UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission File Number 001-41347

EXPION360 INC.

(Exact name of registrant as specified in its charter)

Nevada

(state or other jurisdiction of incorporation or organization)

81-2701049

(IRS Employer Identification No.)

2025 SW Deerhound Ave Redmond OR 97756

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (541) 797-6714

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.001 par value	XPON	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

☐ Large Accelerated Filer

☐ Accelerated Filer

☒ Non-Accelerated Filer

☒ Smaller Reporting Company

☒ Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Title or class	Shares outstanding as of November 3, 2022
Common Stock, $.001 par	6,802,464

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	5
ITEM 1. FINANCIAL STATEMENTS	5
1. Organization and Nature of Operations	11
2. Summary of Significant Accounting Policies	11
3. Property and Equipment, Net	19
4. Accrued Expenses and Other Current Liabilities	20
5. Liabilities for Sale of Future Revenues	20
6. Short-Term Revolving Loans	20
7. Long-Term Debt	21
8. Shareholder Promissory Notes	22
9. Convertible Notes	23
10. Commitments and Contingencies	24
11. Conversion to a C Corporation	26
12. Stockholders’ Equity	26
13. Income Taxes	30
14. 401(k) Plan	30
15. Related Party Transactions	30
16. Subsequent Events	30
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	30
OVERVIEW	30
COMPETITIVE STRENGTHS	31
RECENT DEVELOPMENTS AND TRENDS	32
KEY LINE ITEMS	33
RESULTS OF OPERATIONS	34
LIQUIDITY AND CAPITAL RESOURCES	35
CRITICAL ACCOUNTING POLICIES AND ESTIMATES	37
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS	38
NOTICE REGARDING TRADEMARKS	39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39
ITEM 4. CONTROLS AND PROCEDURES	39
PART II - OTHER INFORMATION	40
ITEM 1. LEGAL PROCEEDINGS	40
ITEM 1A. RISK FACTORS	40
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	41
ITEM 4. MINE SAFETY DISCLOSURES	41
ITEM 5. OTHER INFORMATION	41
ITEM 6. EXHIBITS INDEX	42
SIGNATURES	43

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Expion360 Inc.

Balance Sheets (Unaudited)


	As of September 30, 2022			As of December 31, 2021
Assets
Current Assets
Cash and cash equivalents	$	8,117,029		$	773,238
Accounts receivable, net		280,465			775,160
Inventory		5,036,057			2,051,880
Prepaid/in-transit inventory		268,663			1,081,225
Prepaid expenses and other current assets		205,893			71,703
Total current assets		13,908,107			4,753,206

Property and equipment		1,261,706			523,419
Accumulated depreciation		(201,763	)		(96,190	)
Property and equipment, net		1,059,943			427,229

Other Assets
Operating leases – right-of-use asset		3,277,314			1,281,371
Deposits		74,877			63,901
Total other assets		3,352,191			1,345,272
Total assets	$	18,320,241		$	6,525,707

Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	146,673		$	63,180
Customer deposits		161,791			436,648
Accrued expenses and other current liabilities		248,025			140,618
Line of credit and short-term revolving loans		—			550,000
Current portion of operating lease liability		465,471			218,788
Liability for sale of future revenues, net		—			11,502
Note payable in default		—			100,000
Current portion of long-term debt		70,285			51,135
Total current liabilities		1,092,245			1,571,871

Long-term debt, net of current portion and discount		454,109			779,486
Operating lease liability, net of current portion		2,872,575			1,092,861
Shareholder promissory notes		825,000			825,000
Total liabilities	$	5,243,929		$	4,269,218

(continued on next page)

Expion360 Inc.

Balance Sheets (Unaudited) – Continued

	As of September 30, 2022			As of December 31, 2021
Stockholders’ equity
Preferred stock, par value $.001; 20,000,000 shares authorized; 0 zero shares issued and outstanding		—			—
Common stock, par value $.001; 200,000,000 shares authorized; 6,802,464 and 4,300,000 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		6,802			4,300
Additional paid-in capital		25,239,654			8,355,140
Accumulated deficit		(12,170,144	)		(6,102,951	)
Total stockholders’ equity		13,076,312			2,256,489
Total liabilities and stockholders’ equity	$	18,320,241		$	6,525,707

The accompanying notes are an integral part of these financial statements

Expion360 Inc.

