of convertible notes and convertible preferred stock on diluted net loss per share. The following shows the amounts used in computing net loss per share: Schedule of net loss per share Three Months Ended March 31, 2023 2022 Net loss $ ( 1,977,278 ) $ ( 696,853 ) Weighted average common shares outstanding – basic and diluted 6,815,002 4,300,000 Basic and diluted net loss per share $ ( 0.29 ) $ ( 0.16 ) As of March 31, 2023 and December 31, 2022, the Company has outstanding warrants and options convertible into 1,629,936 and 1,717,936 shares of common stock, respectively. The following table sets forth the number of shares excluded from the computation of diluted loss per share, as their inclusion would have been anti-dilutive. Schedule of anti-dilutive share As of: March 31, 2023 December 31, 2022 Stock options 829,500 829,500 Warrants 800,436 888,436 1,629,936 1,717,936 Stock-Based Compensation The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation—Stock Compensation”, which requires compensation costs to be recognized at grant date fair value over the requisite service period of each of the awards. The Company recognizes forfeitures of awards as they occur. The 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 model, including risk-free interest rate, volatility, expected dividend yield and expected life. Changes to assumptions could cause significant adjustments to the valuation. New Accounting Pronouncements In September 2022, the FASB issued ASU 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” which is intended to enhance the transparency surrounding the use of supplier finance programs in connection with the purchase of goods and services. Supplier finance programs may also be referred to as reverse factoring, payables finance, or structured payables arrangements. The amendments in ASU 2022-04 require a buyer that uses supplier finance programs to disclose sufficient qualitative and quantitative information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. ASU 2022-04 is effective for all entities for fiscal years beginning after December 15, 2022 on a retrospective basis, including interim periods with those fiscal years, except for the requirement to disclose roll forward information, which is effective prospectively for fiscal years beginning after December 15, 2023. The Company adopted this standard effective January 1, 2023, and the adoption of this guidance did not have an impact on the Company’s financial statements or disclosures. 17 In March 2022, the FASB issued ASU 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,” which addresses and amends areas identified by the FASB as part of its post-implementation review of the accounting standard that introduced the current expected credit losses (“CECL”) model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. For entities, such as Expion360 Inc., that have not yet adopted the CECL accounting model in ASU 2016-13, the effective date for the amendments in ASU 2022-02 is the same as the effective date in ASU 2016-13 (i.e., fiscal years beginning after December 15, 2022, including interim periods within those fiscal years). The Company adopted this standard effective January 1, 2023, and the adoption of this guidance did not have an impact on the Company’s financial statements or disclosures. In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with Topic 606, Revenue from Contracts with Customers, on the acquisition date as if the acquirer had entered into the original contract at the same date and on the same terms as the acquiree. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for public business entities. The Company adopted this standard effective January 1, 2023, and the adoption of this guidance did not have an impact on the Company’s financial statements or disclosures. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates on certain types of financial instruments, including trade receivables. In addition, new disclosures are required. The ASU, as subsequently amended, is effective for the Company for fiscal years beginning after December 15, 2022. The Company adopted this standard effective January 1, 2023, and the adoption of this guidance did not have an impact on the Company’s financial statements or disclosures. Accounting Guidance Issued but Not Yet Adopted In March 2023, the FASB issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” This ASU was issued to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. ASU 2023-02 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact of this standard on our financial statements. In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,” which amends the guidance in Topic 820, Fair Value Measurement , to clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, the ASU introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years for public business entities. The Company is currently evaluating the impact of this standard on our financial statements. 