UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
(Amendment No. 1)
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021March 31, 2023
OR
| ☐ | 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: 001-40867
Volcon, Inc.
(Exact (Exact Name of Registrant as Specified in Its Charter)
| Delaware | 84-4882689 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 78665 | ||
| (Address of Principal Executive Offices) | (Zip Code) |
(512) 400-4271
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 | VLCN | 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 such filing requirements for the past 90 days. Yes☐ No ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically if any, 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 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. ☐
Securities registered pursuant to Section 12(b) 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☒
The registrant had [●] shares of common stock outstanding at November [●], 2021.May 4, 2023.
TABLE OF CONTENTS
EXPLANATORY NOTE
This Amendment No. 1 to the Quarterly Report on Form 10-Q of Volcon, Inc. (the “Company”) amends the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, originally filed with the Securities and Exchange Commission on May 5, 2023 (the “Original Filing”). The Company is filing this Amendment No. 1 for the sole purpose of: (i) correcting the number of shares of common stock outstanding on the cover page; and (ii) amending the certification filed as Exhibit 32.1 to the Original Filing to correct the inadvertent omission of the conformed signature of the Chief Executive Officer. The certification was fully executed on May 5, 2023 and was in the Company’s possession at the time of the Original Filing. Except as described above, no other changes have been made to the Original Filing. This Amendment No. 1 continues to speak as of the date of the Original Filing, and the Company has not updated the disclosures contained therein to reflect any events that occurred at a date subsequent to the date of the Original Filing. This Amendment No. 1 should be read in conjunction with the Original Filing.
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-Q. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “should,” “would,” “could,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements.
While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Other sections of this Form 10-Q may describe additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations, and we do not intend to do so.
Forward-looking statements include, but are not limited to, statements about:
We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q in the case of forward-looking statements contained in this Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. Although we believe that the expectations reflected in the forward looking-statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, you should not rely on any of the forward-looking statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
PART I -— FINANCIAL INFORMATION
ItemITEM 1. Financial Statements.FINANCIAL STATEMENTS
VOLCON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 2,657,379 | $ | 536,082 | ||||
| Accounts receivable | 35,663 | 0 | ||||||
| Inventory | 2,328,686 | 0 | ||||||
| Inventory deposits | 2,940,314 | 0 | ||||||
| Prepaid expenses and other current assets | 341,314 | 102,789 | ||||||
| Total current assets | 8,303,356 | 638,871 | ||||||
| Long term assets: | ||||||||
| Property and equipment, net | 761,042 | 305,271 | ||||||
| Intangible assets - domain names, net | 20,248 | 16,954 | ||||||
| Other long-term assets | 749,187 | 50,560 | ||||||
| Right of use asset - operating lease | 2,296,872 | 842,357 | ||||||
| Total assets | $ | 12,130,705 | $ | 1,854,013 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,330,714 | $ | 81,400 | ||||
| Accrued liabilities | 154,366 | 34,044 | ||||||
| Current portion of notes payable | 17,438 | 8,873 | ||||||
| Right of use operating lease liability, short term | 328,337 | 141,943 | ||||||
| Customer deposits | 2,334,105 | 55,865 | ||||||
| Promissory Notes | 1,138,844 | 0 | ||||||
| SAFE liability | 0 | 2,000,000 | ||||||
| Total current liabilities | 5,303,804 | 2,322,125 | ||||||
| Notes payable, net of discount and current portion | 73,218 | 59,329 | ||||||
| Right of use operating lease liability, long term | 1,964,779 | 614,414 | ||||||
| Total liabilities | 7,341,801 | 2,995,868 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Stockholders' equity (deficit): | ||||||||
| Preferred stock: $par value, shares authorized, 2,900,000 shares designated | ||||||||
| Series A Preferred Stock: $par value, 1,400,000 shares designated shares issued and outstanding as of September 30, 2021, designated, issued or outstanding as of December 31, 2020 | 12 | 0 | ||||||
| Series B Preferred Stock: $ par value,1,500,000 shares designated, shares issued and outstanding as of September 30, 2021, designated, issued or outstanding as of December 31, 2020 | 11 | 0 | ||||||
| Common stock: $par value, shares authorized, shares issued and outstanding as of September 30, 2021, issued or outstanding as of December 31, 2020 | 13 | 8 | ||||||
| Additional paid-in capital | 31,509,121 | 232,550 | ||||||
| Accumulated deficit | (26,720,253 | ) | (1,374,413 | ) | ||||