Statements of Operations (Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021
Sales, net	$	1,383,011		$	1,331,081		$	5,741,075		$	3,209,847
Cost of sales		980,141			796,966			3,770,025			2,024,442
Gross profit		402,870			534,115			1,971,050			1,185,405
Selling, general and administrative		1,662,005			725,529			6,479,954			1,460,369
Loss from operations		(1,259,135	)		(191,414	)		(4,508,904	)		(274,964	)

Other (Income) / Expense
Interest income		(64	)		(9	)		(158	)		(168	)
Debt conversion expense		—			—			—			112,133
Interest expense		34,016			161,801			1,571,848			343,904
Gain on sale of property and equipment		(13,312	)		—			(13,312	)		—
Other (income) expense		(471	)		(430	)		(389	)		(430	)
Total other (income) / expense		20,169			161,362			1,557,989			455,439
Loss before taxes		(1,279,304	)		(352,776	)		(6,066,894	)		(730,403	)

Franchise taxes		—			—			300			—
Net loss	$	(1,279,304	)	$	(352,776	)	$	(6,067,193	)	$	(730,403	)

Net loss per share (basic and diluted)	$	(0.19	)	$	(0.13	)	$	(1.03	)	$	(0.28	)
Weighted-average number of common shares outstanding		6,802,464			2,653,464			5,913,763			2,602,952

The accompanying notes are an integral part of these financial statements

Expion360 Inc.

Statements of Stockholders’ Equity (Deficit) for Nine Months ended September 30, 2022 and 2021 (Unaudited)


	Common Stock				Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Amount
Balance at December 31, 2020	2,430,514	$	2,431	$	—		$	(1,382,093	)	$	(1,379,662	)
Issuance of shares upon conversion of convertible notes	59,515		59		173,098			—			173,157
Effect of induced conversion of debt	—		—		112,133			—			112,133
Issuance of shares in exchange for building signage	6,667		7		19,993			—			20,000
Issuance of shares for cash	81,106		81		269,919			—			270,000
Net loss	—		—		—			(247,193	)		(247,193	)
Balance at March 31, 2021	2,577,802	$	2,577	$	575,143		$	(1,629,286	)	$	(1,051,565	)
Issuance of shares for cash	75,662		76		251,924			—			252,000
Net loss	—		—		—			(130,435	)		(130,435	)
Balance at June 30, 2021	2,653,464	$	2,654	$	827,067		$	(1,759,721	)	$	(930,000	)
Net loss	—		—		—			(352,775	)		(352,775	)
Balance at September 30, 2021	2,653,464	$	2,654	$	827,067		$	(2,112,496	)	$	(1,282,775	)

Balance at December 31, 2021	4,300,000	$	4,300	$	8,355,140		$	(6,102,951	)	$	2,256,489
Net loss	—		—		—			(696,853	)		(696,853	)
Balance at March 31, 2022	4,300,000	$	4,300	$	8,355,140		$	(6,799,804	)	$	1,559,636
Issuance of shares, initial public offering, net of issuance costs	2,466,750		2,466		14,770,021			—			14,772,487
Issuance of shares in exchange for IPO services	35,714		36		(36	)		—			—
Issuance of stock options	—		—		2,114,529			—			2,114,529
Net loss	—		—		—			(4,091,036	)		(4,091,036	)
Balance at June 30, 2022	6,802,464	$	6,802	$	25,239,654		$	(10,890,840	)	$	14,355,616
Net loss	—		—		—			(1,279,304	)		(1,279,304	)
Balance at September 30, 2022	6,802,464	$	6,802	$	25,239,654		$	(12,170,144	)	$	13,076,312

The accompanying notes are an integral part of these financial statements

Expion360 Inc.
Statements of Cash Flows (Unaudited)


	For the Nine Months Ended September 30,
	2022			2021
Cash flows from operating activities

