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, 2024 and 2023, 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. Unless otherwise noted, all references to shares and per share amounts for the years ended December 31, 2024 and 2023 presented in this section have been adjusted retroactively to reflect a 1-for-100 reverse stock split, which was effective at 5:00 p.m. Pacific Time on October 8, 2024 (the “Reverse Stock Split”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reverse Stock Split and Reverse Stock Split True-Up Payment” below for additional information about the Reverse Stock Split. 34 Overview Expion360 focuses on the design, assembly, manufacturing, and sale of lithium iron phosphate (“LiFePO4”) batteries and supporting accessories for recreational vehicles (“RVs”), marine applications and home energy storage products with plans to expand into industrial applications. Our high-powered, lithium battery solutions incorporate innovative concepts and have been designed to include some of the most dense and minimal-footprint batteries in the RV and marine industries. In addition, in January 2025 we began selling our e360 Home Energy Storage Solutions, which consist of two LiFePO4 battery storage solutions and seek to provide consumers with a cost-effective, low barrier of entry, flexible system to power their homes utilizing solar energy, wind, or grid back-up. We are deploying multiple intellectual property strategies with research and products to sustain and scale our business. This includes design, development and collaboration, using our IP to bring safety, quality and service to our customers. Our customers consist of dealers, wholesalers, private-label customers, and original equipment manufacturers (“OEMs”) who then sell our products to end consumers and drive brand awareness nationally. Our primary target markets are currently the RV, marine, and home energy storage industries. We believe 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 e360 Home Energy Storage Solutions, and we hope to establish a new standard in the industry for barrier price, flexibility, and integration with this offering. Along with the RV, marine and home energy storage markets, we aim to provide additional capacities to the expanding electric forklift and industrial material handling markets. We launched our e360 product line, which is manufactured for the RV and marine industries, 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 storage 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. As of January 2025, we have begun shipping orders of our e360 Home Energy Storage Solutions. We currently operate Expion360 as one reportable business segment, Energy Storage (ES). 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, strong case materials, and internal and structural layouts, and are backed by responsive customer service. Recent Developments January 2025 Registered Direct Offering and Warrant Private Placement On January 3, 2025, we sold to certain institutional investors, in a registered direct offering, an aggregate of (i) 474,193 shares of common stock; and (ii) 574,193 pre-funded warrants (the “January 2025 Pre-Funded Warrants”) to purchase up to 574,193 shares of common stock (the “January 2025 Pre-Funded Warrant Shares”). The offering price per share was $2.48 and the offering price per January 2025 Pre-Funded Warrant was $2.479. Each January 2025 Pre-Funded Warrant was exercisable for one share of common stock for $0.001 immediately and the January 2025 Pre-Funded Warrants were all exercised immediately upon issuance. The number of January 2025 Pre-Funded Warrant Shares are subject to adjustments for stock splits, recapitalizations, and reorganizations. In a concurrent private placement that closed January 3, 2025, we also issued to the institutional investors unregistered warrants (the “January 2025 Warrants”) to purchase up to an aggregate of 1,048,386 shares of common stock (the “January 2025 Warrant Shares”) at an exercise price of $2.36 per share, subject to adjustment for reverse stock splits, recapitalizations, and reorganizations. The January 2025 Warrants were immediately exercisable and can be exercised until January 3, 2030. In connection with the private placement, we filed a registration statement on Form S-1 (File No. 333-284354), which was declared effective by the SEC on February 11, 2025, covering the resale of the January 2025 Warrant Shares. 