Expion360 Inc. 10-K

ITEM 7. 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 our audited financial statements and related notes for the fiscal years ended December 31, 2023 and 2022, included in this Annual Report. 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 Annual Report, including in Item 1A. “Risk Factors” and “Cautionary Note Concerning Forward-Looking Statements and Industry Data.” 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 Annual Report. Certain other amounts that appear in this section may not sum due to rounding. Overview Expion360 focuses on the design, assembly, manufacturing, and sales of LiFePO4 batteries and supporting accessories for RVs, marine applications and home energy storage products with plans to expand into 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 and marine industries. We are developing the e360 Home Energy Storage System that we expect to change the industry in barrier price, flexibility, and integration. We are deploying multiple intellectual property strategies with research and 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 primary target markets are currently the RV and marine industries. 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. We are also focused on expanding into the home energy storage market with the introduction of our two LiFePO4 battery storage solutions, where we aim to provide a cost-effective, low barrier of entry, 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 and marine industries, was launched in December 2020. The e360 product line, through its sales growth, has shown to be a preferred conversion solution for lead-acid batteries. In December 2023, we announced our entrance into the home energy storge market with our introduction of two LiFePO4 battery storage solutions that enable residential and small business customers to create their own stable micro-energy grid and lessen the impact of increasing power fluctuations and outages. 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. Recent Developments Corporate Leadership In December 2023, John Yozamp retired as our Chief Business Development Officer. In connection with Mr. Yozamp’s retirement, the Company and Mr. Yozamp entered into: (i) a consulting agreement pursuant to which Mr. Yozamp has agreed to provide services as our independent sales representative for a period of six months, subject to extension or earlier termination as provided for in the agreement, and (ii) a standard release agreement pursuant to which Mr. Yozamp agreed to release certain claims against us. 33 Convertible Note Financing and Equity Line of Credit Financing In December 2023, we entered into a securities purchase agreement (the “Note Purchase Agreement”) with 3i, LP (“3i”) pursuant to which we sold, and 3i purchased: (i) a senior unsecured convertible note we issued in the aggregate principal amount of $2,750,000, with an 10.0% original issue discount and an interest rate of 9.0% per annum (the “3i Note”), (ii) up to $247,500 in newly issued shares of Common Stock (the “Interest Shares”), which may be payable, at our option and subject to the fulfillment of certain conditions set forth in the 3i Note, to satisfy interest payments under the Note, and 63,497 shares of Common Stock, which is equal to $300,000 of shares of Common Stock calculated as of the date of the Note Purchase Agreement issued to 3i as consideration for its commitment to purchase the Note (collectively, the “3i Note Transaction”). The 3i Note is convertible into a maximum of 727,387 shares of Common Stock. The conversion of the 3i Note is subject to the terms of the Note Purchase Agreement, including the beneficial ownership limitations and share issuance caps specified therein. In connection with the 3i Note Transaction, we filed a prospectus supplement with the SEC pursuant to Rule 424(b) under the Securities Act . In December 2023, we entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”) with Tumim Stone Capital, LLC (“Tumim”), pursuant to which we have the right, but not the obligation, to sell to Tumim, and Tumim is obligated to purchase, up to the lesser of (a) $20,000,000 in aggregate gross purchase price of newly issued Common Stock and (b) the Exchange Cap (as defined in the Common Stock Purchase Agreement) (the “Equity Line of Credit Financing”). In connection with the Equity Line of Credit Financing, we filed a Registration Statement on Form S-1 (File No. 333-276663) with the SEC on January 23, 2024, which was declared effective on February 9, 2024. New Products In January 2024, we introduced our next generation GC2 and Group 27 series lithium iron phosphate (“LiFePO4”) batteries. The new versions now include higher amp-hour options (4.0Ah and 4.5Ah cell technology) and the latest advancements in power technology features, including Expion360’s proprietary Vertical Heat Conduction™ (“VHC™”) internal heating, Bluetooth® and controller area network (“CAN Bus”) communication. Expion360 began taking pre-orders of the new GC2 and Group 27 batteries in Q1 2024 with anticipated deliveries Q2 2024. See the section titled “ Business—Expansion into New Markets ” for additional information about the higher amp-hour cells and Vertical Heat Conduction™ internal heating. Debt Repayment On January 23, 2024 the Company paid off a stockholder note payable with principal due of $62,500, along with the remaining interest due. On February 29, 2024, the Company sold two trucks and paid off combined principal of $72,115 for the corresponding notes payable, as well as interest and fees. On March 11, 2024, the Company sold another truck and paid off the principal of $14,196 for the corresponding note payable, as well as interest and fees. Warrant Exercises In February 2024, a holder of 7,535 warrants previously issued by the Company with an exercise price of $3.32 exercised their warrants on a cashless basis, which resulted in the issuance of an additional 1,606 shares of Common Stock. As of the date of this Annual Report, the Company had 765,295 outstanding warrants. 