Net loss	$	(6,067,193	)	$	(730,403	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		115,670			38,176
Accrued interest on convertible notes		—			72,997
Amortization of debt discount (sale of future revenues)		295			87,219
Amortization of debt discount - notes		1,196,843			21,104
Debt conversion expense on induced conversion of convertible notes		—			112,133
Gain on sale of property and equipment		(13,312	)		—
Increase in allowance for doubtful accounts		19,604			—
Stock-based compensation		2,114,529			—

Changes in operating assets and liabilities:
(Increase) / Decrease in accounts receivable		475,091			(532,296	)
Increase in inventory		(2,984,177	)		(523,358	)
(Increase) / Decrease in prepaid/in-transit inventory		812,562			(1,177,264	)
Increase in prepaid expenses and other current assets		(134,191	)		(58,303	)
Increase in deposits		(10,976	)		(48,284	)
Increase / (Decrease) in accounts payable		(87,369	)		38,689
Decrease in customer deposits		(274,857	)		—
Increase / (Decrease) in accrued expenses and other current liabilities		107,407			(30,109	)
Decrease in liability for refunds		—			(58,000	)
Increase in right-of-use assets and lease liabilities		30,454			15,188

Net cash used in operating activities		(4,699,620	)		(2,772,511	)

Cash flows from investing activities
Purchases of property and equipment		(434,458	)		(94,202	)
Net proceeds from sale of property and equipment		51,679			—
Net cash used in investing activities		(382,779	)		(94,202	)

Cash flows from financing activities
Payments on line of credit and short-term revolving loans		(550,000	)		(230,000	)
Proceeds from sale of future revenues		—			125,000
Payments on liability for sale of future revenues		(11,797	)		(250,516	)
Principal payments on long-term debt		(1,784,500	)		(17,836	)
Proceeds from issuance of convertible notes, net of discount		—			2,781,000
Net proceeds from issuance of common stock		14,772,487			522,000
Net cash provided by financing activities		12,426,190			2,929,648

Net change in cash and cash equivalents		7,343,791			62,934
Cash and cash equivalents, beginning		773,238			290,675
Cash and cash equivalents, ending		8,117,029			353,609

Expion360 Inc.

Statements of Cash Flows (Unaudited) - Continued

	For the Nine Months Ended September 30,
Supplemental disclosure of cash flow information:	2022		2021
Cash paid for interest	$	401,037	$	287,761
Cash paid for franchise taxes	$	300	$	1,829

Non-cash operating activities:
Convertible notes and accrued interest converted to common stock	$	—	$	173,157
Reclassification of accrued interest to long-term debt	$	—	$	5,183
Reclassification of modified convertible note to long-term debt	$	—	$	100,000
Reclassification of modified member promissory note to convertible notes	$	—	$	250,000
Issuance of common stock in exchange for property and equipment	$	—	$	20,000
Acquisition/modification of operating lease right-of-use asset and lease liability	$	2,348,509	$	1,268,089
Purchases of property and equipment in exchange for long-term debt	$	181,430	$	246,166
Purchases of property and equipment in exchange for short-term payable	$	170,863	$	—

The accompanying notes are an integral part of these financial statements

1. Organization and Nature of Operations

Expion360 Inc. (formerly Yozamp Products Company, LLC dba Expion360) (“the Company”) was incorporated in the state of Nevada in November 2021. Effective November 1, 2021, the Company converted to a C corporation. Prior to conversion, the Company was a limited liability company (LLC) with an indefinite life organized in the State of Oregon in June 2016. The LLC elected to be treated as a Subchapter S corporation effective January 1, 2017. Net profits and losses of the LLC and all distributions were allocated among the members in proportion to the ownership units held. The Original LLC Agreement was amended and restated on January 1, 2021 to add additional members and a non-voting class of member units. Upon conversion to a C corporation, all existing LLC members at the time of conversion were issued shares of common stock and became shareholders of the Company. (See Note 11 – Conversion to a C Corporation).

The Company designs, assembles, and distributes premium lithium batteries for RV, Marine, Golf, Industrial, Residential, and Off-The-Grid needs. The Company uses lithium iron phosphate (LiFePO4) batteries. LiFePO4 batteries are considered a top choice for high energy density, dependability, longevity, and safety, providing the ability to power anything, anywhere.

