EXPION360 INC. 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 endedDecember 31, 2022 and 2021, included in this Annual Report on Form 10-K. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties that may adversely impact our operations and financial results. These risks and uncertainties are discussed in this Annual Report on Form 10-K, including in Item 1A. "Risk Factors" and "Cautionary Note Concerning Forward-Looking Statements". 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 on Form 10-K. Certain other amounts that appear in this section may not sum due to rounding.
Overview
We focus on the design, assembly, manufacturing, and sales of lithium iron
phosphate (LiFePO4) batteries and supporting accessories for recreational
vehicles ("RVs") and marine applications with plans to expand into home energy
storage products and industrial applications. We design, assemble, and
distribute high-powered, lithium battery solutions using ground-breaking
concepts with a creative sales and marketing approach. We believe that our
product offerings include some of the most dense and minimal-footprint batteries
in the RV & Marine industry. We are developing the e360 Home Energy Storage: a
system that we expect to significantly change the industry in barrier price,
flexibility, and integration. We are deploying multiple IP strategies with
cutting-edge research and unique products to sustain and scale the business. We
currently have customers consisting of dealers, wholesalers, private label
customers and original equipment manufacturers who are driving revenue and brand
awareness nationally.
Our corporate headquarters are based in Redmond, Oregon , with assembly in the
United States and suppliers based in Asia . We are currently in the process of
building out manufacturing capacity at our corporate headquarters. Our long-term
target is to onshore the manufacturing of most of our components and assemblies,
including cell manufacturing, to the United States .
Our main target markets are currently the RV & Marine industry. We believe that
we are well positioned to capitalize on the rapid market conversion from
lead-acid to lithium batteries as the primary method of power sourcing in these
industries. Additional focus markets include home energy storage, where we aim
to provide a cost-effective, low barrier of entry, and a do-it-yourself ("DIY")
flexible system for those looking to power their homes via solar energy, wind,
or grid back-up. Along with RV/Marine and home energy storage markets, we aim to
provide additional capacities to the ever-expanding electric forklift and
industrial material handling markets.
Expion360's e360 product line, which is manufactured for the RV/Marine industry,
was launched in December 2020 . The e360 product line, through its rapid sales
growth, has shown to be a preferred conversion solution for lead-acid batteries.
We believe that our e360 Home Energy Storage system has strong revenue potential
with recurring income opportunities for us and our associated sales partners.
Our products provide numerous advantages for various industries that are looking
to migrate to lithium-based energy storage. They incorporate detailed-oriented
design and engineering and strong case materials and internal and structural
layouts, and are backed by responsive customer service.
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Recent Developments
Warrant Exercises
InMarch 2023 , holders of 73,000 warrants previously issued by the Company with an exercise price of$2.90 exercised their warrants on a cashless basis, which resulted in the issuance of an additional 31,102 shares of the Company's common stock. During the same period, holders of 15,000 warrants previously issued by the Company with an exercise price of$3.32 exercised their warrants by paying the exercise price, which resulted in the issuance of an additional 15,000 shares of common stock and the receipt by the Company of$49,800 . As of the date of this Annual Report on Form 10-K, the Company had 770,436 outstanding warrants. Corporate Leadership
InJanuary 2023 , the Company made certain leadership changes which included appointingBrian Schaffner as Chief Executive Officer, succeeding company Co-FounderJohn Yozamp who resigned as Chief Executive Officer and as a Director and assumed the new position of Chief Business Development Officer. In addition, Co-Founder, Director and Chief Operating Officer,Paul Shoun , was appointed to the additional position of President.Greg Aydelott was also promoted from Chief Accounting Officer to Chief Financial Officer. Independent company director,David Hendrickson has been elected Chairman of the Board, succeedingJohn Yozamp . Debt Repayment
InJanuary 2023 , the Company repaid a vehicle loan with an interest rate of 11.21% in the amount of$89,360 which included principal, interest, and fees. The repayment removed debt with the highest interest rate and provides us with more flexibility to dispose or re-purpose the related asset, which is a 2019 Freightliner truck. New Products
InJanuary 2023 , introduced AURA POWERCAP™ 600 and AURA POWERCAP™ 800.Expion360 began taking pre-orders of the new AURA POWERCAP™ 600 and 800 in Q1 2023 with anticipated deliveries Q2 2023. See "-Competitive Strengths-Expansion into New Markets" for additional information about the AURA POWERCAP™ 600 and AURA POWERCAP™ 800.
