Expion360 Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The 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 and six months ended June 30, 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. These risks 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 to rounding. OVERVIEW We focus on the design, assembly, manufacturing, and sales of lithium iron phosphate (LiFePO4) batteries and supporting accessories for recreational vehicles (“RVs”) and marine applications with plans to expand into home energy storage products and industrial applications. We design, assemble, and distribute high-powered, lithium battery solutions using ground-breaking concepts with a creative sales and marketing approach. 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 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. Our corporate headquarters are based in Redmond, Oregon, with assembly in the United States and suppliers based in Asia and Europe. 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. Our 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. Additional focus markets include home energy storage, where we aim to provide a cost-effective, low barrier of entry, and a do-it-yourself (“DIY”) flexible system for those looking to power their homes via solar energy, wind, or grid back-up. Along with RV/Marine and home energy storage markets, we aim to provide additional capacities to the ever-expanding electric forklift and industrial material handling markets. Expion360’s 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. Our products provide numerous advantages for various industries that are looking to migrate to lithium-based energy storage. They incorporate detailed-oriented design and engineering and strong case materials and internal and structural layouts and are backed by responsive customer service. 28 COMPETITIVE STRENGTHS We believe the following strengths differentiate Expion360 and create long-term sustainable competitive advantages. Superior Capacity to Lead Acid Competitors Lead-acid batteries have always been the standard in RV and marine transportation vehicles. Our lithium-ion batteries offer superior capacity to our lead-acid competitors. Our batteries utilize lithium iron phosphate, and therefore, are expected to have a lifespan of approximately 12 years — three to four times that of certain lead-acid batteries and with ten times the number of charging cycles. Furthermore, our typical battery provides three times the power of the typical, lead-acid battery despite being half the weight (comparing, for example, a typical lead-acid battery like Renogy Deep Cycle AGM, which is rated at 100Ah, to our own LFP 100Ah battery and assuming slow discharge at a .1C rate). Battery Pack Flexibility Our 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. 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 Expion360 is managed by a team with a strong track record in the RV and clean energy spaces. 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 While RV and marine applications currently drive revenue, Expion360 has plans to expand into the home energy market in the coming years. Our 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. In 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 station. 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. 29 Additionally, in June 2023, Expion360 unveiled e360 SmartTalk, an innovative mobile app that allows the seamless integration and management of e360 Bluetooth enabled lithium iron phosphate (LiFePO4) batteries. The technology enables users to wirelessly monitor and manage e360 batteries, providing a view of individual battery conditions and performance as well as a comprehensive view of an entire power bank consisting of multiple e360 batteries. The 48 Volt GC2 LiFePO4 battery was also introduced in June 2023 as our first e360 SmartTalk Battery for powering electric golf carts and other light electric vehicles (LEVs). Strong National Retail Customers and Distribution Channels Expion360 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, and Meyer Distributing, both distributors of aftermarket RV parts. RECENT DEVELOPMENTS AND TRENDS Key Factors Affecting Our Operating Results Our operating results and financial performance are significantly dependent on the following factors: Consumer Demand Although 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. 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, higher interest rates, and other changes in macroeconomic conditions which have created a decrease in end user spending decisions which is affecting our markets. These conditions could have a negative effect on our business. While RV and marine applications drive current revenues, Expion360 has plans to expand into the home energy market in the coming years. Our 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. 30 Manufacturing and Supply Chain Our 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. Our 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 suppliers. 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 We sell seven 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. Accessory 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. Competition We 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. 31 Research and Development We 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. New 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 Revenue 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. Materially, all of our sales are within the United States. Cost of Sales Our primary cost of sales as a percentage of sales is related to our direct product and landing costs. Direct labor costs consist of payroll costs (including taxes and benefits) of employees directly engaged in assembly activities. 