18 3. Property and Equipment, Net Property and equipment consist of the following: Schedule of property and equipment March 31, 2023 December 31, 2022 Vehicles and transportation equipment $ 602,376 $ 593,097 Leasehold improvements 314,819 314,819 Office furniture and equipment 188,131 188,131 Manufacturing equipment 179,274 179,274 Warehouse equipment 81,164 81,164 QA equipment 22,142 22,142 Tooling and Molds 15,992 15,992 $ 1,403,898 $ 1,394,619 Less: accumulated depreciation ( 298,980 ) ( 250,861 ) Property and equipment, net $ 1,104,918 $ 1,143,758 Depreciation expense was $ 48,120 and $ 29,026 for the three months ended March 31, 2023 and 2022, respectively. 4. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: Schedule of accrued expenses and other current liabilities As of March 31, 2023 As of December 31, 2022 Accrued salaries and payroll liabilities $ 227,199 $ 169,337 Commissions 34,979 9,720 Rebate liability 26,015 26,015 Deferred income and deposit (sublease) 4,445 14,168 Franchise tax 400 400 Accrued interest 68 222 Other 32,696 86,302 Accrued expenses and other current liabilities $ 325,802 $ 306,164 5. Liabilities for Sale of Future Revenues On December 8, 2020 and January 26, 2021, Reliant Funding, under two separate ACH Total Receipts Purchase Agreements (“Purchase Agreements”), purchased a 50% interest in the Company’s future revenues for a total aggregate purchase price of $250,000. Pursuant to the terms of the Purchase Agreements, the purchased percentage continued to be owned by Reliant Funding, until the Company paid the full purchased amount of $349,750. Repayment of the purchased amount was achieved through 252 daily bank account withdrawals of $1,388 through December 15, 2021 and $694 thereafter through January 26, 2022. During the three months ended March 31, 2022, the Company repaid a total of $11,797, including $295 of interest. There were no payments made in the three months ended March 31, 2023. Interest was recognized at an effective annual interest rate of approximately 71%. The Purchase Agreements were secured by substantially all of the assets of the Company. As of March 31, 2023 and December 31, 2022, the Company had no remaining liability related to the Purchase Agreements. 6. Short-Term Revolving Loans In 2020, the Company received funds under four unsecured Working Capital Loan Agreements (“WC Loans”). As of December 31, 2022, the loans had been repaid and a balance of $0 was outstanding. Under the WC Loan Agreements and in accordance with the modified terms, the Company was subject to monthly extended maturity interest of one percent on the ending outstanding monthly balance which increased one percent for each month beyond the extended maturity date. The WC Loans were repaid in full in April 2022. 19 The terms of each WC Loan are summarized below: · $200,000 limit – dated March 22, 2020; monthly interest-only payments at 15% annual interest; principal due 12 months from date of issue. This note was modified effective January 1, 2021 to extend the maturity date to December 31, 2021. The Company paid $50,000 towards the principal balance in November 2021. The balance of $150,000 was paid in full in April 2022 (see below). · $400,000 limit – dated August 31, 2020; monthly interest-only payments at 10% annual interest; pursuant to the WC Loan, the maturity was to be determined by mutual agreement and was to be at least 30 days after a maturity date is agreed upon. The note was modified effective January 1, 2021 to establish a maturity date of December 31, 2021, and was paid in full in April 2022 (see below). All fees incurred in connection with obtaining and modifying these agreements were nominal and, given the short-term maturity of one year, were expensed as incurred. There was no accounting impact to the financial statements related to the modifications. 7. Long-Term Debt Long-term debt consisted of the following at March 31, 2023 and December 31, 2022: Schedule of long-term debt March 31, 2023 December 31, 2022 Senior secured promissory notes – various investors. Monthly payments of interest only at 10% plus deferred interest of 5% accrued monthly to be paid at maturity. A minimum of one year interest is due at maturity. Matures the earlier of (a) May 15, 2023, (b) the closing of a qualified subsequent financing or (c) the closing of a change of control. The notes are senior to all other debt and are secured by substantially all assets of the Company. The notes included detachable warrants to purchase 482,268 shares of common stock at an exercise price of $3.32 per share (see Note 10 – Stockholders’ Equity). Debt issuance costs and discount totaling $1,287,160 at date of issuance were being amortized and recognized as additional interest expense over the term of the notes using the straight-line method because it was not substantially different from the effective interest rate method. We determined the expected life of the notes to be the contractual term. Interest expense related to these notes includes amortization of debt issuance costs and discount in the amount of $0 and $214,527, respectively, for the three months ended March 31, 2023 and 2022, respectively. The notes were paid in full in April 2022. $ — $ — Note payable – bank. Payable in monthly installments of $332, including interest at 5.8% per annum, due August 2025, secured by equipment and personally guaranteed by a co-founder. 8,967 9,825 Note payable – credit union. Payable in monthly installments of $508, including interest at 5.45% per annum, due July 2026, secured by a vehicle and personally guaranteed by a co-founder. 