Expion360 (XPON) - 2023 Q4 - Annual Report

Part I Business Expion360 designs and sells LiFePO4 batteries for RV, marine, and home energy markets, aiming to onshore production and capitalize on the shift to lithium - The company focuses on designing, assembling, and selling LiFePO4 batteries and accessories for RVs, marine applications, and home energy storage, with plans to enter industrial markets[21] - Expion360 aims to capitalize on the market conversion from lead-acid to lithium batteries and is expanding into the home energy storage market with its e360 Home Energy Storage System[23][24] - The company's competitive strengths include superior battery capacity compared to lead-acid competitors (3-4 times the lifespan, 10 times the charging cycles), flexible battery pack design, and expansion into new product areas like the AURA POWERCAP™ and e360 SmartTalk mobile app[34][36][37] - Expion360 relies on third-party manufacturers in Asia for its batteries and cells but has a long-term goal to onshore manufacturing to its Redmond, Oregon headquarters[22][44] - The company has significant customer concentration, with two customers accounting for approximately 21% of total sales in the year ended December 31, 2023[49] - To protect its technology, the company has filed 11 patent applications (7 design, 4 utility) and owns 15 trademark registrations in the United States[50][51] Risk Factors The company faces intense competition, recurring net losses, a "going concern" warning, customer concentration, supply chain dependence, and product liability risks - The company has a history of net losses, reporting a net loss of $7.5 million for both the years ended December 31, 2023, and 2022[65] - The company's audited financial statements include a "going concern" explanatory paragraph, indicating substantial doubt about its ability to continue operations over the next twelve months due to recurring losses and negative cash flows[68] - Significant customer concentration risk exists, with two customers accounting for 21% of total sales in 2023 and three customers accounting for 41% in 2022[70] - The company is heavily dependent on third-party manufacturers in Asia, with approximately 70% and 85% of inventory purchases made from foreign suppliers in 2023 and 2022, respectively[82] - The company's co-founder and former CEO, John Yozamp, along with his brother, beneficially own approximately 21.5% and 7.1% of the outstanding common stock, respectively, giving them substantial influence over stockholder matters[134] - As an "emerging growth company," Expion360 takes advantage of reduced reporting requirements, which could make its securities less attractive to some investors[125] Unresolved Staff Comments The company has no unresolved comments from the Securities and Exchange Commission staff - None[138] Cybersecurity Expion360 maintains a cybersecurity risk management program overseen by its COO and Board, with no material incidents reported despite increasing threats - The company has a cybersecurity risk management program, overseen by the Chief Operating Officer, which is integrated into its overall risk management systems and involves third-party consultants[141] - The Board of Directors and the Audit Committee actively oversee cybersecurity threats, with the Audit Committee receiving regular updates from management on data protection, cybersecurity risks, and incident response plans[144][145] - While no material adverse effects from cybersecurity incidents have been reported, the company acknowledges that threats are pervasive and increasing[143] Properties The company leases its corporate headquarters, a large warehouse for future assembly, and a distribution facility, all deemed sufficient for near-term needs Leased Facilities | Location | Size (sq. ft.) | Purpose | Monthly Rent (as of early 2023) | | :--- | :--- | :--- | :--- | | Redmond, OR | ~15,000 | Corporate HQ, Engineering, Sales, Warehouse | ~$19,000 | | Redmond, OR | ~31,400 | Warehousing, Future Assembly Plant | ~$32,400 | | Elkhart, IN | ~7,000 | Office Space, Local Warehousing/Distribution | $4,900 | Legal Proceedings The company is not currently involved in any material legal proceedings expected to adversely affect its financial condition - The company is not currently party to any material pending legal proceedings[151] Mine Safety Disclosures This disclosure item is not applicable to the company's operations - Not applicable[153] Part II Market for Common Equity and Related Matters Expion360's common stock trades on Nasdaq, has never paid dividends, and retains IPO proceeds for