When investors hear the words Lithium batteries, the obvious first thought is the electric vehicle (EV) market and rightly so, as explosive demand for EVs is expected to result in a 300-400% increase in the lithium battery sales by the end of the decade. Within the market for lithium batteries there are several competing technologies based on different chemical makeups that each have their strengths and ideal use cases.
• Lithium Cobalt Oxide Batteries – Principally used for small electronics (cell phones or laptops) due to their ability deliver power over long periods of time. However, these batteries have a relatively low number of charging cycles before they begin to deteriorate (1,000 or fewer).
• Lithium Nickel Cobalt Aluminum Oxide Batteries – a very popular offering in the EV market as they have high charging cycles and can deliver a sustained amount of current for long times.
• Lithium Iron Phosphate (LiFePo4 or LFP) – offer a high number of charging cycles, can discharge more of its stored energy without damaging the battery and are well-suited for situations with very high power demands. Principally, used in high power needs like RVs, Marine, and off-grid energy storage, some companies like China's BYD (OTC:BYDDF) are starting to deploy LiFePo4 batteries in EVs as well. The only drawback for LiFePO4 batteries is that they cannot be charged below 32 degrees (0 Celsius).
Expion360 (NASDAQ:XPON) was founded in 2016 as Yozamp Products by the company's CEO John Yozamp. Mr. Yozamp came to the battery market after successfully running a solar panel company (Zamp Solar) that served the RV industry. The company rebranded itself as Expion360 and went public in April 2022. Expion360 designs, assembles and distributes lithium iron phosphate (LiFePO4) batteries principally for the recreational vehicle (RV) and marine markets today leveraging a strong dealer network across the US. The company anticipates further expansion into the residential and off-grid markets in the coming years.
The RV Market
Traditionally, most RV owners have sought out the security of RV parks to ensure electric service at their location where they can connect to standard grid service. In recent years, perhaps driven by social media trends or by a desire to get away from it all, RV owners have sought out ways to disconnect from the grid and explore more remote options including "dry camping" (defined as camping in an RV without connections to water, sewer or electric). However, many of these same RV owners also have grown very accustomed to having certain features of modern life – air conditioning, cell phone charging, refrigeration, etc. – which all requires a steady supply of electricity even when away from the typical RV park.
Some RV owners still use small portable generators of 2000 to 3000 watts to meet their electrical needs as that has historically been the most cost-effective option. However, the noise associated with a generator can limit their hours of operation (many RV locations have mandated quiet hours) and for many the noise associated with a generator is precisely the sort of thing they are trying to escape from when they dry camp.
RV users have been early adopters of solar technologies as it has given them additional flexibility as they travel. Early solar systems were used to charge lead acid batteries (more on that below) which have significant limitations, so adoption was relatively slow. The gold standard in the RV industry today is a solar system designed to charge Lithium Iron Phosphate (often referred to as LiFePO4 or LFP) batteries such as the ones designed and assembled by Expion360.
The company has strong network of more than 175 customers – dealers, wholesalers and OEMs – who sell their batteries, chargers, battery management system and other accessories. Recently, the company expanded their relationship with the largest RV Dealer in the US, Camping World, a subsidiary of Camping World Holdings (NYSE:CWH), to offer a complete Lithium power bundle – solar panels, battery and an inverter that can be installed at select Camping World locations. The ability to offer a complete, installed solution to new RV users who may be novices when it comes to powering their RVs is a point of differentiation for Expion360 versus their competitors.
Marine
The marine market is very similar to the RV market where users are looking for a stable power supply when on the water or away from typical onshore grid tie ups. There are many factors that influence the decision to choose a LiFePO4 system versus a lead acid battery system but for marine applications weight and the energy availability of LFP batteries are the primary factors.
The 100 Ah Expion360 battery weighs just 29 lbs compared to up to 63 lbs for a comparable lead acid battery. Obviously, the savings in weight continue to grow as you add more and more batteries to the bank.
Currently, Expion360 does not have a comparable relationship with a major marine dealer as it does with Camping World on the RV side of the business.
Off-Grid Market
A burgeoning market that Expion360 is working toward entering is the demand off-grid home energy storage. To date, this has been a small market as the total number of homes in the US with solar panels installed is only 2.7 million and just 6% of these homes (roughly 160,000 homes) have battery storage as the majority of residential solar is grid-connected.
Many of the homes utilizing battery storage are in areas where tying into the traditional power grid is cost prohibitive, so the buyers tend to be a bit more price sensitive than those in the Marine and RV markets.