35 We received net proceeds of approximately $2.2 million from the offering and used approximately $500,000 of the net proceeds to satisfy a portion of certain amounts owed to our Series A Warrant holders pursuant to the terms of the outstanding Series A Warrants. Chief Operating Officer Medical Leave of Absence On November 16, 2024, Paul Shoun, our Co-Founder, President, Chief Operating Officer, and Chairman of the Board, commenced a temporary medical leave of absence from his duties as Chief Operating Officer. During his leave, Mr. Shoun continued to perform his duties as President and Chairman of the Board during his leave. Mr. Shoun resumed his duties as Chief Operating Officer in February 2025. In connection with Mr. Shoun’s return to his full responsibilities, Carson Heagen, our Vice President of Operations, who temporarily assumed the role of Chief Operating Officer, ceased serving in that capacity. Resignation of Chief Financial Officer and Appointment of Interim Chief Financial Officer On December 16, 2024, Greg Aydelott, our Chief Financial Officer, notified us of his resignation effective December 31, 2024, due to family health concerns. Mr. Aydelott is remaining with the Company in a consulting role on an ongoing basis. In connection with Mr. Aydelott’s resignation, on December 20, 2024, our Board appointed Brian Schaffner, who serves as our Chief Executive Officer and as a member of the Board, to serve as our interim Chief Financial Officer effective immediately upon Mr. Aydelott’s resignation. The Board has commenced a search for a new Chief Financial Officer. Reverse Stock Split and Reverse Stock Split True-Up Payment Effective as of 5:00 p.m. Pacific Time on October 8, 2024 (the “Effective Date”), we effected a 1-for-100 reverse stock split of our common stock (the “Reverse Stock Split”), which was approved by the Board on September 27, 2024, following stockholder approval at our annual meeting of stockholders held on September 27, 2024. No fractional shares of common stock were issued as a result of the Reverse Stock Split and instead each holder of Common Stock who was otherwise entitled to receive a fractional share as a result of the Reverse Stock Split received one whole share of common stock in lieu of such fractional share. As a result of this, 210,668 shares were issued on or before October 17, 2024. In addition, the Reverse Stock Split effected a reduction in the number of shares issuable pursuant to our equity awards, warrants and non-plan options outstanding as of the Effective Date, and a corresponding increase in the respective exercise prices, conversion prices, reset prices and the like thereunder. As a result of the daily VWAP of the common stock during the five trading days before and after the Reverse Stock Split, a Reverse Stock Split cash true-up payment provision in the Series A Warrants, which is capped at $5.0 million in the aggregate under all Series A Warrants, was triggered, but the payment of the Reverse Stock Split cash true-up payment was suspended in accordance with the terms of the Series A Warrants. In connection with the closing of the January 3, 2025 offering, we used $500,000 of the net proceeds from the offering to satisfy a portion of certain amounts owed to the holders of the Series A Warrants pursuant to the terms thereof. August 2024 Public Offering and Subsequent Warrant Exercises and Adjustments to Warrant Exercise and Reset Prices On August 8, 2024, we sold in a public offering (the “August 2024 Public Offering”) (i) 33,402,000 common units (the “Common Units,” pre-Reverse Stock Split), each consisting of one share of common stock, two Series A warrants each to purchase one share of common stock (pre-Reverse Stock Split and pre-Adjustment (as defined below) and each, a “Series A Warrant”) and one Series B warrant to purchase such number of shares of common stock as determined in the Series B warrant (each, a “Series B Warrant”), and (ii) 16,598,000 pre-funded units (the “Pre-Funded Units,” and together with the Common Units, the “Units,” pre-Reverse Stock Split), each consisting of one pre-funded warrant to purchase one share of common stock (each, an “August 2024 Pre-Funded Warrant”), two Series A Warrants, and one Series B Warrant, through Aegis Capital Corp. serving as underwriter (in its capacity as such, the “Underwriter”). The Common Units were sold at a price of $0.20 per unit and the August 2024 Pre-Funded Warrants were sold at a price of $0.199 per unit (pre-Reverse Stock Split). 36 In addition, we granted the Underwriter a 45-day option to purchase additional shares of common stock and/or August 2024 Pre-Funded Warrants and/or Series A Warrants and/or Series B Warrants, representing up to 15% of the number of the respective securities sold in the August 2024 Public Offering, solely to cover over-allotments, if any. The Underwriter partially exercised its over-allotment option with respect to 15,000,000 Series A Warrants and 7,500,000 Series B Warrants (pre-Reverse Stock Split). The August 2024 Pre-Funded Warrants were immediately exercisable at an exercise price of $0.001 per share (pre-Reverse Stock Split) and could be exercised at any time until exercised in full. All August 2024 Pre-Funded Warrants have been exercised. Each Series A Warrant is exercisable at any time or times beginning on September 30, 2024, which was the first trading day following our notice to the Series A Warrant holders of stockholder approval received at the 2024 Annual Meeting, and will expire five years from such date. Each Series A Warrant was initially exercisable at an exercise price of $24.00 per share of common stock (post-Reverse Stock Split). The exercise price of the Series A Warrants was subject to reduction on the 11th trading day after the stockholder approval to the greater of the lowest daily VWAP during the ten-trading-day period following