18,098 19,364 Note payable – SBA. Economic Injury Disaster Loan payable in monthly installments of $731, including interest at 3.75% per annum, due May 2050, and personally guaranteed by a co-founder. 149,328 150,114 20 Note payable – individual. Monthly payments of interest only at 10% per annum, matured December 31, 2021 resulting in the entire principal balance recorded in current portion of long-term debt on the accompanying Balance Sheets for the year ending December 31, 2021; pursuant to the note, the past due balance is subject to 1% additional monthly interest which increases one percent for each month beyond maturity date, unsecured. The Company remained in compliance with the extended maturity interest payments and paid the note in full in April 2022. — — Note payable – finance company. Payable in monthly installments of $994, including interest at 8.5% per annum, due July 2026, secured by a vehicle and personally guaranteed by a shareholder. The Note was paid in full September 2022. — — Note payable – finance company. Payable in monthly installments of $2,204, including interest at 11.21% per annum, due August 2026, secured by a vehicle and personally guaranteed by a co-founder. The note was paid in full January 2023. — 79,963 Notes payable – The Company has six notes payable to GM Financial for vehicles at March 31, 2023 and December 31, 2022. In April 2022, the Company secured a commercial line up to $300,000 to be used to finance vehicle purchases. The agreementexpired in April 2023 but was renewed for a commercial line up to $350,000 and prevailing GM Financial existing term notes will remain. The new agreement expires in April 2024. The notes are payable in aggregate monthly installments of $4,679, including interest at rates ranging from 5.89% to 7.29% per annum, mature at various dates from October 2027 to May of 2028, and are secured by the related vehicles. Two of the notes are personally guaranteed by a co-founder. 241,228 251,209 Total $ 417,621 $ 510,475 Less current portion ( 53,975 ) ( 71,426 ) Long-term debt, net of unamortized debt discount and current portion $ 363,646 $ 439,049 Future maturities of long-term debt are as follows: Schedule of long term debt payment Twelve months ending March 31, 2024 $ 53,975 2025 57,346 2026 58,648 2027 55,953 2028 51,143 Thereafter 140,556 Total $ 417,621 8. Shareholder Promissory Notes As of both March 31, 2023 and December 31, 2022, the Company had an outstanding principal balance of $825,000 due to shareholders under unsecured Promissory Notes Agreements (“Notes”). The Notes require monthly interest-only payments at 10% per annum. The Notes mature at various dates from August 2023 to December 2024 as follows: August 2023 - $500,000; January 2024 - $125,000; and December 2024 - $200,000. Interest paid to the shareholders under the Notes totaled $ 20,627 and $ 20,627 during the three months ended March 31, 2023 and March 31, 2022, respectively. There was no accrued interest as of March 31, 2023 or December 31, 2022 related to these Notes. 9. Commitments and Contingencies Operating Leases The Company leases its warehouses and office space under long-term lease arrangements. None of its leases include characteristics specified in ASC 842, Leases , that require classification as financing leases, and accordingly, these leases are accounted for as operating leases. The Company does not recognize a right-of-use asset and lease liability for short term leases, which have terms of 12 months or less. For longer-term lease arrangements that are recognized on the Company’s Balance Sheet, the right-of-use asset and lease liability are initially measured at the commencement date based upon the present values of the lease payments due under the leases. 21 The implicit interest rates of the Company’s lease arrangements are generally not readily determinable and as such, the Company applies an incremental borrowing rate, which is established based upon the information available at the lease commencement date, to determine the present value of lease payments due under the arrangement. Under ASC 842, the incremental borrowing rate (IBR) for leases must be (1) a rate of interest over a similar term, and (2) for an amount that is equal to the lease payments. The Company uses both the Federal Reserve Economic Data (FRED) U.S. corporate debt effective yield and the U.S. Treasury rates adjusted for credit spread as the primary data points for purposes of determining the IBR. In the first quarter of 2022, the Company entered into two new long-term, non-cancelable operating lease agreements for office and warehouse space resulting in the Company recognizing an additional lease liability totaling of $2,348,509, representing the present value of the lease payments discounted using an effective interest rate of 8.07% and 8.86%, and corresponding right-of-use assets of $2,348,509. The leases expire in December 2026 and December 2028. The second lease contains one three-year option to renew. The lease is guaranteed by a co-founder. In the first quarter of 2021, the Company entered into a long-term, non-cancelable operating lease agreement for office and warehouse space resulting in the Company recognizing an additional lease liability