However, trends in tiny home demand and second homes that are off-grid indicate that there is a new type of off-grid solar and energy storage consumer who tends to have more financial flexibility.
It is possible that initiatives to strengthen domestic solar production over the next decade could involve incentives for additional residential solar panel installations and as battery storage options from companies like Expion360 continue to mature we expect a greater percentage of future installations will include a storage option.
Target Market Growth
Expion360's principal market remains the US RV market which has experienced incredible growth over the past decade as a result of:
• Demographic shifts - Baby Boomers have entered retirement age and have added RVs to their households.
• Increased popularity of RVs with younger generations who are looking for unique experiences and who appreciate improved styling of many new RV models. A recent study indicated that 84% of 18 -34 year-old's plan to buy an RV in the next 5 years.
• Covid-related spending which saw industry sales spike 33.8% to 576,000 units in 2021. This is a record high number of units sold in the US surpassing the previous record (2017) by over 14%. Significantly, higher gas prices will probably dampen some of this explosive growth in 2022, but the growth of the installed base of RVs creates additional opportunities for Expion360.
It is estimated that 11.2 million households or 8.6% of all US households currently own an RV. Obviously, not all of these are potential customers due to the price point of the company's products, but the RV market in the US remains very healthy and growing.
Revenue Growth
Since the company's founding in 2016, Expion360 has grown its revenues from just $25,000 in their first year of operations to over $4.5 million 2021 just 5 years later. This growth has been a result of the company's strong presence in many large RV dealer networks, increased acceptance of LFP batteries in the market and soaring RV demand.
Why LiFePO4?
Without delving too deep into the chemistry of the lithium iron phosphate (LiFePO4 or LFP) batteries like those assembled and sold by Expion360, it is worth covering why they are the gold standard in power storage today.
• Size/Weight – In general when comparing a LFP battery pack to the traditional lead acid alternatives, the LFP battery pack will be roughly half the weight of lead acid. In the case of Expion360's most popular model it weighs in at about 31 pounds versus over 60 pounds for a lead acid alternative. But this is only part of the weight story….
• Accessible Power – A 100 amp hour (Ah) lead acid battery can only be drained to roughly 50% (or yield 50 Ah) before you will damage the battery. This is one of the leading reasons why real-world performance of lead acid batteries is so poor – people drain their batteries below 50% without being aware of it. Conversely, a 120 Ah LFP battery can be drained to effective 0% without doing any damage to the battery (though most manufacturers recommend stopping at 10%). Thus, the LFP battery will give a user effectively 100 Ah and weigh 31 pounds but to get that same amount of useable power from a lead acid battery you would need two 63-pound 100 Ah lead acid batteries or a total 126 pounds of batteries. If you are attempting to run a large system (maybe 450 Ah) this means the LFP option would weigh 155 pounds, but a lead acid system could weigh over 600 pounds.
• Longer Life – Lead Acid battery manufacturers market their batteries as being able to cycle up to 1,000 times but those are typically under ideal laboratory conditions with no user error (excessive drawdown or overcharging). The real-world performance of these batteries seems to suggest that 500 cycles might be more realistic. Most LFP batteries claim to be able to cycle between 3,000 and 5,000 times before the battery degrades. Depending upon the use that means an LFP battery could last 10 years or more which is one reason why Elon Musk said in 2021 that he anticipates all stationary energy storage systems will switch to LFP chemistry.
With all these advantages it seems hard to believe there is any demand in the market left for traditional lead acid batteries but there is one factor that we've not discussed yet: Price. Top of the line LiFePO4 batteries with US assembly will typically cost between $900 and $1,100 for 100 Ah battery. By comparison a similar lead acid battery may only cost $200-220. We've already discussed the fact that a lead acid system requires roughly twice the number of batteries to provide the same amount of energy to the system and the fact that LFP batteries have significantly longer lives but there remains a meaningful sticker shock for some consumers when they see the price of LFP batteries. If a consumer plans to be in their RV or Boat for many years, the case for LFP batteries can be made by arguing that they are much cheaper than the lead acid alternative when considering the price per cycle.
This calculation includes several assumptions but on a cost per cycle basis, the lead acid alternative is nearly 74% more expensive than the LFP alternative. However, it can be a challenge to make an argument to some budget conscious shoppers that the more expensive LFP option will save them money over the next decade if they are new to the RV or Marine market.