business growth - The company's common stock began trading on the Nasdaq Capital Market under the symbol "XPON" on April 1, 2022[155] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future, retaining funds for operations and growth[156] - The company completed its IPO on April 5, 2022, raising net proceeds of $14,772,487. The use of these proceeds remains consistent with the plans disclosed in the final prospectus[159][160] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A covers decreased net sales, lower gross profit, increased SG&A, flat net loss, tightened liquidity, recent financing, and a "going concern" warning Recent Developments Recent developments include executive changes, securing a $2.75 million convertible note and a $20 million equity line, and introducing new battery products - In December 2023, the company entered into a securities purchase agreement for a $2.75 million senior unsecured convertible note and a common stock purchase agreement for a $20 million equity line of credit[169][170] - In January 2024, the company introduced its next-generation GC2 and Group 27 series LiFePO4 batteries, featuring higher amp-hour options and advanced technology like internal heating and Bluetooth communication[171] - In early 2024, the company paid off a $62,500 stockholder note and sold three trucks, paying off approximately $86,300 in related vehicle loans[172] Results of Operations (FY 2023 vs. FY 2022) Fiscal year 2023 saw a 16.5% decrease in net sales, a 31.2% drop in gross profit, a 6.1% rise in SG&A, and a flat net loss of $7.5 million Fiscal Year Operating Results Comparison | | 2023 | 2022 | | :--- | :--- | :--- | | Net Sales | $5,981,134 | $7,162,837 | | Gross Profit | $1,575,523 | $2,288,445 | | Gross Margin | 26.3% | 31.9% | | Loss from Operations | ($7,169,612) | ($5,953,414) | | Net Loss | ($7,456,274) | ($7,536,540) | - Net sales decreased by $1.2 million (16.5%) year-over-year, primarily due to a decrease in OEM sales driven by a slowdown in the consumer market[194] - Gross profit margin decreased by 5.6 percentage points to 26.3% in 2023, attributed to lower sales volumes which reduced economies of scale on fixed costs[196] - SG&A expenses increased by $503,000 (6.1%) due to higher legal and professional fees ($2.0M vs $0.9M), sales and marketing ($0.9M vs $0.7M), and R&D ($0.4M vs $0.3M), which offset a significant decrease in salaries and benefits[197][198] Liquidity and Capital Resources Liquidity tightened with cash decreasing to $3.9 million, leading to a "going concern" warning, prompting new financing through a convertible note and equity line Cash Flow Summary | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($5,531,232) | ($5,468,572) | | Net cash provided by / (used in) investing activities | $16,578 | ($515,692) | | Net cash provided by financing activities | $2,246,108 | $12,412,270 | - Cash and cash equivalents decreased from $7.2 million at year-end 2022 to $3.9 million at year-end 2023[202] - Recurring losses and negative cash flows have raised substantial doubt about the company's ability to continue as a going concern[206] - As of December 31, 2023, the company had outstanding debt including a $2.8 million short-term convertible note, $762,500 in stockholder loans, and $349,000 in other long-term debt[208][209][210] Critical Accounting Policies and Estimates Critical accounting policies involve inventory valuation, property and equipment, lease accounting (ASC 842), and revenue recognition upon transfer of control - Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. As of Dec 31, 2023, inventory consisted of $2.97M in finished goods and $0.86M in raw materials[226] - Leases are accounted for by recognizing a right-of-use (ROU) asset and a lease liability based on the present value of future lease payments, using the company's incremental borrowing rate[229][230] - Revenue is recognized upon shipment or delivery to the customer, which is when the performance obligation is satisfied and control transfers[232] - Research and development costs are expensed as incurred and amounted to $391,148 in 2023, up from $270,100 in 2022[234] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Expion360 is exempt from providing quantitative and qualitative market risk disclosures - The company is not required to provide this information as it qualifies as a smaller reporting company[238] Financial Statements and Supplementary Data This section refers to the consolidated financial statements and notes, located starting on page F-1 of the report - The company's financial statements are located in the 'Index