Beginning in March 2020, the COVID-19 pandemic and the measures imposed to contain this pandemic have disrupted and may continue to impact the Company’s business. The magnitude of the impact of the COVID-19 pandemic on the Company’s productivity, results of operations, and financial position, and its disruption to the Company’s business and battery development and timeline, will depend in part on the length and severity of these restrictions and on the Company’s ability to conduct business in the ordinary course.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statement presentation. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the three- and nine-month periods ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The unaudited interim financial statements should be read in conjunction with the Company’s financial statements and related notes as of and for the year ended December 31, 2021, as disclosed in the Company’s prospectus, dated March 31, 2022, filed with the SEC in accordance with Rule 424(b) of the Securities Act on April 4, 2022 (the “Prospectus”) in connection with the Company’s initial public offering.

Unless otherwise noted, all references to shares and shareholders in the accompanying financial statements have been restated retrospectively, to reflect the equity structure of the C corporation as of the beginning of the first period presented.

Liquidity and Capital Resources

The Company has sustained recurring losses and has negative cash flows from operations for the nine months ended September 30, 2022. Historically, the Company’s growth has been funded through a combination of sales of equity interests, third party debt, and working capital loans. The Company’s sales for the nine months ended September 2022 increased 79% over sales for the nine months ended September 30, 2021, as product demand continued to rise. On April 1, 2022, the Company completed an initial public offering and listing of its shares on the Nasdaq Stock Market (IPO). Proceeds from the IPO, net of costs, totaled $14,772,487, of which approximately $2,464,000 was used to pay down principal and accrued interest on high interest-bearing debt, which will help to improve monthly cash flows going forward. The remaining proceeds will be used, in part, to stock inventory to keep up with demand and to build in-house assembly lines to improve the cash-flow cycle, side-stepping the four-month turnaround that the Company currently experiences from suppliers in China. In the first half of 2022, a distribution warehouse was set up in Indiana to better service customers throughout the U.S. and an assembly facility was leased in Redmond, Oregon for future expansion of the in-house assembly lines. Additionally, management has secured a secondary source for lithium iron phosphate cells used in its batteries that is based in Denmark, should supply disruption issues with China arise. Management believes that these factors will contribute to achieving operating efficiency and profitability. However, there can be no assurance that the Company will be successful in achieving its objectives, including achieving operating efficiency and profitability.

The Company believes that as a result of the IPO, it currently has sufficient cash to meet its funding requirements for at least twelve months after the date of the issuance of these financial statements. However, the Company has experienced and continues to experience negative operating margins. The Company expects that it may need to raise additional capital in the future to expand its presence in the marketplace and achieve operating efficiencies, and to 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.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary materially from the estimates that were used. The Company’s significant accounting estimates include the carrying value of accounts receivable and inventory, the depreciable lives of fixed assets, and stock-based compensation.

Future events, including the extent and the duration of the COVID-19-related economic impacts and their effects, cannot be predicted with certainty and, accordingly, the Company’s accounting estimates require the exercise of judgment.

Cash and Cash Equivalents

The Company considers all cash amounts which are not subject to withdrawal restrictions or penalties and all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. The Company maintains its cash balances with high-quality financial institutions located in the United States. Accounts are secured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per institution. At times, balances may exceed federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents. As of September 30, 2022, cash balances exceeded FDIC limits by $1,064,880.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount, are due within a year or less, and generally do not bear any interest. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. An allowance for uncollectible accounts is recorded to reduce accounts receivable to the estimated amount that will be collected. The allowance is based upon management’s review of the accounts receivable aging and specific identification of potentially uncollectible balances. Recoveries of accounts previously written off and adjustments to the allowance for uncollectible accounts are recorded as adjustments to bad debt expense. The allowance for doubtful accounts totaled $19,604 as of September 30, 2022. There was no allowance for doubtful accounts as of December 31, 2021, as management believed all outstanding amounts to be fully collectible.

Customer Deposits

As of September 30, 2022 and December 31, 2021, the Company had customer deposits totaling $161,791 and $436,648, respectively.