Key Factors Affecting Our Operating Results
Our operating results and financial performance are significantly dependent on the following factors:
Consumer Demand
Although most of our current sales are generated through dealers, wholesalers
and original equipment manufacturers ("OEM") focused on the RV and marine
markets, ultimate demand for our products is reliant on demand from consumers.
Our sales are completed on a purchase order basis, and most are without firm,
long-term revenue commitments or sales arrangements, which we expect to continue
going forward. Therefore, our future sales will be subject to risks and
uncertainties related to end user demand.
Demand from end users is affected by a number of factors which may include fuel
costs, overall macroeconomic conditions, and travel restrictions (resulting from
COVID-19 or otherwise). During the COVID-19 pandemic, the increased adoption of
the RV lifestyle benefited battery suppliers. However, more recently we have
seen a rise in fuel costs and other changes in macroeconomic conditions which
has created a decrease in end user spending decisions which is affecting our
markets.
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While RV and marine applications drive current revenues, Expion360 has plans to
expand into the home energy market in the coming years. Our e360 Home Energy
Storage system is planned to target entry level customers with its modular
design that will allow for DIY expansion. We see the vision of stored energy as
a portable, moving concept, where stored energy can be transported from the home
to other devices outside of it. Furthermore, Expion360 plans to file for IP
protection for Expion360's "Smart Talk" upon completion of development. "Smart
Talk" is designed to allow multiple batteries in a bank to communicate as one
and be linked to a network. 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 inChina , who also produce our battery cells. We then assemble and package the batteries inthe 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 ourChina -based third-party manufacturers and cell suppliers, reflected in our ability to increase our purchase order volumes (qualifying us for related volume-based discounts) and to order and receive delivery of cells in anticipation of required demand, has helped us moderate increased supply-related costs associated with inflation, currency fluctuations, andU.S. government tariffs imposed on our imports and to avoid potential shipment delays. We aim to maintain an appropriate level of inventory to satisfy our expected supply requirements. We believe that we could locate alternative third-party manufacturers to fulfill our needs. Our third-party manufacturers source the raw materials and battery components required for the production of our batteries directly from third party suppliers that meet our approval and quality standards, and as a result, we may have limited control over the agreed pricing for these raw materials and battery components. We estimate that raw material costs account for over half of our cost of goods sold. The costs of these raw materials, particularly lithium-ion batteries, are volatile and beyond our control. Additionally, availability of the raw materials used to manufacture our products may be limited at times, resulting in higher prices and/or the need to find alternative suppliers. For example, a global shortage and component supply disruptions of electronic battery components are currently being reported, and the full impact to us is yet unknown. Our battery cell manufacturers also have joint venture factories outside ofChina and have secured sourcing contracts from lithium suppliers inSouth America andAustralia . In addition, the Company has secured a secondary source for lithium iron phosphate cells used in its batteries from a supplier inDenmark , enabling the Company to source materials outside ofChina in the event it becomes necessary to do so. Product and Customer Mix
We sell six models of LiFEPO4 batteries, the AURA POWERCAP, and individual or
bundled accessories for battery systems. Our products are sold to different
customers (i.e., dealers, wholesalers, OEMs, etc.) at differing prices and have
varying costs. The average selling price and costs of goods sold for a
particular product, will vary with changes in the sales channel mix, volume of
products sold, and the prices of such products sold relative to other products.
While we work with our suppliers to limit price and supply cost increases, our
products may see price increases resulting from a rise in supply costs due to
currency fluctuations, inflation, and tariffs. Accessory and OEM sales typically
have lower average selling prices and resulting margins which could decrease our
margins and therefore negatively affect our growth or require us to increase the
prices of our products. However, the benefits of increased sales volumes
typically offset these reductions. The relative margins of products sold also
impact our results of operation. As we introduce new products, we may see a
change in product and sales channel mix which could result in period-to-period
fluctuations in our overall gross margin.
Competition
We compete with both traditional lead-acid and lithium-ion battery manufacturers
that primarily either import their products or components or manufacture
products under a private label. As we develop new products and expand into new
markets, we may experience competition with a broader range of companies. These
companies may have more resources than us and be able to allocate more resources
to their current and future products. Our competitors may source products or
components at a lower cost than us which may require us to evaluate our own
costs, lower our product prices, or increase our sales volume to maintain our
expected profitability levels.