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 Selling, 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, and tax and accounting services. Interest and Other Income, net Interest 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 June 30, 2023, all debt issuance costs have been fully amortized. 32 Provision for Income Taxes The 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 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. The 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 June 30, 2023 or December 31, 2022. The 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 June 30, 2023 or December 31, 2022 and did not recognize interest and/or penalties in the statement of operations for the years ended June 30, 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 Arrangements We have no material off-balance sheet arrangements. RESULTS OF OPERATIONS The following table sets forth certain operational data as a percentage of sales: Three Months Ended Six Months Ended June 30, June 30, 2023 2022 2023 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 73.7 67.9 72.2 64.0 Gross profit 26.3 32.1 27.8 36.0 Selling, general, and administrative expenses 113.1 164.4 126.0 110.6 Loss from operations (86.8 ) (132.4 ) (98.2 ) (74.6 ) Other expense — net (1.1 ) 53.4 8.7 35.3 Loss before income taxes (85.7 ) (185.7 ) (106.9 ) (109.9 ) Net loss (85.7 ) (185.7 ) (106.9 ) (109.9 ) Sales, net Sales, net for the three months ended June 30, 2023 decreased by $478,000, or 21.7%, compared to the three months ended June 30, 2022. Sales were $2.2 million for the three months ended June 30, 2022 and $1.7 million for the three months ended June 30, 2023. 33 Sales, net for the six months ended June 30, 2023 decreased by $1.1 million, or 25.8%, compared to the six months ended June 30, 2022. Sales were $4.4 million for the six months ended June 30, 2022 and $3.2 million for the six months ended June 30, 2023. The year over year decrease was primarily attributable to a large initial stocking order for one of our resellers which was fulfilled in the first and second quarters of 2022. Additionally, the second quarter of 2022 included back orders that were fulfilled with inventory purchased with IPO proceeds. Cost of Sales Total cost of sales for the three months ended June 30, 2023 decreased by $226,000, or 15.1%, compared to the three months ended June 30, 2022. Cost of sales were $1.5 million for the three months ended June 30, 2022 and $1.3 million for the three months ended June 30, 2023. Cost of sales as a percentage of sales increased by 5.7% in that period. Total cost of sales for the six months ended June 30, 2023 decreased by $455,000, or 16.3%, compared to the six months ended June 30, 2022. Cost of sales were $2.8 million for the six months ended June 30, 2022 and $2.3 million for the six months ended June 30, 2023. Cost of sales as a percentage of sales increased by 8.2% in that period. The percentage increase in cost of sales was primarily related to the lower sales volume resulting in lower absorption of our fixed facilities costs and labor, along with 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 Our gross profit for the three months ended June 30, 2023 decreased by $252,000, or 35.7%, compared to the three months ended June 30, 2022. Gross profit was $706,000 for the three months ended June 30, 2022 and $454,000 for the three months ended June 30, 2023. Gross profit as a percentage of sales decreased by 5.7% for that period, from 32.0% for the three months ended June 30, 2022 to 26.3% for the three months ended June 30, 2023. Our gross profit for the six months ended June 30, 2023 decreased by $670,000, or 42.7%, compared to the six months ended June 30, 2022. Gross profit was $1.6 million for the six months ended June 30, 2022 and $898,000 for the six months ended June 30, 2023. Gross profit as a percentage of sales decreased by 8.2% for that period, from 36.0% for the six months ended June 30, 2022 to 27.8% for the six months ended June 30, 2023. The decrease in gross profit was primarily attributable to the lower sales volume resulting in lower absorption of our fixed facilities costs and labor, along with 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 Selling, general and administrative expenses decreased by $1.7 million, or 46.1%, to $2.0 million for the three months ended June 30, 2023 compared to $3.6 million for the three months ended June 30, 2022. Selling, general and administrative expenses decreased by $745,000, or 15.5%, to $4.1 million for the six months ended June 30, 2023 compared to $4.8 million for the six months ended June 30, 2022. The change is primarily due to a decrease in non-cash stock-based compensation of $2,114,529 which was partially offset by a $759,714 increase in legal and professional services and a $141,094 increase in sales and marketing. 