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. The Company began in-house assembly in 2021 and as of September 30, 2022 and December 31, 2021, inventory consisted of finished assemblies totaling $2,436,475 and $985,537, respectively, and raw materials (inventory components, parts, and packaging) totaling $2,599,582 and $1,066,343, 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 September 30, 2022 or December 31, 2021. The Company prepays for inventory purchases from foreign suppliers. Prepaid inventory totaled $268,663 and $1,081,225 at September 30, 2022 and December 31, 2021, respectively, and included inventory in transit where title had passed to the Company but had not yet been physically received.

Vendor and Foreign Concentrations of Inventory Suppliers

During the three months ended September 30, 2022 and 2021, approximately 91% and 92%, respectively, of inventory purchases were made from foreign suppliers in China and Hong Kong. During the nine months ended September 30, 2022 and 2021, approximately 92% and 93%, respectively, of inventory purchases were made from foreign suppliers in China and Hong Kong. Any adverse change in either the economic or political conditions abroad could negatively impact the Company’s supply chain. The inability to obtain product to meet sales demand could adversely affect results of operations. However, the Company has secured a secondary source for lithium iron phosphate cells used in its batteries from a supplier in Denmark, enabling the Company to source materials outside of China in the event it becomes necessary to do so.

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:

Schedule of estimated useful lives

Vehicles and transportation equipment		5 - 7 years
Office furniture and equipment		3 - 7 years
Manufacturing equipment		3 - 10 years
Warehouse equipment		3 - 10 years
QA equipment		3 - 10 years
Tooling and molds		5 - 10 years

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

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

Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent

the Company’s obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on the Company’s Balance Sheets. The Company does not have any finance leases.

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

Impairment of Long-Lived Assets

Long-lived assets consist primarily of property and equipment. When events or circumstances indicate the carrying value of a long-lived asset may be impaired, the Company estimates the future undiscounted cash flows to be derived from the use and eventual disposition of the asset to assess whether or not a potential impairment exists. If the carrying value exceeds the estimate of future undiscounted cash flows, the impairment is calculated as the excess of the carrying value of the asset over the estimate of its fair value. Fair value is determined primarily using the estimated cash flows discounted at a rate commensurate with the risk involved. No long-lived asset impairment was recognized during the three months or nine months ended September 30, 2022 and 2021.

Product Warranties

The Company sells the majority of its products to customers along with conditional repair or replacement warranties. The Company’s branded DC mobile chargers are warrantied for two years from the date of sale and its branded VPR 4EVER Classic and Platinum batteries are warrantied at gradually lesser levels over a twelve-year period from date of sale. The Company determines its estimated liability for warranty claims based on the Company’s experience of the amount of claims actually made. Management estimates no liability as of September 30, 2022 and December 31, 2021 because, historically, there have been very few claims and costs for repairs or replacement parts have been nominal. It is possible that the Company’s estimate of a liability for product liability claims will change in the near term.

Liability for Refunds

The Company does not have a formal return policy but does accept returns under its warranty policies. Returns have historically been minimal. However, during 2020 the Company sold discontinued products and recorded a liability for refunds. As of December 31, 2020, the liability totaled $58,000. During the three months and nine months ended September 30, 2021, the Company issued credits totaling $8,628 and $58,000, respectively, which were included in the refund liability as of December 31, 2020. As of December 31, 2021, all allowable discontinued products had been returned and the Company had no further refund liability. Revenue is recorded net of this amount. Any returns of discontinued product are not added back to inventory and therefore related costs are nominal and not recorded as an asset.

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.

Concentration of Major Customers

A customer is considered a major customer when net revenue attributable to the customer exceeds 10% of total revenue for the period or outstanding receivable balances exceed 10% of total receivables.

During the three months ended September 30, 2022, sales to two customers totaled $220,300 and $174,636, respectively, comprising approximately 16% and 13% of total sales, respectively. There were no accounts receivable for these customers as of September 30, 2022. During the nine months ended September 30, 2022, sales to two customers totaled $1,264,344 and $552,477, respectively, comprising approximately 22% and 10%, respectively, of total sales. Accounts receivables for these customers totaled $7,486 and $0, respectively, representing approximately 3% of total accounts receivable as of September 30, 2022. Accounts receivable from two additional customers totaled $47,758 and $43,031, representing approximately 17% and 15%, respectively, of total accounts receivables as of September 30, 2022.

