XPON: Updating our model to reflect continued weakness in the RV market
NASDAQ:XPON
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Expion360 (NASDAQ:XPON) provided an updated outlook on its expectation for the full year 2023 results and we are updating our model to reflect the continued weakness in the company’s core end market – LiFePO4 batteries sold into the recreational vehicle (RV) market.
Management indicated in a letter to shareholders that they “expect to report a year-over-year mid-teens percentage decline in 2023 revenue” in a business update released on February 6, 2024. As we’ve discussed previously, one of the major risks for the company is the concentration of sales into the RV market which could be impacted by a high interest rate environment. We believe that economic concerns of many potential RV buyers are leading to purchase deferrals and those lost RV sales are impacting companies that sell RV accessories like the batteries sold by Expion360. While the RV market likely experienced another double-digit decline in shipments in 2023, many industry forecasts are projecting a sharp rebound in 2024. Given our expectation that a higher rate environment will persist for at least a portion of 2024, we are being more conservative with our expectations for a resurgence in the RV market.
In December the company released details on its entry into the home energy storage market. This new offering from Expion360 can be thought of as the company’s answer to the Tesla Powerwall (NASDAQ:TSLA) and is a wall-mounted 10kW battery and inverter to store excess power generated onsite. We have not seen a complete product data sheet to evaluate how the Expion360 system compares to the Powerwall or other home energy storage systems in terms of size, inverter efficiency, the installation process, or price, but we hope to get more details in the coming months. In 2023, it was reported that Tesla had installed over 500,000 Powerwall systems and there is a large market and growing demand for onsite power storage solutions. While Tesla has vastly superior marketing and significantly greater brand recognition, we think that Tesla’s efforts to establish the home energy storage market will benefit all companies in this market including Expion360. The market for home energy storage has become more crowded with new offerings from Enphase Energy (NASDAQ:ENPH), Generac (NYSE:GNRC), Panasonic, and LG Chem but we think the company’s strong reputation for providing high-quality Lithium Iron Phosphate batteries with an outstanding safety record, could help it establish itself in this market. The company has indicated that they are taking initial orders in Q1 2024 with the first deliveries occurring in the second half of 2024.
We are encouraged by the company’s efforts to deliver a high-quality home energy storage solution to the market and believe that several state initiatives will help drive consumers to consider the benefits of onsite solar and home energy storage solutions. The company will have to secure additional distribution and installation partners to be successful in this market but the diversification of the company’s product line is a positive development.
In January, the company introduced its refreshed battery line-up with featuring several enhancements including a proprietary internal heating system and added connectivity (via an app) to monitor battery status. We think the internal heating solution could be a key point of differentiation for Expion360. We will have to monitor the market’s acceptance of the new battery offerings because Expion360 has priced the batteries at a premium to the most competing LiFePO4 batteries. Increasingly, we believe price is becoming a greater factor for consumers as the number of competitors in the market has expanded significantly in the last 24 months.
Expanded Financing Commitments:
In late December the company announced that it had issued an unsecured convertible promissory note to an investor (3i Fund) with an original principal amount of $2.75 million. Given the company’s current burn rate which likely accelerated in the fourth quarter, this loan probably provides the company with an additional 4-6 months of working capital. The note matures in December 2024 and bears an interest rate of 9%.
The more significant financing news was the 24-month equity line of credit established with Tumim Stone Capital which gives the company the right to issue to Tumim up to $20 million of common stock.
The company has indicated that the proceeds of this line of credit will be used to fund operations and this agreement provides capital to get the company through 2025. One of our previous concerns for 2024 was the company’s financial condition and that has largely been addressed as a result of these transactions.
Additional Considerations
While it is welcome news that the company appears to have addressed its funding needs for through 2025, existing shareholders should be aware that the company’s outstanding share count and the number of freely trading shares will likely increase significantly in the next 24 months. With an average volume of just about 25,000 shares/day, absorbing additional shares in the market could be difficult and could lead to added volatility of the company’s shares.
We think the market of LiFePO4 battery manufacturers remains remarkably fragmented and is ripe for consolidation. Expion360’s position as a public company could make it an interesting strategic acquirer of many of the private LiFePO4 battery companies that have a larger market share in adjacent verticals like marine batteries or batteries for light electric vehicles.
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