the stockholder approval and the floor price of $5.206 (representing 20% of the lower of our common stock’s closing price on Nasdaq on the date that we priced the August 2024 Public Offering, post-Reverse Stock Split) or our common stock’s average closing price on Nasdaq for the five trading days ending on such date (such lower price, without giving effect to such 20% reduction, the “Nasdaq Minimum Price”), and the number of shares issuable upon exercise would be proportionately adjusted such that the aggregate exercise price would remain unchanged. As of September 30, 2024, there would have been 5,301,592 shares of common stock (post-Reverse Stock Split and assuming the Adjustment had occurred on September 30, 2024) issuable upon exercise of the Series A Warrants as of that date. Subsequent to September 30, 2024, the exercise price under the Series A Warrants was reduced to the floor price of $5.206 (representing 20% of the Nasdaq Minimum Price, post-Reverse Stock Split), beginning on October 14, 2024, the 11th trading day following stockholder approval. As of December 31, 2024, 14,900 shares of common stock have been issued upon exercise of Series A Warrants and 5,286,692 shares of common stock remain issuable upon exercise of Series A Warrants. Each Series B Warrant was exercisable immediately upon issuance at an exercise price of $0.10 per share (post-Reverse Stock Split). The number of shares of common stock issuable under the Series B Warrants were subject to adjustment using a reset price based on the weighted average price of common stock over a rolling five-trading-day period between the issuance date of the Class B Warrants and the close of trading on the tenth trading day following stockholder approval, subject to certain floor prices. As of December 31, 2024, 1,294,367 shares of common stock (post-Reverse Stock Split) had been issued upon exercise of Series B Warrants and there were 1,032,198 shares of common stock (post-Reverse Stock Split) issuable upon exercise of Series B Warrants based on the reset price of $5.45 (representing the lowest arithmetic average of the daily VWAP during the five-trading-day period from September 12, 2024 through September 18, 2024). Effective October 8, 2024, after market close, the Reverse Stock Split occurred and as of December 31, 2024, 87,384 shares of common stock remain issuable upon exercise of Series B Warrants using the reset price, which was reduced to the floor price of $5.206 (representing 20% of the Nasdaq Minimum Price (post-Reverse Stock Split and post-Adjustment). Key Factors Affecting Our Results of Operations Our results of operations and financial performance are significantly dependent on the following factors: Consumer Demand Although our sales are primarily generated from dealers, wholesalers, private-label customers and OEMs focused on the RV, marine, and home energy markets, the demand for our products from these customers depends on consumer demand. 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. Accordingly, our growth prospects and future sales are subject to risks and uncertainties related in part to consumer demand for our products, which is affected by a number of factors, including fuel costs, discretionary spending, macroeconomic conditions, including inflation, changes in tariffs and interest rates, geopolitical pressures, and volatility in the RV, marine, and home energy markets. In recent years we have seen a rise in fuel costs, higher interest rates, and other changes in macroeconomic conditions, which have resulted in decreased consumer spending decisions and affecting our industry as a whole. In addition, we expect escalating tensions between the U.S. and China, where several of our key manufacturers and suppliers are located, as well as the ongoing risk of new or additional tariffs impacting lithium-ion batteries or related parts, to increase our cost of goods sold, which could require us to increase prices to our customers or result in lower gross margins on our products. These conditions have had, and may continue to have, a negative effect on our business, financial condition, and results of operations. 37 While RV and marine applications have historically driven our revenue, in January 2025, we began shipping orders of our e360 Home Energy Storage Solution, comprised of two LiFePO4 battery storage solutions. Our e360 Home Energy Storage Solutions aim to provide consumers with a cost-effective, low barrier of entry, flexible system to power their homes utilizing solar energy, wind, or grid back-up. The success of our strategy depends on (i) the continued growth of these addressable markets in line with our expectations, and (ii) our ability to successfully enter and maintain a competitive position in the RV, marine, and home energy markets with commercially viable products. We expect to incur significant marketing costs understanding and growing our presence within these markets, and researching and targeting customers in these markets, and our efforts may not be successful in generating sales. If we fail to execute on this growth strategy in accordance with our expectations, our sales growth