| Total stockholders’ equity (deficit) | 4,788,904 | (1,141,855 | ) | |||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | $ | 12,130,705 | $ | 1,854,013 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VOLCON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
AND THE THREE MONTHS ENDED SEPTEMBER 30, 2020
AND THE PERIOD FEBRUARY 21, 2020 (INCEPTION) TO SEPTEMBER 30, 2020
(unaudited)
| Three Months Ended | Nine Months Ended | Period February 21, 2020 to | ||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenue | $ | 75,067 | $ | 0 | $ | 75,067 | $ | 0 | ||||||||
| Cost of goods sold | 1,176,691 | 0 | 1,176,691 | 0 | ||||||||||||
| Gross margin | (1,101,624 | ) | 0 | (1,101,624 | ) | 0 | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 1,135,205 | 9,346 | 1,937,745 | 26,946 | ||||||||||||
| Product development | 3,021,207 | 281,462 | 7,595,581 | 331,621 | ||||||||||||
| General and administrative expenses | 586,494 | 13,751 | 14,634,037 | 18,090 | ||||||||||||
| Total operating expenses | 4,742,906 | 304,559 | 24,167,363 | 376,657 | ||||||||||||
| Loss from operations | (5,844,530 | ) | (304,559 | ) | (25,268,987 | ) | (376,657 | ) | ||||||||
| Other income (expense) | (3,842 | ) | 0 | (9,332 | ) | 0 | ||||||||||
| Interest expense | (42,183 | ) | 0 | (67,521 | ) | 0 | ||||||||||
| Total other expense | (46,025 | ) | 0 | (76,853 | ) | 0 | ||||||||||
| Loss before provision for income taxes | (5,890,555 | ) | (304,559 | ) | (25,345,840 | ) | (376,657 | ) | ||||||||
| Provision for income taxes | 0 | 0 | 0 | 0 | ||||||||||||
| Net loss | $ | (5,890,555 | ) | $ | (304,559 | ) | $ | (25,345,840 | ) | $ | (376,657 | ) | ||||
| Net loss per common share – basic and diluted | $ | (2.55 | ) | $ | (2.42 | ) | $ | (11.95 | ) | $ | (7.31 | ) | ||||
| Weighted average common shares outstanding – basic and diluted | 2,303,508 | 125,687 | 2,121,129 | 51,520 | ||||||||||||
March 31, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 4,220,884 | $ | 10,986,592 | ||||
| Restricted cash | 551,250 | 551,250 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $43,265 and $62,451 at March 31, 2023 and December 31, 2022, respectively | 710,271 | 864,957 | ||||||
| Inventory | 6,120,748 | 5,645,883 | ||||||
| Inventory deposits | 1,206,318 | 427,662 | ||||||
| Prepaid expenses and other current assets | 1,829,040 | 1,850,666 | ||||||
| Total current assets | 14,638,511 | 20,327,010 | ||||||
| Long term assets: | ||||||||
| Property and equipment, net | 897,599 | 601,766 | ||||||
| Intangible assets, net | 4,360 | 5,813 | ||||||
| Other long-term assets | 285,037 | 285,037 | ||||||
| Right-of-use assets - operating leases | 1,415,930 | 1,505,987 | ||||||
| Total assets | $ | 17,241,437 | $ | 22,725,613 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 557,411 | $ | 1,036,628 | ||||
| Accrued liabilities | 1,589,050 | 2,045,239 | ||||||
| Accrued purchase commitments | – | 28,600 | ||||||
| Current portion of notes payable | 14,200 | 18,670 | ||||||
| Convertible notes, net of issuance costs | 19,130,384 | 17,353,748 | ||||||
| Right-of- use operating lease liabilities, short-term | 401,553 | 391,117 | ||||||
| Customer deposits | 3,144 | 23,471 | ||||||
| Total current liabilities | 21,695,742 | 20,897,472 | ||||||
| Notes payable, net of current portion | 81,172 | 50,116 | ||||||
| Right-of-use operating lease liabilities, long-term | 1,046,544 | 1,143,011 | ||||||
| Total liabilities | 22,823,458 | 22,090,599 | ||||||
| COMMITMENTS AND CONTINGENCIES | – | – | ||||||
| Stockholders' (deficit) equity: | ||||||||
| Preferred stock: $ par value, shares authorized, shares outstanding | – | – | ||||||
| Common stock: $ par value, shares authorized, shares issued and outstanding at March 31, 2023 and shares issued and outstanding as of December 31, 2022 | 200 | 198 | ||||||
| Additional paid-in capital | 77,452,175 | 76,369,742 | ||||||
| Accumulated deficit | (83,034,396 | ) | (75,734,927 | ) | ||||
| Total stockholders’ (deficit) equity | (5,582,021 | ) | 635,013 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 17,241,437 | $ | 22,725,613 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
VOLCON, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)OPERATIONS
(unaudited)
FOR THE PERIOD FROM FEBRUARY 21, 2020 (INCEPTION) TO SEPTEMBER 30, 2020
| Common stock | Series A preferred stock | Series B preferred stock | Additional | |||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | paid-in | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | deficit | Total | ||||||||||||||||||||||||||||
| Balance at February 21, 2020 | – | $ | – | – | $ | – | – | $ | – | $ | – | $ | – | $ | – | |||||||||||||||||||||
| Issuance of founders shares for cash | 1,625,000 | 7 | – | – | – | – | 10,826 | – | 10,833 | |||||||||||||||||||||||||||
| Stock-based compensation | 312,500 | 1 | – | – | – | – | 60,962 | – | 60,963 | |||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (376,657 | ) | (376,657 | ) | |||||||||||||||||||||||||
| Balance at September 30, 2020 | 1,937,500 | $ | 8 | – | $ | – | – | $ | – | $ | 71,788 | $ | (376,657 | ) | $ | (304,861 | ) | |||||||||||||||||||
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2021MARCH 31, 2023 AND 2022
(Unaudited)
| Common stock | Series A preferred stock | Series B preferred stock | Additional | |||||||||||||||||||||||||||||||||
