Expion360 Inc

*** Overview***

Our operations have been financed primarily through net proceeds from the sale of securities and from borrowings. As of March 31, 2024 and December 31, 2023, our current assets exceeded current liabilities by $2.6 million and $4.3 million, respectively, and we had cash and cash equivalents of $2.3 million 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 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 March 31, 2024, we expect our short-term liquidity requirements to include (a) principal debt payments totaling approximately $3.4 million net of amortization and (b) lease obligation payments of approximately $738,000, including imputed interest.

We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred beyond the next twelve months and believe these requirements consist primarily of funds necessary for eighteen 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 three months ended March 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 twelve months after the date that the financial statements for the year ended March 31, 2024 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 our Annual Report.

Financing Obligations

As of March 31, 2024, our long-term debt totaled $255,000, comprised of $146,000 outstanding under a COVID-19 Economic Injury Disaster Loan, $104,000 outstanding under vehicle financing arrangements, and an equipment loan for $5,000.

Stockholder Promissory Notes

Unsecured promissory notes due to stockholders had an outstanding principal balance of $700,000 as of March 31, 2024. The unsecured promissory notes require monthly interest-only payments at 10% per annum and mature at various dates from August 2024 to December 2024. See Note 6 – “Stockholder Promissory Notes” in our unaudited interim financial statements and related notes for the three months ended March 31, 2024 and 2023 included elsewhere in this Quarterly Report for more information about the unsecured promissory notes.

Vehicle Financing Arrangements

As of March 31, 2024, we had three notes payable to GM Financial for vehicles. In addition, a commercial line secured in April 2022 for $300,000 was renewed in April 2023 and increased to $350,000, and renewed again in April 2024 for the same $350,000 amount. This commercial line may be used to finance vehicle purchases and expires in April 2025. The notes are payable in aggregate monthly installments of $2,560, including interest at rates ranging from 6.14% to 7.29% per annum, mature at various dates from October 2027 to May 2028, and are secured by the related vehicles.

In January and February 2024, we repaid three vehicle loans with interest rates of 4.345-5.89% in the amount of $82,124 which included principal, interest, and fees.

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 a senior unsecured convertible note (the “3i Note”) in the aggregate original principal amount of $2,750,000 (the “Convertible Note Financing”). The gross proceeds to us were $2.5 million, prior to the payment of legal fees and transaction expenses. As of March 31, 2024, we had issued 10,698 shares of common stock to 3i for the payment of $41,250 in interest under the 3i Note.

The principal repayment amount of the 3i Note totals $2,750,000. 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 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, and matures December 27, 2024 unless earlier converted or redeemed. See Note 7 – “Convertible Note and Equity Line of Credit.” An interest payment of $2,750 was made in December 2023 for the pro-rated interest due for December.

Equity Line Purchase Agreement

On December 27, 2023, we entered into a 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 purchase agreement) (the “Equity Line of Credit Financing”). See Note 7 – “Convertible Note and Equity Line of Credit.” For the three months ended March 31, 2024, we sold 38,224 shares of common stock for an aggregate amount of $125,153. Redemption amounts of $49,872 were paid to 3i, which applied payments of $43,575 to the loan principal, $3,922 to interest and $2,375 as a redemption premium as of March 31, 2024.

As of March 31, 2024, the outstanding principal balance of the note is $2,706,425 and the remaining interest is $199,578.

Contractual and Other Obligations

Our estimated future obligations consist of long-term operating lease liabilities. As of March 31, 2024, the Company had $2.6 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.

Inventory

Inventory is stated at the lower of cost (first in, first out) or net realizable value and consists of batteries and accessories, resale items, components, and related landing costs. As of March 31, 2024 and December 31, 2023, the Company had inventory that consisted of finished assemblies totaling $2,647,702 and $2,967,021, respectively, and raw materials (inventory components, parts, and packaging) totaling $1,132,915 and $858,369, respectively. The valuation of inventory includes fixed production overhead costs based on normal capacity of the assembly warehouse.

The Company periodically reviews its inventory for evidence of slow-moving or obsolete inventory and provides for an allowance when considered necessary. The Company determined that no such reserve was necessary as of March 31, 2024 or December 31, 2023. The Company prepays for inventory purchases from foreign suppliers. Prepaid inventory totaled $118,811 and $163,948 at March 31, 2024 and December 31, 2023, respectively, and included inventory in transit where title had passed to the Company but had not yet been physically received.

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:

Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives.

Betterments, renewals, and extraordinary repairs that extend the lives of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to assets retired are removed from the accounts, and the gain or loss on disposition is recognized in the Statements of Operations.

Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on the Company’s Balance Sheets. The Company does not have any finance leases.

Lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the Company’s Balance Sheet. The Company’s leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company accounts for lease and non-lease components as a single lease component for all its leases.

Revenue Recognition

The Company’s revenue is generated from the sale of products consisting primarily of batteries and accessories. The Company recognizes revenue when control of goods or services is transferred to its customers in an amount that reflects the consideration it is expected to be entitled to in exchange for those goods or services. To determine revenue recognition, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the performance obligation(s) are satisfied. Revenue is recognized upon shipment or delivery to the customer, as that is when the customer obtains control of the promised goods and the Company’s performance obligation is considered satisfied. As such, accounts receivable is recorded at the time of shipment or will call, when the Company’s right to the consideration becomes unconditional and the Company determines there are no uncertainties regarding payment terms or transfer of control.

Shipping and Handling Costs

Shipping and handling fees billed to customers are classified on the Statement of Operations as “Net sales” and totaled $22,690 and $9,532 during the three months ended March 31, 2024 and 2023, respectively. Shipping and handling costs for shipping product to customers totaled $43,043 and $43,208 during the three months ended March 31, 2024 and 2023, respectively, and are classified in selling, general, and administrative expense in the accompanying Statements of Operations.

Research and development costs are expensed as incurred. Research and development costs charged to expense amounted to $75,502 and $77,180 for the three months ended March 31, 2024 and 2023, and are included in selling, general and administrative expenses in the accompanying Statements of Operations.

Income Taxes

The Company is a C corporation and its 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.