34 Presented in the table below is the composition of selling, general and administrative expenses: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Salaries and benefits $ 845,479 $ 2,804,205 $ 1,625,738 $ 3,430,567 Legal and professional 318,661 155,964 1,022,246 262,532 Sales and marketing 297,673 151,701 452,832 311,738 Rents, maintenance, utilities 145,148 177,794 294,801 310,797 Research and development 94,078 107,058 171,258 112,375 Software, fees, tech support 56,095 37,138 105,181 76,061 Depreciation 47,919 35,459 88,447 62,893 Travel expenses 38,656 36,506 108,140 73,154 Insurance 34,676 19,813 66,542 39,401 Supplies, office 14,311 56,077 38,712 86,968 Other 58,968 39,857 98,662 51,462 Total $ 1,951,664 $ 3,621,572 $ 4,072,559 $ 4,817,948 Other Expense Our other (income)/expense for the three months ended June 30, 2023 and 2022 was ($18,000) and $1.18 million, respectively. Other income for the three months ended June 30, 2023 was made up almost entirely of interest income related to investments. Other expense for the three months ended June 30, 2022 was made up almost entirely of interest expense of debt obligations and the amortization of debt discount. Our other expense for the six months ended June 30, 2023 and 2022 was $281,000 and $1.54 million, respectively. Other expense for the six months ended June 30, 2023 was made up almost entirely of settlement expense. Other expense for the six months ended June 30, 2022 was made up almost entirely of interest expense of debt obligations and the amortization of debt discount. During the three months ended June 30, 2023 and 2022, non-cash amortization of debt discount totaled $0 and $982,317, respectively. Interest expense attributable to debt obligations totaled $26,000 and $193,000 during the three months ended June 30, 2023 and 2022, respectively. During the six months ended June 30, 2023 and 2022, non-cash amortization of debt discount totaled $0 and $1.20 million, respectively. Interest expense attributable to debt obligations totaled $65,000 and $341,000 during the six months ended June 30, 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 Our net loss for the three months ended June 30, 2023 and 2022 was $1.5 million and $4.09 million, respectively. Our net loss for the six months ended June 30, 2023 and 2022 was $3.5 million and $4.79 million, respectively. The decrease in net loss was primarily the result of decreased selling, general, and administrative expenses as we incurred lower non-cash stock-based compensation and no interest expense from the amortization of debt discount. Additionally, for the period ended June 30, 2023, the Company recognized $281,680 in non-cash stock-based settlement expenses, compared to $0 for the period ended June 30, 2022. See Item 1 “Legal Proceedings” of Part II Other Information. 35 LIQUIDITY AND CAPITAL RESOURCES Overview Our operations have been financed primarily through net proceeds from the sale of securities and from borrowings. As of June 30, 2023 and December 31, 2022, our current assets exceeded current liabilities by $8.0 million and $10.8 million, respectively, and we had cash and cash equivalents of $3.6 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. We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred within the next twelve months and believe those requirements to consist primarily of funds necessary to pay operating expenses, interest and principal payments on our debt, and capital expenditures related to assembly line expansion. As of June 30, 2023, we expect our short-term liquidity requirements to include (a) approximately $379,000 of capital additions; (b) principal debt payments totaling approximately $174,000; and (c) lease obligation payments of approximately $726,000, including imputed interest. We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next twelve months. 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. For the three and six months ended June 30, 2023 and 2022, respectively, the Company 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 period ended June 30, 2023 are issued. However, management is working to address its cash flow challenges, including raising additional capital, managing inventory levels, identifying alternative supply chain resources, and continuing to develop our in-house assembly lines. See also the risk factor entitled “Our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern and a continuation of negative financial trends could result in our inability to continue as a going concern” in Item 1A, “Risk Factors” of our 2022 From 10-K. Financing Obligations On April 1, 2022, we closed our initial public offering which resulted in approximately $14.8 million of net proceeds, of which approximately $2,464,000 was used to pay down principal and accrued interest on high interest-bearing debt. As of June 30, 2023, the Company’s debt totaled $374,000, comprised of $149,000 outstanding under a COVID-19 Economic Injury Disaster Loan, $200,000 outstanding under vehicle financing arrangements, and an equipment loan for $8,000. In January 2023, the Company repaid a vehicle loan with an interest rate of 11.21% in the amount of $89,360 which included principal, interest, and fees. In May 2023, the Company sold a vehicle including repayment of the related vehicle loan with an interest rate of 5.89% in the amount of $31,568 which included principal and interest. In addition, as of June 30, 2023, the Company had outstanding stockholder loans totaling $825,000. Stockholder Promissory Notes Unsecured promissory notes due to stockholders had an outstanding principal balance of $825,000 as of June 30, 2023. The unsecured promissory notes require monthly interest-only payments at 10% per annum and mature at various dates from January 2024 to December 2024. See Note 8 – Stockholder Promissory Notes in Item 1 – Financial Statements of Part I – Financial Information. 