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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.
New technologies are rapidly emerging in the markets where we conduct business and many new energy storage technologies have been introduced over the past several years. Our ability to achieve significant and sustained penetration of key developing markets, including the RV and marine markets, will depend upon our success in developing these and other technologies, either independently, through joint ventures, or through acquisitions, which in each case may require significant capital and commitment of resources to research and development. As a result, we may need to raise additional funds for these research and development efforts. Key Line Items Revenue
The Company's revenue is generated from the sale of products consisting
primarily of batteries and accessories. The Company recognizes revenue when
control of goods or services is transferred to its customers in an amount that
reflects the consideration it is expected to be entitled to in exchange for
those goods or services. Materially, all of our sales are within
Cost of Sales
Our primary cost of sales is related to our direct product and landing costs. Direct labor costs consist of payroll costs (including taxes and benefits) of employees directly engaged in assembly activities. Per full absorption cost accounting, overhead related to our cost of sales is added, consisting primarily of warehouse rent and utilities. The costs can increase or decrease based on costs of product and assembly parts (purchased at market pricing), customer supply requirements, and the amount of labor required to assemble a product, along with the allocation of fixed overhead.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries, benefits, and sales and marketing costs. Other costs include facility and related costs, professional fees and other legal expenses, consulting, and tax and accounting services.
Interest and Other Income, net
Interest expense consists of interest costs on loans with interest rates
ranging from 3.75% to 11.21% and amortization of debt issuance costs. As of
Provision for Income Taxes
UntilNovember 2021 , the Company was a limited liability company taxed as a Subchapter S corporation and was not a taxpaying entity for federal income tax purposes. The Company's taxable income or losses were allocated to its members in accordance with their respective ownership percentages. Therefore, no provision or liability for federal income taxes has been included in the accompanying historical financial statements. Certain states impose minimum franchise taxes on entities taxed as an S corporation, accordingly, the accompanying financial statements include provisions for state franchise tax fees. 33 EffectiveNovember 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 existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company has adopted the provisions in ASC 740, Income Taxes, related to accounting for uncertain tax positions. It requires that the Company recognize the impact of a tax position in the financial statements if the position is more likely than not to be sustained upon examination and on the technical merits of the position. Management has concluded that there were no material unrecognized tax benefits atDecember 31, 2022 and 2021. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company's balance sheet atDecember 31, 2022 or 2021 and did not recognize interest and/or penalties in the statement of operations for the years endedDecember 31, 2022 and 2021, since there are no material unrecognized tax benefits. Management believes no material change to the amount of unrecognized tax benefits will occur within the next twelve months.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Results of Operations
Year Ended
The following table sets forth certain operational data as a percentage of
sales:
Fiscal Year Ended 12/31/2022 Fiscal Year Ended 12/31/2021
$ % of Net sales $ % of Net sales
Net sales $ 7,162,837 100.0 % $ 4,517,499 100.0 %
Cost of sales 4,874,392 68.1 2,871,770 63.6
Gross profit 2,288,445 31.9 1,645,729 36.4
Selling, general, and
administrative expenses 8,241,859 115.1 2,909,085 64.4
Loss from operations (5,953,414 ) -83.1 (1,263,356 ) -28.0
Other expense - net (1,591,976 ) -22.2 (3,448,202 ) 76.3
Loss before income taxes (7,545,390 ) -105.3 (4,711,558 ) -104.3
Net loss (7,536,540 ) -105.2 (4,720,858 ) -104.5
Sales, net
Sales, net for the year endedDecember 31, 2022 increased by$2.6 million , or 58.6%, compared to the year endedDecember 31, 2021 . Sales were$4.5 million for the year endedDecember 31, 2021 and$7.2 million for the year endedDecember 31, 2022 . The year over year increase was primarily attributable to increases in our overall sales volumes as a result of our expanding product offerings, growing distribution network, and expanded OEM market penetration. 34 Cost of Sales
Total cost of sales for the year endedDecember 31, 2022 increased by$2.0 million , or 69.7%, compared to the year endedDecember 31, 2021 . Cost of sales were$2.9 million for the year endedDecember 31, 2021 and$4.9 million for the year endedDecember 31, 2022 . Cost of sales as a percentage of sales increased by 4.5% in that period. The increase in cost of sales was primarily related to increases in facilities costs and labor as we expanded our operations, and in supplier and shipping costs, which the Company is currently monitoring.