| Number of | Number of | Number of | paid-in | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | deficit | Total | ||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 1,937,500 | $ | 8 | – | $ | – | – | $ | – | $ | 232,550 | $ | (1,374,413 | ) | $ | (1,141,855 | ) | |||||||||||||||||||
| Proceeds from WeFunder offering, net of issuance costs of $53,500 | – | – | – | – | – | – | 2,205,440 | – | 2,205,440 | |||||||||||||||||||||||||||
| Issuance of series A preferred stock, net of issuance costs of $205,470 | 79,750 | – | 415,287 | 4 | – | – | 2,464,504 | – | 2,464,508 | |||||||||||||||||||||||||||
| Conversion of WeFunder offering to series A preferred stock | – | – | 351,832 | 4 | – | – | (4 | ) | – | – | ||||||||||||||||||||||||||
| Conversion of SAFE Liability to series A preferred stock | – | – | 424,269 | 4 | – | – | 1,999,996 | – | 2,000,000 | |||||||||||||||||||||||||||
| Issuance of series B preferred stock, net of issuance costs of $890,026 | 123,296 | – | – | – | 1,105,827 | 11 | 9,615,320 | – | 9,615,331 | |||||||||||||||||||||||||||
| Issuance of common stock with promissory notes, net of issuance costs of $65,000 | 266,664 | 3 | – | – | – | – | 734,997 | – | 735,000 | |||||||||||||||||||||||||||
| Stock-based compensation | 162,507 | 2 | – | – | – | – | 14,256,318 | – | 14,256,318 | |||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (25,345,840 | ) | (25,345,840 | ) | |||||||||||||||||||||||||
| Balance at September 30, 2021 | 2,569,717 | $ | 13 | 1,191,388 | $ | 12 | 1,105,827 | $ | 11 | $ | 31,509,121 | $ | (26,720,253 | ) | $ | 4,788,904 | ||||||||||||||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 1,170,458 | $ | 1,184,502 | ||||
| Cost of goods sold | (1,229,981 | ) | (3,527,715 | ) | ||||
| Gross margin | (59,523 | ) | (2,343,213 | ) | ||||
| Operating expenses: | ||||||||
| Sales and marketing | 1,789,370 | 1,014,906 | ||||||
| Product development | 1,786,351 | 2,495,712 | ||||||
| General and administrative expenses | 1,890,091 | 2,794,940 | ||||||
| Total operating expenses | 5,465,812 | 6,305,558 | ||||||
| Loss from operations | (5,525,335 | ) | (8,648,771 | ) | ||||
| Other income | 5,885 | 41,117 | ||||||
| Interest expense | (1,780,019 | ) | (4,691 | ) | ||||
| Total other expense | (1,774,134 | ) | 36,426 | |||||
| Loss before provision for income taxes | (7,299,469 | ) | (8,612,345 | ) | ||||
| Provision for income taxes | – | – | ||||||
| Net loss | $ | (7,299,469 | ) | $ | (8,612,345 | ) | ||
| Net loss per common share – basic | $ | (0.30 | ) | $ | (0.40 | ) | ||
| Net loss per common share – diluted | $ | (0.30 | ) | $ | (0.40 | ) | ||
| Weighted average common shares outstanding – basic | 24,535,131 | 21,745,089 | ||||||
| Weighted average common shares outstanding – diluted | 24,535,131 | 21,745,089 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
VOLCON, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(Unaudited)
| Common stock | Additional | |||||||||||||||||||
| Number | paid-in | Accumulated | ||||||||||||||||||
| of Shares | Amount | capital | deficit | Total | ||||||||||||||||
| Balance at January 1, 2023 | 24,426,260 | $ | 198 | $ | 76,369,742 | $ | (75,734,927 | ) | $ | 635,013 | ||||||||||
| Issuance of common stock for exercise of stock options and restricted shares | 50,000 | 1 | 24,999 | – | 25,000 | |||||||||||||||
| Stock-based compensation | 138,859 | 1 | 1,057,434 | – | 1,057,435 | |||||||||||||||
| Net loss | – | – | – | (7,299,469 | ) | (7,299,469 | ) | |||||||||||||
| Balance at March 31, 2023 | 24,615,119 | $ | 200 | $ | 77,452,175 | $ | (83,034,396 | ) | $ | (5,582,021 | ) | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
VOLCON, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
| Common stock | Additional | |||||||||||||||||||
| Number of | paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | capital | deficit | Total | ||||||||||||||||
| Balance at January 1, 2022 | 17,309,187 | $ | 128 | $ | 47,803,643 | $ | (41,499,522 | ) | $ | 6,304,249 | ||||||||||
| Issuance of common stock for public offering, net of issuance costs of $1,910,816 | 6,666,667 | 67 | 18,089,117 | – | 18,089,184 | |||||||||||||||
| Issuance of common stock for exercise of warrants | 6,247 | – | – | – | – | |||||||||||||||
| Issuance of common stock for exercise of stock options and restricted shares | 82,520 | – | 15,000 | – | 15,000 | |||||||||||||||
| Stock-based compensation | 44,623 | – | 1,575,165 | – | 1,575,165 | |||||||||||||||
| Net loss | – | – | – | (8,612,345 | ) | (8,612,345 | ) | |||||||||||||
| Balance at March 31, 2022 | 24,109,244 | $ | 195 | $ | 67,482,925 | $ | (50,111,867 | ) | $ | 17,371,253 | ||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
VOLCON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2021
MARCH 31, 2023 AND FOR THE PERIOD FROM FEBRUARY 21, 2020 (INCEPTION) TO SEPTEMBER 30, 20202022
(Unaudited)
| March 31, 2023 | March 31, 2022 | |||||||
| Cash flow from operating activities: | ||||||||
| Net loss | $ | (7,299,469 | ) | $ | (8,612,345 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | 1,057,435 | 1,575,165 | ||||||
| Loss on write down of inventory and inventory deposits | 14,843 | – | ||||||
| Gain on sale of property and equipment | (5,578 | ) | – | |||||
| Write-off of intangible assets | – | 6,427 | ||||||
| Non-cash interest expense | 1,776,636 | – | ||||||
| Amortization of right-of-use assets | 90,057 | 158,672 | ||||||
| Depreciation and amortization | 51,841 | 112,980 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 154,686 | (82,397 | ) | |||||