totaling of $1,268,089, representing the present value of the lease payments discounted using an effective interest rate of 7.47% and a corresponding right-of-use asset of $1,268,089. The lease expires in January 2028 and contains one three-year option to renew. The lease is guaranteed by the a co-founder. The Company has two other leases—one that expired in January 2023 and one that expires in February 2025. The leases generally provide for annual increases based on a fixed amount and generally require the Company to pay real estate taxes, insurance, and repairs. Both leases are guaranteed by the a co-founder. The following is a summary of total lease costs during the three months ended March 31, 2023 and 2022: Schedule of lease cost Three Months Ended March 31, 2023 2022 Operating lease cost $ 188,029 $ 164,360 Short-term lease costs 150 1,838 Variable lease costs — — Sublease income ( 18,596 ) ( 48,599 ) $ 169,583 $ 117,599 The weighted-average remaining lease term was 5.25 years and 5.49 years as of March 31, 2023 and December 31, 2022, respectively. The weighted average discount rate was 8.49% and 8.48%, as of March 31, 2023 and December 31, 2022, respectively. Operating cash flows from the operating leases totaled $92,107 and $93,756 for the three months ended March 31, 2023 and 2022, respectively. The total lease liability as of March 31, 2023 and December 31, 2022 was $3,113,919 and $3,220,019, respectively. 22 The following is a maturity analysis of the annual undiscounted cash flows of the operating lease liabilities as of March 31, 2023, for years ending March 31: Schedule of future minimum lease payment Total 2024 $ 721,358 2025 737,560 2026 717,328 2027 722,542 2028 655,027 Thereafter 337,708 Total future minimum lease payments $ 3,891,523 Less imputed interest $ ( 777,604 ) Total $ 3,113,919 Current lease liability $ 475,738 Noncurrent lease liability 2,638,181 Total $ 3,113,919 Subleases The Company subleases office and warehouse space under three of its existing operating leases with similar terms as the Company’s lease agreements. Because the Company is not relieved of its primary obligations under the original lease, the Company accounts for the subleases as a lessor. Sublease rental income is recorded based on the contractual rental payments which are not substantially different from recognition on a straight-line basis over the lease term and totaled $20,161 and $36,113 during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023 and December 31, 2022, deferred income and a sublease deposit totaled $4,445 and $14,168, respectively, and is included in accrued expenses and other current liabilities on the accompanying Balance Sheets. The following are the total future minimum sublease payments as of March 31, 2023: Schedule of future minimum sublease payments Twelve months ending March 31, 2024 $ 41,864 2025 39,428 Total future minimum lease payments $ 81,292 Litigation The Company may be involved from time to time in litigation or claims arising in the ordinary course of its business. While the ultimate liability, if any, arising from these claims cannot be determined with certainty, the Company believes that the resolution of any such matters will not likely have a material adverse effect on the Company’s financial statements. On November 22, 2022, Expion360 Inc. (the “Company”) received notice of a complaint (the “Complaint”) filed against it in Oregon state court by Ravi Sinha. The Complaint alleges, inter alia , that Mr. Sinha is entitled to 282,284 shares of the Company’s common stock, or in the alternative, $300,000 plus interest in connection with services he previously rendered the Company as its chief executive officer. On March 21, 2023, the Company entered into a settlement agreement with Mr. Sinha and the matter has been resolved with cash and the issuance of common stock (see Note 10 – Stockholders’ Equity). 10. Stockholders Equity The Company is authorized to issue an aggregate of 220,000,000 shares of capital stock, par value $0.001 per share, consisting of 200,000,000 shares of common stock and 20,000,000 shares of preferred stock. On March 31, 2023, at the closing price of $4.84 per share, the Company issued 52,000 shares of common stock as part of the settlement agreement with Mr. Sinha dated March 21, 2023. As of March 31, 2023 and December 31, 2022, 6,900,566 and 6,802,464 shares, respectively, of common stock were issued and outstanding. No shares of preferred stock have been issued. 23 A holder of common stock is entitled to one vote for each share of common stock. The holders of common stock have no conversion, redemption or preemptive rights and shall be entitled to receive dividends when, as, and if declared by the board of directors. Upon dissolution, liquidation, or winding up of the Company, after payment or provision for payment of debts and other liabilities of the Company, subject to the rights, if any, of the holders of any class or series stock having a preference over the right to participate with common stock with respect to the distribution of assets of the Company upon such dissolution, liquidation, or winding up of the Company, the holders of common stock shall be entitled to receive the remaining assets of the Company available for distribution to its stockholders ratably in proportion to the number of shares of common stock held. Since no shares of preferred stock have been issued, no rights and privileges of preferred stockholders have been defined. Initial Public Offering On April 1, 2022, the Company completed an initial public offering (“IPO”). 