During the three months ended September 30, 2021, sales to one customer totaled $132,870, comprising approximately 10% of total sales. Accounts receivable for this customer totaled $104,562, representing approximately 14% of total accounts receivable as of September 30, 2021. During the nine months ended September 30, 2021, sales to two customers totaled $440,036 and $370,134, respectively, comprising approximately 14% and 12%, respectively, of total sales. Accounts receivable from these customers totaled $97,127 and $104,562, respectively, representing approximately 13% and 14%, respectively, of total accounts receivable as of September 30, 2021. Accounts receivable from one additional customer totaled $104,405, representing approximately 14% of total accounts receivable as of September 30, 2021.

Shipping and Handling Costs

Shipping and handling fees billed to customers are classified on the Statement of Operations as “Sales, net” and totaled $6,133 and $5,839 during the three months ended September 30, 2022 and 2021, respectively and $17,514 and $20,812 during the nine months ended September 30, 2022 and 2021, respectively. Shipping and handling costs for shipping product to customers totaled $54,840 and $23,664 during the three months ended September 30, 2022 and 2021, respectively, and $137,497 and $73,393 during the nine months ended September 30, 2022 and 2021, respectively, and are classified in selling, general and administrative expense in the accompanying Statements of Operations.

Advertising and Marketing Costs

The Company expenses advertising and marketing costs as incurred. Advertising and marketing expense totaled $93,364 and $11,025 for the three months ended September 30, 2022 and 2021, respectively and $164,118 and $46,550 for the nine months ended September 30, 2022 and 2021, respectively, and is included 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 $39,180 and $3,205 for the three months ended September 30, 2022 and 2021, respectively and $145,401 and $14,917 for the nine months ended September 30, 2022 and 2021, respectively, and are included in selling, general and administrative expenses in the accompanying Statements of Operations.

Income Taxes

From January 1, 2017 to October 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.

Effective November 1, 2021, the Company converted from an LLC to a C corporation and, as a result, became subject to corporate federal and state income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of exiting assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides sweeping tax changes in response to the COVID-19 pandemic. Some of the more significant provisions are removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. As of September 30, 2022 and December 31, 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.

On December 27, 2020, the United States enacted the Consolidated Appropriations Act of 2021 (“CAA”). The CAA includes provisions extending certain CARES Act provisions and adds coronavirus relief, tax and health extenders. The Company will continue to evaluate the impact of the CAA and its impact on its financial statements in 2022 and beyond.

Fair Value of Financial Instruments

The Company accounts for its financial assets and liabilities in accordance with ASC Topic 820, Fair Value Measurement. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data. These inputs include quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in the assessment of fair value.

The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, short-term revolving loans, shareholder promissory notes, and long-term debt. The fair value of cash and cash equivalents, accounts receivable, accounts payable, and short-term revolving loans approximates their respective carrying values because of the short-term nature of those instruments. The fair value of the shareholder promissory notes, convertible notes, and long-term debt approximates their respective carrying values because the interest rate approximates market rates available to the Company for similar obligations with the same maturities.

Segment Reporting

The Company currently operates in one reportable segment. An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”) to evaluate performance and make operating decisions. The Company has identified its CODM as the Chief Executive Officer.

Basic and Diluted Net Loss Per Share

The basic net loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding during the period. Diluted earnings or loss per share adjusts the basic earnings or loss per share for the potentially dilutive impact of securities (e.g., options and warrants).

We calculate basic and diluted net loss per share using the weighted average number of common shares outstanding during the periods presented. In periods of a net loss position, basic and diluted weighted average common shares are the same. For the diluted earnings per share calculation, we adjust the weighted average number of common shares outstanding to include dilutive stock options, warrants, unvested restricted stock units and shares associated with the conversion of any convertible notes or preferred stock, when applicable. We use the if-converted method for calculating any potential dilutive effect of convertible notes and convertible preferred stock on diluted net loss per share.

The following shows the amounts used in computing net loss per share:

Schedule of net loss per share


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net loss	$	(1,279,304	)	$	(352,776	)	$	(6,067,193	)	$	(730,403	)

SEC Form 10-Q filed by Expion360 Inc.