| Inventory | (489,708 | ) | (1,519,431 | ) | ||||
| Inventory deposits | (778,656 | ) | 393,741 | |||||
| Prepaid assets and other current assets | 21,625 | (656,709 | ) | |||||
| Other assets | – | (9,453 | ) | |||||
| Accounts payable | (479,216 | ) | 35,097 | |||||
| Accrued liabilities | (484,789 | ) | 483,830 | |||||
| Right-of-use liabilities - operating leases | (86,031 | ) | (116,716 | ) | ||||
| Customer deposits | (20,327 | ) | (1,216,883 | ) | ||||
| Net cash provided by (used in) operating activities | (6,476,651 | ) | (9,448,022 | ) | ||||
| Cash flow from investing activities: | ||||||||
| Purchase of property and equipment | (333,619 | ) | (223,632 | ) | ||||
| Proceeds from sale of property and equipment | 89,000 | – | ||||||
| Net cash used by investing activities | (244,619 | ) | (223,632 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Repayment of notes payable | (69,438 | ) | (4,764 | ) | ||||
| Proceeds from issuance of common stock from public offering, net of issuance costs of $1,910,816 | – | 18,089,184 | ||||||
| Proceeds from exercise of stock options | 25,000 | 15,000 | ||||||
| Net cash (used) provided by financing activities | (44,438 | ) | 18,099,420 | |||||
| NET CHANGE IN CASH AND RESTRICTED CASH | (6,765,708 | ) | 8,427,766 | |||||
| CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD | 11,537,842 | 5,572,199 | ||||||
| CASH AND RESTRICTED CASH AT END OF PERIOD | $ | 4,772,134 | $ | 13,999,965 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 2,294 | $ | 3,060 | ||||
| Cash paid for income taxes | $ | – | $ | – | ||||
| Non-cash transactions: | ||||||||
| Acquisition of property and equipment with notes payable | $ | 96,024 | $ | – | ||||
(unaudited)
| Nine Months Ended | Period February 21, 2020 to | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Cash flow from operating activities: | ||||||||
| Net loss | $ | (25,345,840 | ) | $ | (376,657 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | 14,256,318 | 60,963 | ||||||
| Loss on disposal of tooling | 145,000 | 0 | ||||||
| Expenses funded by related party | 0 | 53,662 | ||||||
| Amortization of right of use asset | 252,951 | 0 | ||||||
| Noncash interest expense | 58,312 | 0 | ||||||
| Depreciation and amortization | 134,557 | 194 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (35,663 | ) | 0 | |||||
| Inventory | (2,328,686 | ) | 0 | |||||
| Inventory deposits | (2,940,314 | ) | 0 | |||||
| Prepaid assets and other current assets | (238,525 | ) | (10,000 | ) | ||||
| Other assets | (698,627 | ) | 0 | |||||
| Accounts payable | 1,249,314 | 59,230 | ||||||
| Accrued liabilities | 120,322 | 0 | ||||||
| Right of use liabilities - operating lease | (194,175 | ) | 0 | |||||
| Customer deposits | 2,278,240 | 0 | ||||||
| Net cash provided by (used in) operating activities | (13,286,816 | ) | (212,608 | ) | ||||
| Cash flow from investing activities: | ||||||||
| Purchase of property and equipment | (694,553 | ) | 0 | |||||
| Purchase of intangible assets | (13,125 | ) | (17,438 | ) | ||||
| Net cash used by investing activities | (707,678 | ) | (17,438 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Proceeds from SAFE liability | 0 | 1,625,000 | ||||||
| Proceeds from WeFunder offering, net of offering costs of $53,500 | 2,205,440 | 0 | ||||||
| Repayment of notes payable | (8,488 | ) | 0 | |||||
| Repayment of related party note | 0 | (21,286 | ) | |||||
| Proceeds from issuance of Series A preferred stock, net of $205,470 of issuance costs | 2,464,508 | 0 | ||||||
| Proceeds from issuance of Series B preferred stock, net of $890,026 of issuance costs | 9,615,331 | 0 | ||||||
| Proceeds from issuance of promissory notes, net of issuance costs of $96,000 | 1,104,000 | 0 | ||||||
| Proceeds from issuance of founders shares | 0 | 10,833 | ||||||
| Proceeds from issuance of common stock with promissory notes, net of $65,000 of issuance costs | 735,000 | 0 | ||||||
| Net cash provided by financing activities | 16,115,791 | 1,614,547 | ||||||
| NET CHANGE IN CASH | 2,121,297 | 1,384,501 | ||||||
| CASH AT BEGINNING OF PERIOD | 536,082 | 0 | ||||||
| CASH AT END OF PERIOD | $ | 2,657,379 | $ | 1,384,501 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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VOLCON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
AND FOR THE PERIOD FROM FEBRUARY 21, 2020 (INCEPTION) TO SEPTEMBER 30, 2020
(unaudited)
| Nine Months Ended | Period February 21, 2020 to | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 9,209 | $ | 0 | ||||
| Cash paid for income taxes | $ | 0 | $ | 0 | ||||
| Non-cash transactions | ||||||||
| Recognition of initial Right of use asset - operating lease | $ | 1,707,466 | $ | 0 | ||||
| Acquisition of property and equipment with note payable | $ | 30,942 | $ | 0 | ||||
| Conversion of SAFE liability to Series A preferred stock | $ | 2,000,000 | $ | 0 | ||||
| Noncash increase in related party notes payable | $ | 0 | $ | 53,662 | ||||
VOLCON, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(unaudited)
NOTE 1 – ORGANIZATION, NATURE OF OPERATIONS AND GOING CONCERN
Organization and Nature of Operations
Volcon, Inc. (“Volcon” or the “Company”) was formed on February 21, 2020, as a Delaware Corporation,corporation, under the name Frog ePowersports, Inc. The Company was renamed Volcon, Inc. on October 1, 2020. Volcon is developerdesigns and manufacturer ofsells all-electric off roadoff-road powersport vehicles.