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. The Company incurred IPO costs of $2,494,763 resulting in net proceeds of $14,772,487. Additionally, during the year ended December 31, 2022, the Company issued 35,714 shares of common stock at $7.00 per share to an outside third party in exchange for IPO services. The fair value of the shares of $249,998 were recorded as an increase to common stock of $36 (35,714 shares at $.001 par value) and additional paid in capital of $249,962 and a corresponding reduction to additional paid in capital of $249,998, resulting in a net decrease in additional paid in capital of $36. Warrants/Options On April 1, 2022, the Company issued warrants to IPO underwriters to purchase 148,005 shares of common stock at an exercise price of $9.10 per share. The warrants are exercisable 180 days after grant (September 27, 2022) and expire 5 years from date of grant (March 31, 2027). The fair value of the warrants was determined at date of issuance using the Black-Scholes option-pricing model and the following assumptions: per share price of common stock on date of grant of $7, expected dividend yield of 0%, expected volatility of 110.03%, risk-free interest rate of 2.55% and expected life based on contractual life of 5 years. The fair value of $916,238 was recorded as an increase in additional-paid-in capital and a reduction to additional paid-in capital since the warrants were issued as IPO fees to underwriters, resulting in a zero impact to additional paid-in capital. During the period ending March 31, 2023, 15,000 warrants exercisable at $3.32 per share were exercised on a cash basis which resulted in the issuance of 15,000 shares of common stock. This leaves 544,431 warrants remaining with an exercise price of $3.32. During the period ending March 31, 2023, 73,000 warrants exercisable at $2.90 per share were exercised using the cashless conversion option which resulted in the issuance of 31,102 shares of common stock. This leaves 78,000 warrants remaining with an exercise price of $2.90. As of March 31, 2023 and December 31, 2022, a total of 770,436 and 858,436 warrants were issued and outstanding, respectively. As of March 31, 2023 and December 31, 2022, a total of 30,000 options, which were not issued under a specified plan, were outstanding. As of March 31, 2023, below is a summary of the various warrants/options issued and outstanding: Schedule of various warrants/options issued and outstanding Number of warrants/non-plan options Exercise Price Weighted Average Remaining Life (Yrs) 544,431 $ 3.32 8.65 78,000 $ 2.90 1.61 30,000 $ 3.32 1.61 148,005 $ 9.10 4.00 800,436 24 Stock Option Plans As of March 31, 2023, the Company had adopted two stock-based compensation plans, the 2021 Incentive Award Plan and the 2021 Employee Stock Purchase Plan, both of which are described below and became effective upon the initial public offering. On May 2, 2022, the Company granted 829,500 options under the 2021 Incentive Award Plan. No shares have been issued to date under the 2021 Employee Stock Purchase Plan. The compensation cost that has been charged against operations was $2,114,529 for the year ended December 31, 2022. 2021 Incentive Award Plan The purpose of the Company’s 2021 Incentive Award Plan is to enhance the Company’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing these individuals with equity ownership opportunities. Various stock-based awards may be granted under the plan to eligible employees, consultants, and non-employee directors. The number of shares issued under the plan is subject to limits and is adjusted annually. No more than 1,000,000 shares may be issued pursuant to the exercise of incentive stock options. The aggregate share limit will be subject to an annual increase on the first day of each calendar year ending on and including January 1, 2031, by a number of shares equal to the lesser of (i) a number equal to 5% of the aggregate number of shares of the Company's common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the Company's board or committee. As of March 31, 2023, the aggregate number of shares that can be issued under the Plan is 1,199,623 of which 829,500 have been granted. The number of shares granted, the exercise price, and the terms will be determined at date of grant; however, the exercise price shall not be less than 100% of the fair value on the grant date (110% for options granted to greater than 10% shareholders) and the term shall not exceed ten years. 