34 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 (“OEMs”) 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, inflation, interest rates, and geopolitical pressures. 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 may continue to have a negative effect on our business. While RV and marine applications drive current revenues, Expion360 announced in December 2023 its entry into the home energy storage market with its introduction of two LiFePO4 battery storage solutions. Our e360 Home Energy Storage System aims to provide a cost-effective, low barrier of entry, flexible system for those looking to power their homes via solar energy, wind, or grid back-up. We see the vision of stored energy as a portable, moving concept, where stored energy can be transported from the home to other devices outside of it. The success of our strategy requires (1) continued growth of these addressable markets in line with our expectations and (2) our ability to successfully enter these markets. We expect to incur significant marketing costs understanding these new markets, and researching and targeting customers in these end markets, which may not result in sales. If we fail to execute on this growth strategy in accordance with our expectations, our sales growth would be limited to the growth of existing products and existing end markets. Manufacturing and Supply Chain Our batteries are manufactured by multiple third-party manufacturers located in Asia, 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 foreign 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 components 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. Our battery cell manufacturers have joint venture factories outside of Asia and have secured sourcing contracts from lithium suppliers in South America and Australia. In addition, we secured a secondary source for lithium iron phosphate cells used in its batteries from a supplier in Europe, enabling us to source materials outside of Asia in the event it becomes necessary to do so. 35 Product and Customer Mix As of December 31, 2023, we sell eight models of LiFEPO4 batteries, the Aura, and individual or bundled accessories for battery systems, two of which we have released over the last 12 months. 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. 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 Our revenue is generated from the sale of products consisting primarily of batteries and accessories. We recognize 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. All of our sales are primarily 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. 36 Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries and benefits, legal and professional fees, and sales and marketing costs. Other costs include facility and related costs, research and development, software and tech support, and travel expenses. Interest and Other Income, net Interest expense consists of interest costs on loans with interest rates ranging from 3.75% to 11.2% and amortization of debt issuance costs. As of December 31, 2023, we have debt issuance costs of $667,144 related to a short-term convertible note, which will be amortized January 2024 through December 2024. Provision for Income Taxes We are 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. We have 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 December 31, 2023 or December 31, 2022. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our balance sheet at December 31, 2023 or December 31, 2022 and recognize interest and/or penalties in the statement of operations for the years ended December 31, 2023 and 2022, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within the next twelve months. Off-Balance Sheet Arrangements We have no material off-balance sheet arrangements. 37 Results of Operations Year Ended December 31, 2023, Compared to the Year Ended December 31, 2022 The following table sets forth certain operational data as a percentage of sales: Fiscal Years Ended December 31, 2023 2022 $ % of Net sales $ % of Net sales Net sales $ 5,981,134 100.0 % $ 7,162,837 100.0 % Cost of sales 4,405,611 73.7 4,874,392 68.1 Gross profit 1,575,523 26.3 2,288,445 31.9 Selling, general, and administrative expenses 8,745,135 146.2 8,241,859 115.1 Loss from operations (7,169,612 ) (119.9 ) (5,953,414 ) (83.1 ) Other expense - net 283,369 4.7 1,591,976 22.2 Loss before income taxes (7,452,981 ) (124.6 ) (7,545,390 ) (105.3 ) Net loss (7,456,274 ) (124.7 ) (7,536,540 ) (105.2 ) Sales, net Sales, net for the year ended December 31, 2023 decreased by $1.2 million, or 16.5%, compared to the year ended December 31, 2022. Sales were $7.2 million for the year ended December 31, 2022 and $6.0 million for the year ended December 31, 2023. The year-over-year