could be limited to the growth of existing products and existing end markets. Expion360 has recently added several new distributors and OEM customers in RV and marine markets. Management believes that orders resulting from these new relationships will result in significant new revenue streams in the year ending December 31, 2025. In addition, Expion360 began shipping Home Energy Storage Systems in January 2025. Manufacturing and Supply Chain Our batteries are manufactured by multiple third-party manufacturers located in Asia, which also produce our battery cells. While we do not have long-term purchase agreements with these manufacturers and our purchases are completed on a purchase-order basis, we maintain strong relationships with our manufacturers and cell suppliers, reflected in our ability to increase our purchase order volumes (qualifying us for related volume-based discounts). The strength of these relationships has helped us moderate increased supply-related costs associated with inflation, currency fluctuations, and U.S. government tariffs imposed on our imports, and avoid potential shipment delays. We aim to maintain an appropriate level of inventory to satisfy our expected supply requirements. We believe we could locate suitable alternative third-party manufacturers to fulfill our requirements if needed. 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. Lithium, which is extracted from mined ore, is a key raw material used to produce our battery cells and, as a result, the cost of our battery cells is dependent on the price and availability of lithium, which may be volatile and unpredictable 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 have a secondary source for lithium iron phosphate cells used in our batteries from a supplier in Europe, enabling us to source materials outside of Asia in the event it becomes necessary to do so. In addition to increased mining and newly located reserves, there is an industry push to provide more efficient ways to extract lithium from mined ore. Another development of the past few years is lithium cell recycling. This process will recapture the raw lithium from the cell for reuse in future cells. However, notwithstanding efforts to improve the sustainability and efficiency of lithium mining, the price of lithium is volatile. We continue to monitor developments that may adversely affect our supply chain. 38 Management expects that products from our Asian third-party manufacturers will be subject to additional tariffs in 2025. We believe that we can protect our margins through a combination of supplier concessions, customer price increases and efficiencies gained as sales continue to grow. For additional information regarding, see the section titled “ Risk Factors—Our results of operations could be adversely affected by changes in the cost and availability of raw materials and we are dependent on third-party manufacturers and suppliers ” and “ Risk Factors—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 could harm our business .” Product and Customer Mix As of December 31, 2024, we sell 15 models of LiFEPO4 batteries, the Aura 600, and various individual or bundled accessories for battery systems. Our products are sold to different customers (i.e., dealers, wholesalers, private-label customers, 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 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 operations. 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 and/or components or manufacture their products and/or components 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 lower costs 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, address the needs of our customers, further develop and enhance our products and services, and 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, marine, residential energy storage, and small commercial energy storage 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. Accordingly, we may need to seek additional debt and equity financing to fund our research and development efforts and planned growth. Certifications We have completed the final requirements to obtain UL Safety Certifications on our new 12V Group 27 100Ah and 132Ah batteries, and on our 12V GC2 battery. Now that these certifications have been completed, all of the batteries produced by us will have a UL Safety Certification, emphasizing our commitment to quality, safety and service for our customers. 39 Key Line Items Net Sales 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 our 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. 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 information technology, and insurance. 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 convertible note costs. The amortized convertible note costs were $667,000 and $0 for the years ended December 31, 2024 and 2023, respectively. 