Gross Profit
Our gross profit for the year endedDecember 31, 2022 increased by$643,000 , or 39.1%, compared to the year endedDecember 31, 2021 . Gross profit was$1.6 million for the year endedDecember 31, 2021 and$2.3 million for the year endedDecember 31, 2022 . Gross profit as a percentage of sales decreased by 4.5% for the year endedDecember 31, 2022 , from 31.9% to 36.4% for the year endedDecember 31, 2021 . The decrease in gross profit for the year endedDecember 31, 2022 was primarily attributable to increases in facilities costs and labor as we expanded our operations, and in landed costs, which the Company is currently monitoring.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by$5.3 million , or 183%, to$8.2 million for the year endedDecember 31, 2022 compared to$2.9 million for the year endedDecember 31, 2021 , primarily due to increased costs to support our growth in sales and business development efforts along with various expenses that were incurred due to planning and preparing for our initial public offering. The most substantial increases were in salaries and benefits, of which$2,114,529 was a non-cash expense attributable to stock-based compensation, legal and professional services incurred in anticipation of our initial public offering, sales and marketing, and rents and utilities. Presented in the table below is the composition of selling, general and administrative expenses: Fiscal Year Ended 12/31/2022 Fiscal Year Ended 12/31/2021 Salaries and benefits$ 4,864,239 $ 1,232,660 Legal and professional 887,741 754,510 Sales and marketing 677,679 316,431 Rents, maintenance, utilities 616,141 165,600 Research and development 278,382 58,544 Travel expenses 217,626 72,354
Software, fees, tech support 190,222
89,613 Depreciation 151,353 56,100 Supplies, office 135,187 88,448 Insurance 128,202 35,563 Other 95,087 39,262 Total$ 8,241,859 $ 2,909,085 35 Other Expense Our other expense for the year endedDecember 31, 2022 and 2021 was$1.6 million and$3.4 million , respectively. Other expense for the year endedDecember 31, 2022 was made up almost entirely of interest expense. Other expense for the year endedDecember 31, 2021 was primarily attributable to extinguishment loss on debt settlement. The extinguishment of debt was related to settlement on convertible notes issued in 2021. The noteholders agreed to settle the debt for an aggregate 1,527,647 shares of common stock with a fair value of$5,545,359 ($3.63 per share). Since this transaction involved contemporaneous issuance of shares of common stock by the Company to the converting noteholders, we evaluated the transaction for modification and extinguishment accounting and determined that the debt was extinguished as a result of the issuance of shares that do not represent the exercise of a conversion right contained in the original terms of the notes at issuance. The settlement of the debt resulted in a recognized loss of$2,262,658 recorded as extinguishment loss on debt settlement on the accompanying statements of operations, calculated as the excess of the fair value of the shares issued over the carrying amount of the debt. In addition, the fair value of warrants of$407,700 issued in exchange for services related to obtain the notes (see Note 12 - Stockholders' Equity-Warrants/Options) and the unamortized portion of debt discount remaining at date of settlement of$120,729 were also recorded as extinguishment loss on debt settlement for an aggregate loss of$2,791,087 on the accompanying statements of operations. During the year endedDecember 31, 2022 and 2021, non-cash amortization of debt discount totaled$1.2 million and$118,000 , respectively. Interest expense attributable to debt obligations totaled$409,000 and$436,000 during the year endedDecember 31, 2022 and 2021, respectively. InApril 2022 , with the use of proceeds from the IPO, the Company paid off approximately$2.46 million in debt with interest rates ranging from 10 to 15%.
Net Loss
Our net loss for the years endedDecember 31, 2022 and 2021 was$7.5 million and$4.7 million , respectively. The increase in net loss was primarily the result of increased selling, general, and administrative expenses as we invested in human resources, facilities, and business development in preparation of our expanded growth objectives along with an increase in legal and professional costs in connection with our initial public offering. Additionally, for the year endedDecember 31, 2022 , the Company recognized$2.1 million in non-cash expenses related to stock-based compensation, compared to$188,000 for the year endedDecember 31, 2021 . Further, for the year endedDecember 31, 2022 , the Company recognized non-cash interest expense of approximately$1.2 million . Therefore, of the$7.5 million net loss for the year endedDecember 31, 2022 , a total of$3.3 million was non-cash expenses.