decrease was primarily attributable to decreases in the consumer market, driving decreases in OEM sales. Cost of Sales Total cost of sales for the year ended December 31, 2023 decreased by $469,000, or 9.6%, compared to the year ended December 31, 2022. Cost of sales were $4.9 million for the year ended December 31, 2022 and $4.4 million for the year ended December 31, 2023. Cost of sales as a percentage of sales increased by 5.6% in 2023. The change in cost of sales was primarily related to decreases in overall sales, resulting in a decrease in economies of scale pertaining to fixed costs. Gross Profit Our gross profit for the year ended December 31, 2023 decreased by $713,000, or 31.2%, compared to the year ended December 31, 2022. Gross profit was $2.3 million for the year ended December 31, 2022 and $1.6 million for the year ended December 31, 2023. Gross profit as a percentage of sales decreased by 5.6% for the year ended December 31, 2023, to 26.3% compared to 31.9% for the year ended December 31, 2022. The decrease in gross profit for the year ended December 31, 2023 was primarily attributable to lower sales volumes due to the slowdown in the RV industry resulting in lower economies of scale on the fixed costs. Selling, General and Administrative Expenses Selling, general and administrative expenses increased by $503,000, or 6.1%, to $8.7 million for the year ended December 31, 2023 compared to $8.2 million for the year ended December 31, 2022, primarily due to an increase in legal and professional fees, which was partially offset by a significant decrease achieved in salaries and benefits. In addition, sales and marketing expenses, along with research and development expenses, increased significantly for the year ended December 31, 2023 compared to December 31, 2022. 38 Presented in the table below is the composition of selling, general and administrative expenses: Fiscal Years Ended December 31, 2023 2022 Salaries and benefits $ 3,681,410 $ 4,864,239 Legal and professional 2,034,374 887,741 Sales and marketing 929,220 677,679 Rents, maintenance, utilities 573,652 616,141 Research and development 397,662 278,382 Software, fees, tech support 234,285 190,222 Travel expenses 199,845 217,626 Depreciation 182,825 151,353 Insurance 179,989 128,202 Supplies, office 58,049 135,187 Other 273,824 95,087 Total $ 8,745,135 $ 8,241,859 Other Expense Other expense for the years ended December 31, 2023 and 2022 was $283,000 and $1.6 million, respectively. Other expense for the year ended December 31, 2023 was made up almost entirely of settlement expense of $282,000, with interest income and interest expense offsetting each other at $126,000 and $125,000, respectively. Other expense for the year ended December 31, 2022 was made up almost entirely of interest expense. During the years ended December 31, 2023 and 2022, non-cash amortization of debt discount totaled $0.00 and $1.2 million, respectively. Interest expense attributable to debt obligations totaled $125,000 and $409,000 during the years ended December 31, 2023 and 2022, respectively. In April 2022, with the use of proceeds from the IPO, the Company paid off approximately $2.5 million in debt with interest rates ranging from 10.0 to 15.0%. Net Loss Our net loss for the years ended December 31, 2023 and 2022 was $7.5 million and $7.5 million, respectively. The net loss in the year ended December 31, 2023 was primarily the result of decreased sales; a large decrease in other expenses, especially interest expense, which was offset by the decreased sales, resulting in a net loss very similar for the years ended December 31, 2023 and 2022. Within selling, general, and administrative expense, a large reduction in salary and benefits expense for the year ended December 31, 2023 versus the prior year was offset by large increases in legal and professional fees and research and development, among other expenses. Liquidity and Capital Resources Overview Our operations have been financed primarily through net proceeds from the sale of securities and from borrowings. As of December 31, 2023 and 2022, our current assets exceeded current liabilities by $4.3 million and $10.8 million, respectively, and we had cash and cash equivalents of $3.9 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, which management continues to use for working capital and general corporate purposes. 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 December 31, 2023, we expect our short-term liquidity requirements to include (a) approximately $270,000 of capital additions; (b) principal debt payments totaling approximately $3.6 million net of amortization; and (c) lease obligation payments of approximately $736,000, including imputed interest. 39 We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next 12 months and believe these requirements consist primarily of funds necessary for the next 18 months. Our activities are subject to significant risks and uncertainties, including failing to secure additional funding before the Company achieves sustainable revenues and profit from operations. We expect to continue to incur additional losses for the foreseeable future, and we may need to raise additional debt or equity financing to expand our 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 years ended December 31, 2023 and 2022, we sustained recurring losses and negative cash flows from operations. These factors raise substantial doubt about our ability to continue as a going concern within twelve months after the date that the financial statements for the year ended December 31, 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 managing operational expenses. 