36 Vehicle Financing Arrangements As of June 30, 2023, the Company has five notes payable to GM Financial for vehicles. In addition, the commercial line secured in April 2022 for $300,000 was renewed in April 2023 and increased to $350,000. This commercial line may be used to finance vehicle purchases and expires in April 2024. The notes are payable in aggregate monthly installments of $4,084, 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 of the Company. See Note 7 – Long-Term Debt in Item 1 – Financial Statements of Part I – Financial Information. Cash Flows The following table shows a summary of our cash flows for the periods presented: Six Months Ended June 30, 2023 2022 Net cash provided by / (used in) operating activities $ (3,521,527 ) $ (2,727,928 ) Net cash provided by / (used in) investing activities $ 3,714 $ (138,674 ) Net cash provided by / (used in) financing activities $ (87,188 ) $ 12,483,840 Cash flows used in operating activities Our largest source of operating cash is cash collection from sales of our products. Our primary use of cash in operating activities are for increases in inventory purchases, legal and professional services, increased marketing, and research and development. In the last several years, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the sales of common stock. We generated negative cash flows from operating activities of $3.5 million for the six months ended June 30, 2023, compared to negative cash flows of $2.7 million for the corresponding period in 2022. Factors affecting operating cash flows during the periods included: · For the six months ended June 30, 2023, our loss of $3.5 million was reduced by non-cash transactions including a stock-based settlement of $252,000 and depreciation of $102,000. For the six months ended June 30, 2022, our loss of $4.8 million was adjusted and reduced by non-cash transactions including stock-based compensation of $2.1 million and amortization of debt discount of $1.2 million. · The increase in accounts receivable was $92,000 and $45,000 for the six months ended June 30, 2023 and 2022, respectively. Sales are generally collected within 30 to 45 days. These changes are mainly due to timing where a few large orders were placed and had open balances at a given date. · The decrease in accounts payable was $11,000 and $27,000 for the six months ended June 30, 2023 and 2022, respectively. These changes are mainly due to timing of when payments are due. · Other significant changes include an increase in customer deposits of $157,000 during the six months ended June 30, 2023, representing deposits for custom orders placed in early 2023 for orders that will be shipped and invoiced throughout 2023. · Cash used for inventory and prepaid inventories increased by $437,000 and $706,000 for the six months ended June 30, 2023 and 2022, respectively. The increases are primarily due to timing of significant purchases and prepayments of inventory to Chinese suppliers. Turnaround time for receiving inventory from foreign sources can take up to 120 days, with prepayments required. 37 Cash flows used in investing activities Cash was provided by investing activities in the amount of $4,000 for the six months ended June 30, 2023, and cash was used in investing activities in the amount of $139,000 for the six months ended June 30, 2022. We have had fewer purchases of property and equipment in the six months ended June 30, 2023 than we had in the same period in 2022. We have also received proceeds from selling property and equipment in the six months ended June 30, 2023 that we did not have in the same period in 2022. We anticipate that we will spend up to $379,000 in 2023 as we continue to automate our new assembly line and enhance our quality control measures. Cash flows provided by financing activities Cash used in financing activities was $87,000 for the six months ended June 30, 2023 and cash provided by financing activity was $12.5 million for the six months ended June 30, 2022. For the six months ended June 30, 2023, we paid down debt principal of $137,000, which was offset by net cash proceeds of $50,000 from the exercise of warrants. For the six months ended June 30, 2022, we had net proceeds from the issuance of common stock of $14.8 million due to the IPO, paid down debt principal of $1.7 million, and paid lines of credit of $550,000. Contractual and Other Obligations Our estimated future obligations consist of long-term operating lease liabilities. As of June 30, 2023, the Company had $3.0 million in long-term operating lease liabilities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The above discussion and analysis of our financial condition and results of operations is based upon our financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. Our significant accounting policies are described in Note 2 of the accompanying unaudited interim financial statements. Critical accounting policies are those that we consider to be the most important in portraying our financial condition and results of operations and also 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. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing the financial statements. 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 June 30, 2023 and December 31, 2022, the Company had inventory that consisted of finished assemblies totaling $2,342,945 and $2,722,765, respectively, and raw materials (inventory components, parts, and packaging) totaling $2,624,380 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 June 30, 2023 or December 31, 2022. The Company prepays for inventory purchases from foreign suppliers. Prepaid inventory totaled $160,854 and $141,611 at June 30, 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. 38 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: Vehicles and transportation equipment 5 - 7 years Office furniture and equipment 3 - 7 years Manufacturing equipment 3 - 10 years Warehouse equipment 3 - 10 years Tooling and molds 3 - 10 years QA equipment 3 - 10 years 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. 