On January 5, 2021, the Company created Volcon ePowersports, LLC (“Volcon LLC”), a Colorado wholly ownedwholly-owned subsidiary of the Company, to sell Volcon vehicles and accessories in the United States. Volcon LLC is no longer used for selling vehicles and accessories.
Going Concern
The accompanying interim consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has recurring losses and has generated negative cash flows from operations since inception. Due
In August 2022, the Company ceased manufacturing the Grunt motorcycle in Round Rock, Texas and has outsourced all manufacturing of its vehicles to third-parties. Further, the Company has, or plans to, outsource the manufacturing of all its future vehicles to third-parties for the foreseeable future. The Company has also outsourced certain design and prototype services of its vehicles to third-parties. In September 2022, management reduced headcount and employee related costs in its product development and administrative departments to reduce operating costs.
Also in August 2022, the Company received net proceeds of approximately $22.3 million for the issuance of convertible notes due February 2024 (“Convertible Notes”) and warrants (see Note 6). The Convertible Notes require the Company to have unrestricted and unencumbered cash on deposit of $10,000,000 if the outstanding principal (and interest, if any) of the Convertible Notes is $15,000,000 or greater as of September 30, 2023 and December 31, 2023. The cash on deposit requirement is reduced dollar for dollar to the extent the outstanding principal (and interest, if any) of the Convertible Notes is less than $15,000,000 on each of these conditions, it raiseddates.
Management anticipates that our cash on hand as of March 31, 2023 plus the cash expected to be generated from operations will not be sufficient to fund planned operations and maintain required cash balances for the Convertible Notes beyond one year from the date of the issuance of the financial statements as of and for the three months ended March 31, 2023. There can be no assurance that such additional funding, if needed, would be available to the Company on acceptable terms, or at all. These factors raise substantial doubt about itsregarding our ability to continue as a going concern. Management intendsDue to finance operating costs overthese conditions, this raises substantial doubt about the next twelve months with loans or the sale of equity.Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.
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Impact of COVID-19
The outbreak of the 2019 novel coronavirus disease (“COVID-19”), which was declared a global pandemic by the World Health Organization on March 11, 2020, and the related responses by public health and governmental authorities to contain and combat its outbreak and spread, has severely impacted the U.S. and world economies. Economic recessions, including those brought on by the COVID-19 outbreak, may have a negative effect on the demand for the Company’s products and the Company’s operating results. The range of possible impacts on the Company’s business from the coronavirus pandemic could include: (i) changing demand for the Company’s products; and (ii) potential disruption to the Company’s supply chain and distribution network.network; and (iii) disruption in the production of the Company’s vehicles by third parties due to employee illness or government regulations regarding social distancing and workplace requirements.
Impact of Russia and Ukraine Conflict
On February 24, 2022, Russia invaded Ukraine. The conflict between Russia and Ukraine could impact the availability of nickel, an element used in the production of lithium ion cells used in batteries that power our vehicles. The shortage of these cells could have an impact on our ability to produce vehicles to meet our customers’ demands. In addition, sanctions against Russia could impact the price of elements, including nickel, that are used in the production of batteries which would result in higher costs to produce our vehicles. These sanctions have also impacted the U.S. and global economies and could result in an economic recession which could cause a broader disruption to the Company’s supply chain and distribution network and customer demand for our products.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Unaudited Financial Information
The significantaccompanying interim consolidated financial statements have been prepared in accordance with accounting policies followedprinciples generally accepted in the preparationUnited States of America (“U.S. GAAP”) and should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission ("SEC") on March 7, 2023. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
Results for the interim periods in this report are not necessarily indicative of future financial results and have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our interim consolidated financial statements as follows:of March 31, 2023, and for the three ended March 31, 2023 and 2022. These adjustments are of a normal recurring nature and consistent with the adjustments recorded to prepare the annual audited consolidated financial statements as of December 31, 2022.