Competition
Clearly, the most significant player in the market for LFP batteries in the US is DragonFly Energy which also markets its batteries under the Battle Born brand. Like Expion360, Dragonfly designs and assembles their batteries domestically. The Battle Born brand is stocked in major auto parts retailers as well as stores like Amazon/Walmart etc. In May 2022, roughly a month after Expion360's IPO, Dragonfly announced a that they would be going public via a SPAC to trade under the symbol "DFLI". DragonFly's 2021 revenues were $78.1 million which was 17x the sales of Expion360, but it's worth noting that Q1 sales at Dragonfly totaled $18.1 million as compared to $2.2 million at Expion360 so the multiple contracted to just 8.4 times as large in Q1.
The Battle Born brand is well-known in the industry and they are making a strong push into industries outside of the traditional RV and Marine markets. It is worth noting that the merger agreement includes an earnout provision with a revenue hurdle of $250 million in 2023 which would be 220% increase over 2021 sales. It is unclear if that must be fully organic growth or if it can include acquisitions but it's clear that Dragonfly will be incentivized to grow aggressively over the next 18 months.
RELiON Batteries is another US-based designer and assembler of LFP batteries with an engineering team in the Pacific Northwest and headquartered in the Southeast. RELiON was acquired by Brunswick Corporation (NYSE:BC, manufacturer of Mercury Marine motors, Boston Whaler, SeaRay and Bayliner boat brands among many others)) in 2021 for an undisclosed sum.
Renogy is the low-cost alternative (they recently advertised a 100 Ah LiFePO4 battery at $679 vs over $1,000 for most competitors) that offers complete off-grid solutions to market principally targeting the DIY market. They offer a full suite of products from solar panels to chargers to inverters and of course, LFP batteries. There is very little information publicly available on Renogy but it is believed they completed a $29 million series E venture round in 2022 and their founder and CEO mentioned in an interview that sales had grown "$25 mil to $200 million in four years".
While Expion360 continues to experience significant growth, they are competing with larger, well-financed companies within this space and finding their niche may the key to their long-term success. One of the challenges in this space is creating brand awareness and brand loyalty in an industry that has long be thought to be a commodity. For most people their only interaction with a battery is the one that starts the engine in their car and when that fails, they simply chose the one in stock at their local tire and battery store. LFP batteries are a significant investment for consumers and today, the users are much more sophisticated, so they understand the small differences between brands.
The first company in this industry that make a consumer friendly, plug and play energy system – think solar, batteries, and battery management system – for the mass market could potentially challenge Tesla (NASDAQ:TSLA), LG and Generac (NYSE:GNRC) in the home energy storage market as well.
News
In June the company announced the first step of an ambitious plan to alter the supply chain of 26650 lithium battery cells in the US. Expion360 entered a non-binding letter of intent with a producer of lithium battery manufacturing equipment to build a large-scale lithium battery cell facility in Oregon. While the details are limited at this point, the size of this project would materially alter the LFP battery market in the US and the company's prospects if it is successful. In a press release, the company said that the planned facility could theoretically produce 250,000 – 500,000 type 26650 lithium battery cells per day. This would represent enough cells to possibly produce over 2,000 – 4,000 standard LFP batteries per day. This would represent enough cells to possibly produce over 60,000 standard LFP batteries per day which obviously significantly exceeds the current market demand (for reference industry leader Dragonfly disclosed they sold less than 20,000 batteries in Q1 2022 or an average of less than 250 batteries per day). The company believes that the total cost of this project will be approximately $450 million to be funded through a combination of debt, equity and Federal grants. Considering the market capitalization of Expion360 is currently under $20 million and the company's cash balances in May were $11.6 million the reliance on Federal grants is a key component of this proposal.
There is a desire by many in the industry and politicians alike to reduce the industry's reliance on battery cells from China which currently produces 70% of the lithium battery cells in the world. It is unclear how much of an appetite there will be to fund a project like this at the Federal level with the midterm elections looming, but we will continue to watch for news on this front because this manufacturing facility would be transformative for the company.
Conclusion:
In May 2022, Expion360 had $11.6 million in cash on its balance sheet, and its only meaningful liability was an operating lease of roughly $3 million. We believe that it is possible the company turns cash flow positive in the back half of 2022 given their significant gross margin of 40%.
We believe that Expion360 is well-positioned to capitalize on the current boom in RV and Marine spending in the US based on their strong dealer network. Long-term trends in the residential energy storage and industrial markets will create additional opportunities for LFP battery suppliers like Expion360 as well. The completion of the Dragonfly SPAC transaction will likely focus additional attention on an industry with only a handful of pure energy storage plays like Expion360 and it will give the company another comp for investors. The Company has grown significantly in the 6 short years since it was founded and with the potential on the horizon to become the largest domestic supplier of lithium battery cells, we will continue to watch developments closely at Expion360.
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