2021 Employee Stock Purchase Plan The purpose of the Company’s 2021 Employee Stock Purchase Plan is to assist eligible employees of the Company in acquiring a stock ownership in the Company and to help such employees provide for their future security and to encourage them to remain in the employment of the Company. The plan consists of a Section 423 Component and Non-Section 423 Component. The Section 423 Component is intended to qualify as an employee stock purchase plan and also authorizes the grant of options. Options granted under the Non-Section 423 Component shall be granted pursuant to separate offerings containing sub-plans. The Company may make one or more offerings under the plan. The duration and timing of each offering period may be established or changed by the board, but in no event may an offering period exceed 27 months and in no event may the purchase period for the option exceed the duration of the offering period under which it is established. On each exercise date for an offering period, each participant shall automatically be deemed to have exercised the option to purchase the largest number of whole shares which can be purchased under the offering. Option awards are generally granted with an exercise price equal to 85% of the lesser of the fair market value of a share on (a) the applicable grant date and (b) the applicable exercise date, or such other price as designated by the administrator, provided that in no event shall the option price be less that the per share par value price. The maximum number of shares granted under the plan shall not exceed 2,500,000 shares. The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon similar traded companies’ historical share price movements as adequate historical experience is not available to provide a reasonable estimate. Expected term is calculated based on the simplified method as adequate historical experience is not available to provide a reasonable estimate. The simplified method will continue to apply until enough historical experience is available to provide a reasonable estimate of the expected term. The risk-free interest rate is calculated based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has historically not paid dividends and have no foreseeable plans to pay dividends. 25 The Company has computed the fair value of all options granted during the year ended December 31, 2022 using the following assumptions: Schedule of assumptions used Expected volatility 109.48 % - 113.32 % Expected dividends None Expected term (in years) 2.5 – 5.01 Risk free rate 2.83 % – 3.01 % The Company did not grant any options during the three months ending March 31, 2023. The following table summarizes the Company’s stock option activity under the 2021 Incentive Plan: Schedule of stock option activity (in thousands except number of options and per options data) Number of options Weighted average exercise price Weighted average remaining contractual term (in years) Aggregate intrinsic value (1) Outstanding at beginning of period — $ — — — Granted 829,500 3.43 — 1,173,130 Exercised — — — — Forfeited — — — — Outstanding at end of period 829,500 $ 3.43 8.01 $ 1,173,130 Exercisable at end of period 829,500 $ 3.43 8.01 $ 1,173,130 (1) The aggregate intrinsic value of options outstanding and options exercisable as of March 31, 2023 is $1,173,130, as all options are in the money. The weighted-average grant-date fair value of the options granted during the three months ended March 31, 2023 to employees and non-employees was $ 1,847,193 and $ 267,336 , respectively. All options were immediately vested and there was no unrecognized compensation expense as of March 31, 2023. Common Stock Reserved for Future Issuance The following is a summary of common stock shares reserved for future issuance as of March 31, 2023: Schedule of common stock shares reserved for future issuance Exercise of warrants 770,436 Exercise of options unrelated to any Plan 30,000 Exercise of stock options – 2021 Incentive Award Plan 829,500 Total shares of common stock reserved for future issuances 1,629,936 11. Income Taxes The Company has incurred losses and consequently recorded no provision for state or federal income taxes for the three months ended March 31, 2023. The Company maintains a full valuation allowance on all deferred tax assets, as it has concluded that it is more likely than not that these assets will not be realized. As of March 31, 2023 and December 31, 2022, there were no material unrecognized tax benefits included in the accompanying balance sheets that would, if recognized, affect the effective tax rate. For the three months ended March 31, 2023 and 2022, the Company incurred a provision for state franchise fees of $ 0 and $ 150 , respectively. 26 12. 401(k) Plan The Company adopted a 401(k) Plan (“Plan”) for the benefit of its employees. Employees may contribute to the Plan within defined limits as defined by the Internal Revenue Service. Substantially all employees are eligible to participate. The Company has the option to make profit sharing contributions at its discretion. No profit-sharing contributions have been made. 13. Related Party Transactions As of March 31, 2023 and December 31, 2022, related party transactions consisted of Shareholder Promissory Notes (see Note 8 – Shareholder Promissory Notes). 14. Subsequent Events The date to which events occurring after March 31, 2023, the date of the most recent Balance Sheets, have been evaluated for possible adjustment to the financial statements or disclosures is May 10, 2023, which is the date the financial statements were issued. In April 2023, the Company had 22,606 cashless warrants exercised resulting in 10,151 additional shares of common stock issued. 27