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, which require recognition of 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. We have concluded there were no material unrecognized tax benefits as of December 31, 2024 or December 31, 2023. Our practice is to recognize interest and/or penalties related to income tax matters as income tax expense. We had no accrual for interest or penalties on our balance sheet at December 31, 2024 or December 31, 2023, and did not recognize any interest or penalties in our statement of operations for the years ended December 31, 2024 or 2023, since there are no material unrecognized tax benefits. We do not expect any material change to the amount of unrecognized tax benefits to occur within the next 12 months. Off-Balance Sheet Arrangements We do not have any material off-balance sheet arrangements. 40 Use of Non-GAAP Financial Measures We disclose financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (US GAAP); however, we provide certain financial information on a non-GAAP basis (non-GAAP financial measures). We provide non-GAAP financial measures to provide information that may assist investors in understanding our results of operations and assessing our prospects for future performance, which consist of adjusted cost of sales. We believe evaluating certain financial and operating measures on an adjusted basis is important as it excludes liquidation costs that are not indicative of our core results of operations and are largely outside of our control. However, our non-GAAP financial measures are not intended to represent and should not be considered more meaningful measures than, or alternatives to, measures of financial or operating performance as determined in accordance with US GAAP. We calculate our adjusted cost of sales non-GAAP financial measures for current period financial information by excluding the effect of liquidation of non-core product in the consolidated financial statements. The information presented on an adjusted cost of sales basis, as we present such information, may not necessarily be comparable to similarly titled information presented by other companies, and may not be appropriate measures for comparing our performance relative to other companies. 41 Results of Operations Year Ended December 31, 2024, Compared to the Year Ended December 31, 2023 The following table sets forth certain operational data as a percentage of sales: Fiscal Years Ended December 31, 2024 2023 $ % of Net sales $ % of Net sales Net sales $ 5,624,939 100.0 % $ 5,981,134 100.0 % Cost of sales 4,469,711 79.5 4,405,611 73.7 Gross profit 1,155,228 20.5 1,575,523 26.3 Selling, general, and administrative expenses 7,909,219 140.6 8,745,135 146.2 Loss from operations (6,753,991 ) (120.1 ) (7,169,612 ) (119.9 ) Other expense - net 6,727,032 119.6 283,369 4.7 Loss before income taxes (13,481,023 ) (239.7 ) (7,452,981 ) (124.6 ) Net loss (13,479,475 ) (239.6 ) (7,456,274 ) (124.7 ) Net Sales Net sales for the year ended December 31, 2024 decreased by $356,000, or 6.0%, compared to the year ended December 31, 2023. Sales were $5.6 million for the year ended December 31, 2024 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. Our net sales for the three months ended December 31, 2024, however, increased by $1.1 million, or 131%, compared to the three months ended December 31, 2023. Sales were $2.0 million for the three months ended December 31, 2024 and $859,000 for the three months ended December 31, 2023. Cost of Sales Cost of sales for the year ended December 31, 2024 increased by $64,000, or 1.5%, compared to the year ended December 31, 2023. Cost of sales were $4.5 million for the year ended December 31, 2024 and $4.4 million for the year ended December 31, 2023. Cost of sales as a percentage of sales increased by 5.8% in 2024. The change in cost of sales was primarily related to a decrease in overall sales, resulting in a decrease in economies of scale pertaining to fixed costs, as well as the liquidation of some non-core product in 2024 increasing our cost of sales above what they would have been without the liquidation. During the year ended December 31, 2024, we liquidated some non-core product, which was a factor in reducing leased warehouse space. If we had not done the liquidation, cost of sales for the year ended December 31, 2024 would have decreased by $42,000, or 0.9%, compared to the year ended December 31, 2023. Cost of sales would have been $4.4 million for the year ended December 31, 2024 and $4.4 million for the year ended December 31, 2023. Cost of sales as a percentage of sales would have increased by 4.5% in the year ended December 31, 2024 compared to the prior year. Gross Profit Our gross profit for the year ended December 31, 2024 decreased by $420,000, or 26.7%, compared to the year ended December 31, 2023. Gross profit was $1.2 million for the year ended December 31, 2024 and $1.6 million for the year ended December 31, 2023. Gross profit as a percentage of sales decreased by 5.8% for the year ended December 31, 2024, to 20.5% compared to 26.3% for the year ended December 31, 2023. The decrease in gross profit for the year ended December 31, 2024 was primarily attributable to lower sales volumes due to the slowdown in the RV industry resulting in lower economies of scale on our fixed costs, as well as the liquidation of non-core product increasing our cost of sales above what they would have been without the liquidation. 