Basis of presentationPresentation
The basis of accounting applied is United States generally accepted accounting principles (US GAAP). The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts, transactions and balances have been eliminated in consolidation.
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Stock Dividend
On July 27, 2021, the board of directors approved a common stock dividend of 1.5 shares for each share of common stock. The Company has accounted for this as a stock split since all common stock shares, warrants, options and restricted stock unit amounts and common stock per share amounts will be adjusted for this stock dividend. All periods presented have been adjusted to reflect this stock dividend. As a result of the stock dividend, Series A and Series B preferred stock will convert at a ratio of 2.5 common share for each preferred share outstanding.
Use of estimatesEstimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities as of the dates of the financial statements and the reported amounts of expenses during the reporting periods.
Making estimates requires management to exercise judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, actual results could differ significantly from those estimates.
Cash, Cash Equivalents and cash equivalentsRestricted Cash
Cash and cash equivalents include short-term investments with original maturities of 90 days or less at the date of purchase. The recorded value of our cash and cash equivalents approximates their fair value. There were no cash equivalents as of March 31, 2023 or December 31, 2022. Restricted cash includes cash restricted as collateral for the Company’s corporate credit cards and a letter of credit with the Company’s bank. Cash at March 31, 2023 is $4,220,884 and restricted cash was $551,250.
Revenue recognitionRecognition
Revenue isFor sales of the Grunt motorcycle directly to consumers, revenue was recognized when the Company transferstransferred control of the product to the customer and the 14-day acceptance period hashad expired, or earlier acceptance hashad been received from the customer. Sales directly to consumers were completed as of June 1, 2022. Beginning in February 2023 the Company began selling the Brat EBike directly to consumers in addition to dealers, revenue for direct to consumer sales is recognized when transfer of control of the product is made to the consumer.
For sales to dealers or distributors revenue is recognized when transfer of control of the product is made as there is no acceptance period or right of return. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring control of vehicles, parts, and accessories. Consideration that is received in advance of the transfer of goods areis recorded as customer deposits until delivery has occurred or the customer cancels their order and the consideration is returned to the customer. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. If a right of return exists, the Company adjusts revenue for the estimated effect of returns. Until the Company develop sales history, it will estimate expected returns based on industry data for sales returns as a percent of sales, type of product, and a projection of this experience into the future. OurThe Company’s sales do not have a financing component.
Sales promotions and incentives.The Company provides for estimated sales promotions and incentives, which are recognized as a component of sales in measuring the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Examples of sales promotion and incentive programs include distributerrebates, distributor fees, dealer co-op advertising and volume incentives. Sales promotions and incentives are estimated based on contracts with distributors.contractual requirements. The Company records these amounts as a liability in the balance sheet until they are ultimately paid. Adjustments to sales promotions and incentives accruals are made as actual usage becomes known to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
Shipping and handling charges and costs. The Company records shipping and handling amounts charged to the customer and related shipping costs as a component of cost of sales when control has transferred to the customer.
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Product warrantiesWarranties
The Company provides a one-year warranty on vehicles, and a two-year warranty on the battery pack. The Company accrues warranty reserves at the time a vehiclerevenue is delivered to the customer.recognized. Warranty reserves include the Company’s best estimate of the projected cost to repair or to replace any items under warranty, based on actual warranty experience as it becomes available and other known factors that may impact ourthe evaluation of historical data. The Company reviews its reserves quarterly to ensure that itsthe accruals are adequate in meetingto meet expected future warranty obligations and will adjust estimates as needed. Factors that could have an impact on the warranty reserve include the following: changes in manufacturing quality, shifts in product mix, changes in warranty coverage periods, product recalls and changes in sales volume. Warranty expense is recorded as a component of cost of revenuesgoods sold in the statement of operations. The portion of the warranty provision whichoperations and is expected to be incurred within 12 months from the balance sheet date will be classifiedrecognized as a current while the remaining amount will be classified as long-term liabilities.liability.
Inventory and Inventory Deposits
Inventory costs include material, laborInventories and manufacturing overhead costs, including depreciation expense associated with the manufacture and distribution of the Company’s products. Inventoriesprepaid inventory deposits are stated at the lower of cost (first-in, first-out method) or net realizable value.
Certain vendors require the Company to pay an upfront deposit before they will manufacture and ship our parts or accessories. These payments are classified as prepaid inventory deposits on the balance sheet until title and risk of loss transfers to the Company, at which time they are classified as inventory.
Raw materials inventory costs include the cost of parts, including duties, tariffs and shipping. Work in process and finished goods include the cost of parts, labor and manufacturing overhead costs associated with the assembly of the vehicle. Finished goods also include accessories for the vehicle and branded merchandise such as hats and shirts.
Through August 2022 the Company assembled the Grunt motorcycle in a leased facility. The Company ceased assembly operations at the end of August and outsourced the assembly of the Grunt to a third-party. Subsequent March 31, 2023, the Company transferred substantially all of its raw materials and work-in-process inventory for the Grunt to the third-party manufacturer. Title to the inventory transferred to the third-party manufacturer and it will provide the Company with a credit towards future purchases of finished goods once it begins production of the Grunt EVO.