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. Shipping and Handling Costs Shipping and handling fees billed to customers are classified on the Statement of Operations as “Sales, net” and totaled $15,365 and $7,230 during the three months ended June 30, 2023 and 2022, respectively, and $24,898 and $11,381 during the six months ended June 30, 2023 and 2022, respectively. Shipping and handling costs for shipping product to customers totaled $48,549 and $43,934 during the three months ended June 30, 2023 and 2022, respectively, and $91,757 and $82,658 during the six months ended June 30, 2023 and 2022, respectively, and are classified in selling, general, and administrative expense in the accompanying Statements of Operations. 39 Research and Development Research and development costs are expensed as incurred. Research and development costs charged to expense amounted to $94,078 and $107,058 for the three months ended June 30, 2023 and 2022, respectively, and $171,258 and $112,375 for the six months ended June 30, 2023 and 2022, respectively, 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. 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 June 30, 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. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This 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 regarding the markets where we operate, any statements of the plans and objectives of our management for future operations, any statements concerning proposed new products or services, any statements regarding expected capital expenditures, 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 statement. 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 statements. 40 Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: · We operate in an extremely competitive industry and are subject to pricing pressures. · We have a history of losses and our audited financial statements include a statement that there is a substantial doubt about our ability to continue as a going concern. As our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability. · Our business and future growth depends on the needs and success of our customers, and we have substantial customer concentration. · We may not be able to successfully manage our growth. · We may be negatively impacted by public health epidemics or outbreaks, including the novel coronavirus (“COVID-19”) as well as uncertainty in global economic conditions. · We may fail to expand our sales and distribution channels and our ability to expend into international markets is uncertain. · Nearly all of our raw materials enter the United States through a limited number of ports, and we rely on third parties to store and ship some of our inventory; labor unrest at these ports or other product delivery difficulties could interfere with our distribution plans and reduce our revenue. · Government reviews, inquiries, investigations, and actions could harm our business or reputation. · We are dependent on third-party manufacturers and suppliers, including suppliers located outside the United States, and our operating results could be adversely affected by changes in the cost and availability of raw materials as well as increases in costs, disruption of supply, or shortage of any of our battery components, such as electronic and mechanical parts, or raw materials used in the production of such parts. · We rely on two warehouse facilities and if any of our facilities becomes inoperable for any reason or if our expansion plans fail, our ability to produce our products could be negatively impacted. · Lithium-ion battery cells have been observed to catch fire or release smoke and flame, which may have a negative impact on our reputation and business. · We could face potential product liability claims relating to our products, which could result in significant costs and liabilities, which would reduce our profitability. · Our operations expose us to litigation, tax, environmental, and other legal compliance risks. · Our failure to introduce new products and product enhancements and broad market acceptance of new technologies introduced by our competitors could adversely affect our business. · We may not be able to adequately protect our proprietary intellectual property and technology and we may need to defend ourselves against intellectual property infringement claims. 41 · Quality problems with our products could harm our reputation and erode our competitive position. · Our ability to raise capital in the future may be limited and our stockholders may be diluted by future securities offerings. · We depend on our senior management team and other key employees, and significant attrition within our management team or unsuccessful succession planning could adversely affect our business. · We are an “emerging growth company” and elect to comply with certain reduced reporting requirements applicable to emerging growth companies, which could make our securities less attractive to investors. · Such other factors as discussed in Item 1A “ Risk Factors ” of our 2022 Form 10-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Our actual results will likely differ, and may differ materially, from anticipated results. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and we assume no obligation to update or disclose revisions to those estimates. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections. NOTICE REGARDING TRADEMARKS This report includes trademarks, tradenames, and service marks that are our property or the property of others. Solely for convenience, such trademarks and tradenames sometimes appear without any “™” or “®” symbol. However, failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and tradenames. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information called for by Item 304 of Regulation S-K.