42 Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the year ended December 31, 2024 decreased by $836,000, or 9.6%, compared to the year ended December 31, 2023. Selling, general, and administrative expenses were $7.9 million for the year ended December 31, 2024 and $8.7 million for the year ended December 31, 2023. The decrease in selling, general, and administrative expenses was primarily due to decreases in legal and professional fees as well as salaries and benefits, which was partially offset by an increase in licenses and fees, due to cash premium fees paid when making repayment on our convertible note as well as fees for exiting the warehouse lease. Presented in the table below is the composition of selling, general and administrative expenses: Fiscal Years Ended December 31, 2024 2023 Salaries and benefits $ 3,260,866 $ 3,681,410 Legal and professional 1,584,589 2,034,374 Sales and marketing 926,430 929,220 Rents, maintenance, utilities 449,997 573,652 Research and development 295,292 397,662 Software, fees, tech support 274,780 234,285 Insurance 263,930 179,989 Depreciation 155,315 182,825 Travel expenses 137,298 199,845 Supplies, office 23,876 58,049 Other 536,846 273,824 Total $ 7,909,219 $ 8,745,135 Other Expense Other expense for the years ended December 31, 2024 and 2023 was $6.7 million and $283,000, respectively. Other expense for the year ended December 31, 2024 was made up of $5.0 million in suspended liability expense due to the Reverse Stock Split cash true-up payment provision in the Series A Warrants we sold in the August 2024 Public Offering, as well as $977,000 in interest expense and $709,000 in settlement expense. Other expense for the year ended December 31, 2023 was made up almost entirely of settlement expense, with interest income and interest expense offsetting each other at $126,000 and $125,000, respectively. Net Loss Our net loss for the years ended December 31, 2024 and 2023 was $13.5 million and $7.5 million, respectively. The net loss in the year ended December 31, 2024 was primarily the result of the $5.0 million in suspended liability expense due to the Reverse Stock Split cash true-up payment provision in the Series A Warrants we sold in the August 2024 Public Offering, as well as the increased interest due to the 3i Note (as defined in Note 7, “ Equity and Debt Financings—Convertible Note Financing ”) and increased settlement expense. Liquidity and Capital Resources Overview Our operations have been financed primarily through net proceeds from sales of our common stock and equity and debt financings. As of December 31, 2024 and 2023, our current assets exceeded current liabilities by $2.0 million and $4.3 million, respectively, and we had cash and cash equivalents of $548,000 and $3.9 million, respectively. We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred within the next 12 months and believe those requirements to consist primarily of funds necessary to pay operating expenses, interest and principal payments on our debt. As of December 31, 2024, our short-term liquidity requirements included (a) principal debt payments totaling approximately $32,000 net of amortization, (b) lease obligation payments of approximately $256,000, including imputed interest, and (c) $5.0 million in suspended liability expense due to the Reverse Stock Split cash true-up payment provision in the Series A Warrants we sold in the August 2024 Public Offering. 43 We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next 12 months. Our activities are subject to significant risks and uncertainties, including failing to secure additional funding before we achieve sustainable revenue 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 our long-term business plans 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 to us. For the years ended December 31, 2024 and 2023, 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 12 months after the date the financial statements for the year ended December 31, 2024 are issued. However, management is working to address its cash flow challenges, including by raising additional capital, managing inventory levels, identifying alternative supply chain resources, and managing operational expenses. For additional information regarding risks associated with our ability to continue as a going concern, please see the risk factor titled “ 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 As of December 31, 2024, our long-term debt totaled $230,000, comprised of $143,000 outstanding under a COVID-19 Economic Injury Disaster Loan, $84,000 outstanding under vehicle financing arrangements, and an equipment loan for $3,000. In January 2024, we repaid $62,500 in principal on a stockholder promissory note with an interest rate of 10.0%, and in August 2024, we repaid two shareholder loans with principal of $500,000 and $200,000, respectively, both with interest rates of 10.0%. In February and March 2024, we sold three vehicles including repayment of the related vehicle loans with interest rates of 5.5%-5.9% in the total amount of approximately $88,000, which included principal and interest. In August 2024, we repaid a short-term