Property plant and equipmentEquipment
Property plant and equipment are valued at cost. Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is providedrecorded using the straight-line method over the estimated useful lives of the assets as follows:
| Schedule of estimated useful lives for property, plant and equipment | ||
| Category | Estimated Useful Lives | |
| Machinery, tooling and equipment | ||
| Vehicles | 5 years | |
| Internal use manufactured vehicles | 1 year | |
| Furniture & Fixtures | 5 years | |
| Computers | 3 years |
Leasehold improvements are depreciated over the shorter period of their estimated useful life or term of the lease.
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Long-livedIntangible Assets
Intangible assets include acquired domain names and software. Domain names are amortized over 15 years and software is amortized over the life of the shorter of the software term or three years.
Long-Lived Assets
The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the historical carrying cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to itsthe carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset.
Leases
Right-of-use ("ROU"(“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease componentcomponent.
ASC 842 defines initial direct costs as only the incremental costs of signing a lease. Initial direct costs related to leasing that are not incremental are expensed as general and administrative expenseexpenses in our statements of operations.
The Company’s operating lease agreements primarily consist of leased real estate and are included within ROU assets – operating leases and ROU lease liabilities – operating leases on the balance sheets. The Company’s lease agreements may include options to extend the lease, which are not included in minimum lease payments unless they are reasonably certain to be exercised at lease commencement. The Company's leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Research and development expensesDevelopment Expenses
The Company records research and development expenses in the period in which they are incurred as a component of product development expenses.
Income taxesTaxes
Deferred taxes are determined utilizing the "asset and liability" method, whereby deferred tax asset and liability account balances are determined based on the differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, when it's more likely than not that deferred tax assets will not be realized in the foreseeable future. Deferred tax liabilities and assets are classified as current or non-current based on the underlying asset or liability or if not directly related to an asset or liability based on the expected reversal dates of the specific temporary differences.
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Fair valueValue of financial instrumentsFinancial Instruments
The Company discloses fair value measurements for financial and non-financial assets and liabilities measured at fair value. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. 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 are corroborated by market data.
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.
Stock-based compensation Stock-Based Compensation
The Company has a stock-based incentive award plan for our employees, consultants and directors. The Company measures stock-based compensation at the estimated fair value on the grant date and recognizes the amortization of stock-based compensation expense on a straight-line basis over the requisite service period, or when it is probable criteria will be achieved for performance-based awards. Fair value is determined based on assumptions related to the fair value of the Company common stock, stock volatility and risk-free rate of return. The Company has elected to recognize forfeitures when realized.
The Company outsources certain portions of product design and development for its vehicles to third parties. In addition, the Company has outsourced the manufacturing of all of its vehicles to third-party manufacturers, including one manufacturer for three of its vehicles and this third-party is also performing product design and development services on these vehicles.
One supplier provides the battery and drivetrain components for the Company’s utility terrain vehicle, the Stag. The components are critical to the operation of the Stag.
Recently issued accounting pronouncementsIssued Accounting Pronouncements
In December 2019,June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASU No. 2019-12, Income TaxesAccounting Standards Update 2016-13, “Financial Instruments - Credit Losses (Topic 740)326): Measurement of Credit Losses on Financial Instruments” (“ASU 2019-12”2016-13”): Simplifying the Accounting for Income Taxes. The new standard eliminates certain exceptions related. ASU 2016-13 requires companies to the approach for intraperiod tax allocation, themeasure credit losses utilizing a methodology for calculating income taxes in an interim period,that reflects expected credit losses and the recognitionrequires a consideration of deferred tax liabilities for outside basis differences relateda broader range of reasonable and supportable information to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. For public business entities, itinform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2020,2022, including interim periods within those fiscal years. The Company is currently evaluatingadopted ASU 2016-13 effective January 1, 2023. The Company determined that the potentialupdate applied to trade receivables, but that there was no material impact to the consolidated financial statements from the adoption of this standard on its financial statements.ASU 2016-13.
From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board (“FASB”) or other standard setting bodies that the Company adopts as of the specified effective date. The Company does not believe that the impact of recently issued standards that are not yet effective will have a material impact on the Company’s financial position or results of operations upon adoption.
NOTE 3 – LONG – LIVED ASSETS
Property and equipment
Property and equipment consist of the following:
| Schedule of property and equipment | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Machinery, tooling and equipment | $ | 454,303 | $ | 215,995 | ||||
| Vehicles | 134,144 | 73,202 | ||||||
| Demonstration vehicles | 113,985 | 0 | ||||||
| Fixtures & furniture | 72,346 | 0 | ||||||
| Leasehold improvements | 17,124 | 0 | ||||||
| Computers | 78,879 | 18,112 | ||||||
| 870,780 | 307,309 | |||||||
| Less: Accumulated depreciation | (109,738 | ) | (2,038 | ) | ||||
| Total property, plant and equipment | $ | 761,042 | $ | 305,271 | ||||
Depreciation expense for the three and nine months ended September 30, 2021, was $57,448 and $124,726, respectively. There was no depreciation expense for the period from February 21, 2020 (inception) through September 30, 2020.
Intangible assets
During 2020, the Company acquired certain domain names for $17,438. The domain names are being amortized over an estimated useful life of 15 years. Amortization expense for the three and nine months ended September 30, 2021, was $3,741 and $9,831. Amortization expense for the three months ended September 30, 2020, and the period from February 21, 2020 (inception) through September 30, 2020, was $194.