Liquidity and Capital Resources
Overview
Our operations have been financed primarily through net proceeds from the sale of securities and from borrowings. As ofDecember 31, 2022 and 2021, our current assets exceeded current liabilities by$10.8 million and$3.2 million , respectively, and we had cash and cash equivalents of$7.2 million and$773,000 , respectively. OnApril 1, 2022 , we closed our initial public offering which resulted in approximately$14.8 million of net proceeds. We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred within the next twelve months and believe those requirements to consist primarily of funds necessary to pay operating expenses, interest and principal payments on our debt, and capital expenditures related to assembly line expansion. As ofDecember 31, 2022 , we expect our short-term liquidity requirements to include (a) approximately$379,000 of capital additions; (b) principal debt payments totaling approximately$571,000 ; and (c) lease obligation payments of approximately$719,000 , 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. The Company's activities are subject to significant risks and uncertainties, including failing to secure additional funding before the Company achieves sustainable revenues and profit from operations. The Company expects to continue to incur additional losses for the foreseeable future, and the Company may need to raise additional debt or equity financing to expand its presence in the marketplace, develop new products, achieve operating efficiencies, and accomplish its long-term business plan over the next several years. There can be no assurance as to the availability or terms upon which such financing and capital might be available. For the years endedDecember 31, 2022 and 2021, the Company sustained recurring losses and negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern within twelve months after the date that the financial statements for the year endedDecember 31, 2022 are issued. However, management is working to address its cash flow challenges, including raising additional capital, alternative supply chain resources, and in-house assembly lines. 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 on Form 10-K. 36 Financing Obligations OnApril 1, 2022 , we closed our initial public offering which resulted in approximately$14.8 million of net proceeds, of which approximately$2,464,000 was used to pay down principal and accrued interest on high interest-bearing debt. As ofDecember 31, 2022 , the Company long-term debt totaled$510,475 , comprised of$150,114 outstanding under a COVID-19 Economic Injury Disaster Loan,$350,537 outstanding under vehicle financing arrangements, and an equipment loan for$9,824 . InJanuary 2023 , the Company repaid a vehicle loan with an interest rate of 11.21% in the amount of$89,360 which included principal, interest, and fees. In addition, as ofDecember 31, 2022 , the Company had outstanding shareholder loans totaling$825,000 . Shareholder Promissory Notes
Unsecured promissory notes due to shareholders had an outstanding principal balance of$825,000 as ofDecember 31, 2022 . The unsecured promissory notes require monthly interest-only payments at 10% per annum and mature at various dates fromAugust 2023 toDecember 2024 . See Item 13 "Certain Relationships and Related Transactions andDirector Independence-Certain Related Party Transactions" for more information about the unsecured promissory notes.
Vehicle Financing Arrangements
As ofDecember 31, 2022 , the Company has six notes payable to GM Financial for vehicles. In addition, inApril 2022 , the Company secured a commercial line of up to$300,000 to be used to finance vehicle purchases, which expires inApril 2023 . The notes are payable in aggregate monthly installments of$4,676 , including interest at rates ranging from 5.89% to 7.29% per annum, mature at various dates fromOctober 2027 to May of 2028, and are secured by the related vehicles. Two of the notes are personally guaranteed by a co-founder of the
Company.
Cash Flows
The following table shows a summary of our cash flows for the periods
presented:
Year Ended
December 31,
2022 2021
Net cash used in operating activities
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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 from operating activities are for increases in inventory purchases, increased marketing, and research and development. In the last several years, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from the sales of membership interests/common stock and convertible notes and incurrence of indebtedness. We generated negative cash flows from operating activities of$5.5 million for the year endedDecember 31, 2022 , compared to negative cash flows of$3.9 million for the corresponding period in 2021. Factors affecting operating cash flows during the periods included:
· For the year ended
non-cash transactions including stock-based compensation of
amortization of debt discount on convertible notes of
depreciation of
on debt settlement of
notes issued in 2021, stock-based compensation of
debt discount on convertible notes of
induced conversion of$112,000 .
· Cash provided/(used) by accounts receivable was
the year ended
decrease in accounts receivable for the year ended
increase in accounts receivable for the year ended
respectively. Sales are generally collected within 30 to 45 days. These changes
are mainly due to timing where a few large orders were placed and had open
balances as ofDecember 31, 2021 , but they were within payment terms.
· Other significant changes include a decrease in customer deposits of
during the year ended
that customers deposited in 2021. Additionally, long-term deposits had no
change during the year ended
was primarily due to the addition of lease properties with corresponding
security deposits paid in late 2021. No new deposits were made in 2022.