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 this Annual Report. 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 $2.5 million was used to pay down principal and accrued interest on high interest-bearing debt. As of December 31, 2023, our long-term debt totaled $349,000, comprised of $147,000 outstanding under a COVID-19 Economic Injury Disaster Loan, $196,000 outstanding under vehicle financing arrangements, and an equipment loan for $6,000. In January 2023, we repaid a vehicle loan with an interest rate of 11.2% in the amount of approximately $89,400 which included principal, interest, and fees. In May 2023, we sold a vehicle including repayment of the related vehicle loan with an interest rate of 5.9% in the amount of approximately $31,600 which included principal and interest. In February and March 2024, we sold a total of three vehicles including repayment of the related vehicle loans in the aggregated amount of approximately $86,300 and interest rates of 5.5% to 5.9%. See Note 15 , Subsequent Events . In addition, as of December 31, 2023, we had outstanding stockholder loans totaling $762,500 and a short-term convertible note totaling approximately $2.8 million. Stockholder Promissory Notes Unsecured promissory notes due to stockholders had an outstanding principal balance of $762,500 as of December 31, 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. In January 2024, the Company repaid a $62,500 note maturing on January 29, 2024. A $500,000 note matures in August 2024 and another note for $200,000 matures in December 2024. Vehicle Financing Arrangements As of December 31, 2023, the Company has five notes payable to GM Financial for vehicles. In addition, in April 2022, the Company secured a commercial line of up to $300,000 to be used to finance vehicle purchases, which was increased to $350,000 in April 2023 and expires in April 2024. The notes are payable in aggregate monthly installments of approximately $4,100, including interest at rates ranging from 5.9% to 7.3% per annum, mature at various dates from October 2027 to May 2028, and are secured by the related vehicles. Two of the notes are personally guaranteed by a co-founder of the Company. A separate vehicle financing note has a current balance outstanding of $14,000, with monthly payments of approximately $500 at an interest rate of 5.5% and a maturity date in July 2026. See Note 7, Long-Term Debt. 40 Convertible Note Financing On December 27, 2023, we entered into a securities purchase agreement with 3i, LP (“3i”), pursuant to which the Company sold and 3i purchased a senior unsecured convertible note (the “3i Note”) in the aggregate original principal amount of $2.75 million (the “Convertible Note Financing”). The gross proceeds to us were $2.5 million, prior to the payment of legal fees and transaction expenses. The offering of securities in the Convertible Note Financing was made pursuant to an effective shelf registration statement on Form S-3 (File No. 333-272956), which we filed with the SEC on June 27, 2023 and declared effective on July 10, 2023. The principal repayment amount of the short-term convertible notes totals $2.75 million. The associated costs and expenses incurred in connection with the Convertible Note Financing of approximately $80,000 will be amortized over the 12-month period ending December 31, 2024. The convertible 3i Note requires monthly interest-only payments at 9.0% per annum, payable in cash or, subject to certain conditions set forth in the Note,common stock (subject to certain conditions), and matures December 27, 2024 unless earlier converted or redeemed. See Note 9 , Convertible Notes and Equity Line of Credit. Equity Line Purchase Agreement On December 27, 2023, we entered into a common stock purchase agreement (the “Common Stock Purchase Agreement”) with Tumim Stone Capital, LLC (“Tumim”), pursuant to which we have the right, but not the obligation, to sell to Tumim, and Tumim is obligated to purchase, up to the lesser of (a) $20,000,000 in aggregate gross purchase price of newly issued Common Stock and (b) the Exchange Cap (as defined in the Common Stock Purchase Agreement) (the “Equity Line of Credit Financing”). In connection with the Equity Line of Credit Financing, we filed a Registration Statement on Form S-1 (File No. 333-276663) with the SEC on January 23, 2024, which was declared effective on February 9, 2024. See Note 9, Convertible Note and Equity Line of Credit. Cash Flows The following table shows a summary of our cash flows for the periods presented: Years Ended December 31, 2023 2022 Net cash used in operating activities $ (5,531,232 ) $ (5,468,572 ) Net cash provided by / (used in) investing activities $ 16,578 $ (515,692 ) Net cash provided by financing activities $ 2,246,108 $ 12,412,270 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 for operating activities are related to legal and professional fees, sales and marketing expenses, 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 sales of our common stock. We generated negative cash flows from operating activities of $5.5 million for the year ended December 31, 2023, compared to negative