to Financial Statements' starting on page F-1 of the report[239] Changes in and Disagreements with Accountants The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[240] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[241] - Based on the COSO framework, management concluded that internal control over financial reporting was effective as of December 31, 2023[243] - As an emerging growth company, this annual report does not include an attestation report from the company's registered public accounting firm on internal controls[244] Other Information The company reports no other information for this item - None[246] Disclosure Regarding Foreign Jurisdictions that Prevent Inspection This disclosure item is not applicable to the company - Not applicable[248] Part III Directors, Executive Compensation, Security Ownership, and Related Matters Information for Items 10-14, covering directors, executive compensation, and security ownership, is incorporated by reference from the 2024 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's 2024 definitive Proxy Statement[250][251][252] Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Annual Report and notes the omission of financial statement schedules due to inclusion elsewhere or non-applicability - The company's financial statements are listed in the 'Index to the Financial Statements' on page F-1[256] - All financial statement schedules are omitted as the information is not required or is already present in the financial statements or notes[257] Form 10-K Summary The company has not provided a summary for this item - None[262] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm The auditor's report provides a fair presentation opinion but includes a "Going Concern" paragraph due to recurring losses and negative cash flows - The auditor's report includes a "Going Concern" paragraph, noting that the company's recurring losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern[273] - The critical audit matter identified was related to Equity Transactions, specifically the valuation of options and warrants, which requires significant management judgment[279] Financial Statements Data Financial statements show decreased assets, increased liabilities, a flat net loss of $7.5 million, and $5.5 million net cash used in operations Balance Sheet Highlights (As of Dec 31) | | 2023 | 2022 | | :--- | :--- | :--- | | Total Current Assets | $8,266,389 | $12,342,817 | | Total Assets | $11,905,331 | $16,698,931 | | Total Current Liabilities | $4,015,882 | $1,572,953 | | Total Liabilities | $6,555,649 | $5,091,966 | | Total Stockholders' Equity | $5,349,682 | $11,606,965 | Statement of Operations Highlights (For the Year Ended Dec 31) | | 2023 | 2022 | | :--- | :--- | :--- | | Sales, net | $5,981,134 | $7,162,837 | | Gross Profit | $1,575,523 | $2,288,445 | | Loss from Operations | ($7,169,612) | ($5,953,414) | | Net Loss | ($7,456,274) | ($7,536,540) | | Net Loss Per Share | ($1.08) | ($1.23) | Statement of Cash Flows Highlights (For the Year Ended Dec 31) | | 2023 | 2022 | | :--- | :--- | :--- | | Cash flows from operating activities | ($5,531,232) | ($5,468,572) | | Cash flows from investing activities | $16,578 | ($515,692) | | Cash flows from financing activities | $2,246,108 | $12,412,270 | | Net change in cash | ($3,268,546) | $6,428,006 | | Cash at end of period | $3,932,698 | $7,201,244 | Notes to the Financial Statements Notes reiterate the "going concern" issue, detail customer concentration, debt structure, stock-based compensation, deferred tax assets, and subsequent events - Note 2 reiterates that recurring losses and negative cash flows raise substantial doubt about the company's ability to continue as a going concern[301] - During 2023, sales to two customers totaled $1.2 million, or 21% of total sales. Four other customers represented 90% of total accounts receivable at year-end[323] - In December 2023, the company entered into a $2.75 million convertible note financing agreement with a 10% original issue discount and a 9.0% interest rate, maturing in December 2024[358] - Under its 2021 Incentive Award Plan, the company granted 245,500 stock options and 48,780 RSUs during 2023. Total stock-based compensation expense for 2023 was $495,320[384] - The company maintains a full valuation allowance against its net deferred tax assets of $3.8 million, as it is more likely than not that these assets will not be realized[394][399] - Subsequent to year-end, in January 2024, the company paid executive bonuses for 2023 performance in cash and RSUs and repaid a $62,500 stockholder note[403][406]