· Cash used for inventory and prepaid inventories increased by
These increases are primarily due to significant purchases and prepayments of
inventory to Chinese suppliers that were made in 2022 in order to have
sufficient inventory for projected sales in 2022 and 2023. Turnaround time for
receiving inventory from foreign sources can take up to 120 days, with
prepayments required. Sales for the year ended
sales for the year endedDecember 31, 2021 by$2.6 million .
Cash flows used in investing activities
We used cash in investing activities of$516,000 for the year endedDecember 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 endedDecember 31, 2022 . This was offset by net proceeds of$52,000 received for the sale of property and equipment during the year endedDecember 31, 2022 . We anticipate that we will spend up to$379,000 in 2023 as we continue to automate our new assembly line and enhance our quality control measures.
Net cash used in investing activities of
Cash flows provided by financing activities
Cash provided by financing activities was
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Net cash provided by financing activities of $4.5 million for the year ended
December 31, 2021 , consisted of $4.2 million net proceeds from issuance of
convertible notes and long-term debt, proceeds of $838,000 from the issuance of
membership units/common stock, and proceeds of $125,000 on sale of future
revenues. This was partially offset by payments on debt and liability of future
revenues of $636,000 .
Contractual and Other Obligations
Our estimated future obligations consist of long-term operating lease
liabilities. As of
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations is based upon our financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. Our significant accounting policies are described in Note 2 of the accompanying financial statements for the years endedDecember 31, 2022 and 2021. 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 ofDecember 31, 2022 andDecember 31, 2021 , the Company had inventory that consisted of finished assemblies totaling$2,722,765 and$985,537 , respectively, and raw materials (inventory components, parts, and packaging) totaling$1,807,371 and$1,066,343 , 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.
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Lease ROU assets and lease liabilities are initially recognized based on the
present value of the future minimum lease payments over the lease term at
commencement date calculated using the Company's incremental borrowing rate
applicable to the lease asset, unless the implicit rate is readily determinable.
ROU assets also include any lease payments made at or before lease commencement
and exclude any lease incentives received. The Company's lease terms may include
options to extend or terminate the lease when it is reasonably certain that the
Company will exercise that option. Leases with a term of 12 months or less are
not recognized on the Company's Balance Sheet. The Company's leases do not
contain any residual value guarantees. Lease expense for minimum lease payments
is recognized on a straight-line basis over the lease term.
The Company accounts for lease and non-lease components as a single lease component for all its leases.
Revenue Recognition The Company's revenue is generated from the sale of products consisting primarily of batteries and accessories. The Company recognizes revenue when control of goods or services is transferred to its customers in an amount that reflects the consideration it is expected to be entitled to in exchange for those goods or services. To determine revenue recognition, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the performance obligation(s) are satisfied. Revenue is recognized upon shipment or delivery to the customer, as that is when the customer obtains control of the promised goods and the Company's performance obligation is considered satisfied. As such, accounts receivable is recorded at the time of shipment or will call, when the Company's right to the consideration becomes unconditional and the Company determines there are no uncertainties regarding payment terms or transfer of control. Shipping and Handling Costs Shipping and handling fees billed to customers are classified on the Statement of Operations as "Sales, net" and totaled$23,188 and$25,688 during the years endedDecember 31, 2022 and 2021, respectively. Shipping and handling costs for shipping product to customers totaled$169,335 and$102,653 during the years endedDecember 31, 2022 and 2021, 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$270,054 and$58,044 for the years endedDecember 31, 2022 and 2021, respectively, and are included in selling, general and administrative expenses in the accompanying Statements
of Operations. Income Taxes FromJanuary 1, 2017 toOctober 31, 2021 , the Company was not subject to federal or state income taxes since it was a limited liability company taxed as an S corporation. The Company's taxable income or losses were allocated to its members in accordance with their respective ownership percentages. Therefore, no provision or liability for federal income taxes was included in the accompanying financial statements for the relevant periods in 2021. Certain states impose minimum franchise taxes on entities taxed as an S corporation. Accordingly, the accompanying financial statements include provisions for state franchise tax fees. EffectiveNovember 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. 40 OnMarch 27, 2020 ,the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthenthe 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 ofDecember 31, 2022 and 2021, 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. OnDecember 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 2022 and beyond.
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