convertible note for a total of $2.7 million including principal, interest, and fees. Stockholder Promissory Notes Stockholder promissory notes had an outstanding principal balance of $0 as of December 31, 2024, as they were repaid in August 2024. See Note 6 - Stockholder Promissory Notes for further information on stockholder promissory notes. Vehicle Financing Arrangements As of December 31, 2024, the Company has three 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, renewed in April 2024 for the same amount, and expires in April 2025, which we plan to renew again. The notes are payable in aggregate monthly installments of approximately $2,560, including interest at rates ranging from 6.1% 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 been repaid in connection with the sale of the related vehicle. See Note 5, Long-Term Debt. Convertible Note Financing On December 27, 2023, we entered into a securities purchase agreement with 3i, LP (“3i”) pursuant to which we sold, and 3i purchased, the 3i Note in the aggregate original principal amount of $2,750,000, for gross proceeds of $2.5 million. On August 8, 2024, in connection with the closing of the August 2024 Public Offering, we repaid the 3i Note, and our obligations under the 3i Note were fully satisfied and discharged. Prior to the closing of the August 2024 Public Offering, we had issued 415 shares of common stock (post-Reverse Stock Split) for the payment of $90,839 in interest . 44 Equity Line of Credit On December 27, 2023, we entered into the Common Stock Purchase Agreement, pursuant to which we had the right, but not the obligation, to sell to Tumim Stone Capital, LLC (“Tumim”), and Tumim was 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 purchase agreement) (the “Equity Line of Credit”). In connection with the August 2024 Public Offering, we mutually agreed with Tumim to terminate the Equity Line of Credit, effective immediately upon the closing of the August 2024 Public Offering. Prior to the closing of the August 2024 Public Offering, we had sold 4,336 shares of common stock (post-Reverse Stock Split) under the Equity Line of Credit for an aggregate amount of $828,491, of which $434,958 was used to repay a portion of the balance under the 3i Note, consisting of $380,042 to the loan principal, $34,204 to interest, and $20,712 as a redemption premium . Operating Lease Liabilities Our estimated future obligations consist of total operating lease liabilities. As of December 31, 2024, we had $799,000 in total operating lease liabilities, including the current portion. Other Indebtedness As of December 31, 2024, our long-term debt totaled $230,170, including the current portion, which consists of $31,758. Cash Flows The following table shows a summary of our cash flows for the periods presented: Years Ended December 31, 2024 2023 Net cash used in operating activities $ (9,562,545 ) $ (5,531,232 ) Net cash provided by investing activities $ 113,408 $ 16,578 Net cash provided by financing activities $ 6,064,004 $ 2,246,108 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 $9.6 million for the year ended December 31, 2024, compared to negative cash flows of $5.5 million for the corresponding period in 2023. Factors affecting operating cash flows during the periods included: · For the year ended December 31, 2024, our net loss of $13.5 million was reduced by non-cash transactions including approximately $5.0 million in suspended liability expense due to the Reverse Stock Split cash true-up payment provision in the Series A Warrants we sold in the August 2024 Public Offering, amortization of convertible note costs of approximately $667,000, stock-based compensation of $617,000, stock-based settlement of $209,000, and depreciation of $174,000. For the year ended December 31, 2023, our net 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. · Cash provided / (used) by accounts receivable was ($458,000) and $162,000 for the years ended December 31, 2024 and 2023, respectively, representing an increase in accounts receivable for the year ended December 31, 2024 and a decrease in accounts receivable for the year ended December 31, 2023. Sales are generally collected within 30 to 45 days. These changes are mainly due to timing between sales being recognized and payment being received. · Cash used for increases in (or provided by decreases in) inventory and prepaid inventories were $2.5 million and ($682,000) for the years ended December 31, 2024 and 2023, 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. 45 Cash flows provided by / (used in) investing activities Cash provided by investing activities was $113,000 for the year ended December 31, 2024. Cash used for capital purchases of property and equipment for quality assurance and leasehold improvements to our testing lab totaled $19,000 during the year ended December 31, 2023. This was offset by net proceeds of $132,000 received for the sale and disposal of property and equipment during the year ended December 31, 2024, which included property and equipment and leasehold improvements related to the warehouse lease terminated in September 2024, as well as the sale of three vehicles. 