cash flows of $5.5 million for the corresponding period in 2022. Factors affecting operating cash flows during the periods included: ● For the year ended December 31, 2023, our loss of $7.5 million was reduced by non-cash transactions including stock-based compensation of $560,000, stock-based settlement of $252,000, and depreciation of $206,000. For the year ended December 31, 2022, our loss of $7.5 million was reduced by non-cash transactions including stock-based compensation of $2.1 million, amortization of debt discount on convertible notes of $1.2 million, and depreciation of $165,000. ● Cash provided by accounts receivable was $162,000 and $458,000 for the year ended December 31, 2023 and 2022, respectively, representing a decrease in accounts receivable for the years ended December 31, 2023 and 2022. Sales are generally collected within 30 to 45 days. These changes are mainly due to timing between sales being recognized and payment being received. 41 ● Cash used for inventory and prepaid inventories decreased by $682,000 and increased by $1.5 million for the years ended December 31, 2023 and 2022, respectively. These changes are primarily due to the timing of significant purchases and prepayments of inventory. Turnaround time for receiving inventory from foreign sources can take up to 120 days, with prepayments required. ● Other significant changes include an increase in customer deposits of $17,000 during the year ended December 31, 2023, and a decrease in customer deposits of $437,000 during the year ended December 31, 2022, due to large deposits customers made in 2021 that we applied to orders in 2022, whereas 2023 saw deposits and usage occurring in the same year. Cash flows provided by / (used in) investing activities Cash provided by investing activities was $17,000 for the year ended December 31, 2023. Cash used for capital purchases of property and equipment related to research and development, quality assurance, and logistics equipment was $20,000 during the year ended December 31, 2023. This was offset by net proceeds of $37,000 received for the sale and disposal of property and equipment during the year ended December 31, 2023. We anticipate that we will spend up to $270,000 in 2024 as we continue to enhance our quality control measures. We used cash in investing activities of $516,000 for the year ended December 31, 2022. Cash used for capital purchases of property and equipment related to expanding and improving our facilities and infrastructure was $567,000 during the year ended December 31, 2022. This was offset by net proceeds of $52,000 received for the sale of property and equipment during the year ended December 31, 2022. Cash flows provided by financing activities Cash provided by financing activities was $2.2 million for the year ended December 31, 2023. For the year ended December 31, 2023, we paid down debt principal of $224,000, which was offset by net cash proceeds of $2.4 million from incurrence of short-term debt and net cash proceeds of $50,000 from the exercise of warrants. Cash provided by financing activities was $12.4 million for the year ended December 31, 2022. For the year ended December 31, 2022, we paid down debt principal of $2.4 million, which was offset by net cash proceeds of $14.8 million from sales of our common stock. Contractual and Other Obligations Our estimated future obligations consist of long-term operating lease liabilities. As of December 31, 2023, we had $2.8 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 the generally accepted accounting principles in the United States (“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, Summary of Significant Accounting Policies. 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. 42 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 December 31, 2023 and December 31, 2022, the Company had inventory that consisted of finished assemblies totaling $2,967,021 and $3,243,485, respectively, and raw materials (inventory components, parts, and packaging) totaling $858,369 and $1,286,651, respectively. The valuation of inventory includes fixed production overhead costs based on normal capacity of the assembly warehouse. 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 QA equipment 3 – 10 years Tooling and molds 5 – 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 sheets. 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. 43 Shipping and Handling Costs Shipping and handling fees billed to customers are classified on the statements of operations as “Sales, net” and totaled $70,712 and $23,200 during the years ended December 31, 2023 and 2022, respectively. Shipping and handling costs for shipping product to customers totaled $199,288 and $169,300 during the years ended December 31, 2023 and 2022, respectively, and are classified 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 $391,148 and $270,100 for the years ended December 31, 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 (the “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 December 31, 2023 and 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. ITEM 7A. 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. 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by this Item 8 is found in a separate section of this Annual Report starting on page F-1. See the “Index to Financial Statements” on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.