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. Cash flows provided by financing activities Cash provided by financing activities was $6.1 million for the year ended December 31, 2024. For the year ended December 31, 2024, we paid down debt principal of $3.6 million, which was offset by net cash proceeds of $9.5 million from issuance of common stock and $185,000 net cash proceeds from exercise of warrants. 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. Critical Accounting 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. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. On a recurring basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in an estimate, if any, will be reflected in the consolidated financial statements prospectively from the date of the change in the estimate. Critical accounting estimates 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. 46 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. Useful life is estimated for each item at the time of purchase based on the typical useful life in our experience and best judgment, and remaining useful life of existing assets is evaluated regularly. If an estimated useful life were to be inaccurate, there would not be a material effect on our financials, and the estimated depreciation would be trued up at the time of disposal or impairment. It is our experience that the estimated useful lives of our assets are generally materially accurate. Leases We determine if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets represent our right to use an underlying asset during the lease term, and operating lease liabilities represent our 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 our balance sheets. We do not have any finance leases. We recognize operating lease assets and lease liabilities in the consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by an option to extend (or not to terminate) the lease that is reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor. We discount unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, our incremental borrowing rate (IBR). See Note 8, “Commitments and Contingencies,” of our consolidated financial statements within this Annual Report for further information, including more details of our accounting policy elections and disclosures and remaining minimum operating lease commitments. Revenue Recognition 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 our customers in an amount that reflects the consideration we are expected to be entitled to in exchange for those goods or services. Revenue is recognized upon shipment or delivery to the customer, as that is when the customer obtains control of the promised goods and our performance obligation is considered satisfied. Warrants Warrants are measured at fair value upon issuance and are not subsequently remeasured unless they are required to be reclassified. See “ Note 7—Equity and Debt Financings ” and “Note 9—Stockholders’ Equity” in our accompanying consolidated financial statements for information on the warrants. Changes in assumptions used to estimate fair value could occur from stock pricing volatility depending on our performance and our position in the industry and changes in market interest rates which can result in materially different results. 47 Stock-Based Compensation We use the Black-Scholes option-pricing model to determine the fair value of option grants. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of our future share price, risk-free rates, future dividend yields and estimated forfeitures at the initial grant date. Restricted stock unit awards are valued based on the closing trading price of our common stock on the date of grant. Changes in assumptions used to estimate fair value could occur from stock pricing volatility depending on our performance and our position in the industry and changes in market interest rates which can result in materially different results. 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. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We believe it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences, will be sufficient to recover our deferred tax assets. In the event that we determine all, or part of our net deferred tax assets are not realizable in the future, we will record an adjustment to the valuation allowance and a corresponding charge to earnings in the period such determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of US GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our financial condition and results of operations. We recognize tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recorded in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). As of December 31, 2024 and 2023, we have not recorded any income tax provision/(benefit) resulting from the CARES Act, mainly due to our history of net operating losses. See “Note 11—Income Taxes” of our consolidated financial statements within this Annual Report for further information on our income taxes. 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 305 of Regulation S-K. 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.