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NOTE 3 – INVENTORY
Inventory consists of the following:
| Schedule of inventory | |||||||||
March 31, 2023 | December 31, 2022 | ||||||||
| Raw materials | $ | 2,827,402 | $ | 3,060,160 | |||||
| Work in process | 460,031 | 439,839 | |||||||
| Finished goods | 2,833,315 | 2,145,884 | |||||||
| Total inventory | $ | 6,120,748 | $ | 5,645,883 | |||||
The Company has purchase commitments for future payments due for inventory where initial deposits were paid as of March 31, 2023. The total additional payments due subsequent to March 31, 2023 are $679,646.
NOTE 4 – LONG – LIVED ASSETS
Property and Equipment
Property and equipment consist of the following:
| Schedule of property and equipment | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
| Machinery, tooling and equipment | $ | 525,728 | $ | 352,137 | ||||
| Vehicles | 213,528 | 156,648 | ||||||
| Internal use manufactured vehicles | 274,385 | 274,385 | ||||||
| Fixtures & furniture | 90,768 | 50,768 | ||||||
| Leasehold improvements | 44,663 | 44,663 | ||||||
| Computers | 234,898 | 228,671 | ||||||
| 1,383,970 | 1,107,272 | |||||||
| Less: Accumulated depreciation | (486,371 | ) | (505,506 | ) | ||||
| Total property and equipment | $ | 897,599 | $ | 601,766 | ||||
Depreciation expense for the three months ended March 31, 2023 and 2022 was $50,388 and $111,527, respectively.
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NOTE 5 – NOTES PAYABLE AND PROMISSORY NOTES
Notes Payable
In December 2020, the Company entered into a financing arrangement for $75,702 with an interest rate of 8.64% for a vehicle. The Company willwas required to make monthly payments of $1,211 over 72 months. In April 2021, the Company entered into a financing arrangement for $30,942 with an interest rate of 7.64% for a vehicle. The Company willwas required to make monthly payments of $753 over 48 months. The Company sold both vehicles in the three months ended March 31, 2023 and paid off these notes.
In the three months ended March 31, 2023, the Company entered into two financing arrangements to purchase two vehicles. The total principal of these arrangements is $96,057 with interest rates of 11.44% and 8.63% and monthly payments totaling $1,923 are due over 60 and 72 months.
The following table provides the maturities of these notes payable as of September 30, 2021:March 31, 2023:
| Schedule of maturities for notes payable | ||||||||
| Remainder of 2021 | $ | 5,921 | ||||||
| 2022 | 23,685 | |||||||
| 2023 | 23,685 | |||||||
| Remainder of 2023 | $ | 17,304 | ||||||
| 2024 | 23,685 | 23,073 | ||||||
| 2025 | 17,664 | 23,073 | ||||||
| 2026 and thereafter | 14,654 | |||||||
| 2026 | 23,073 | |||||||
| 2027 | 23,073 | |||||||
| 2028 | 11,913 | |||||||
| 2029 | 1,816 | |||||||
| Total future payments | 109,294 | 123,325 | ||||||
| Less: Interest | (18,638 | ) | (27,953 | ) | ||||
| Total notes payable | 90,656 | 95,372 | ||||||
| Less current portion | (17,438 | ) | (14,200 | ) | ||||
| Long-term notes payable | $ | 73,218 | $ | 81,172 | ||||
Promissory NotesNOTE 6 - CONVERTIBLE NOTES
On September 10, 2021,August 24, 2022, the Company entered intoissued senior convertible notes with an agreement with two lenders to issue 6% promissory notesaggregate principal amount of $2.027,173,913 million.due February 24, 2024. The promissory notes bore interest at Convertible Notes have a conversion price of $62.25 per share of common stock ( total shares if fully converted) and were issued with an original issue discount of 8.0% and are duedo not bear interest unless an event of default has occurred, upon which interest accrues at 10% per annum. The holders of the earlierConvertible Notes can convert any portion of one year from issuance or immediately upon completionthe principal at any time during the term of an initial public offeringthe notes. The holders of the Convertible Notes also received fully vested warrants (the “Note Warrants”) to purchase shares of the Company’s common stock.stock at an exercise price of $2.85 per share. The conversion and warrant exercise prices are subject to adjustment if the Company declares a stock dividend, stock split or recapitalization. The Company also agreed to issue has reserved shares of common stock for the total number of shares the Convertible Notes can be converted into and the total shares issuable upon the exercise of the Note Warrants. The Company received net cash proceeds, after issuance costs (excluding the value of the warrants issued to the lenders. Proceedsplacement agent as discussed below) of $800,00022,300,321 received from.
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The Convertible Note and Note Warrant holders (collectively the promissory note are recorded as shareholders’ equity“Holders”) do not have voting rights to the extent they have not converted their notes or exercised their warrants. The Holders do participate in any dividends or distributions of assets made by the Company to common stockholders based on the allocationnumber of shares their notes can convert into or the number of shares they would receive if all warrants were exercised.
The Convertible Notes contain certain conversion limitations, providing that no conversion may be made if, after giving effect to the conversion, the holder, together with any of its affiliates, would own in excess of 9.99% of the proceeds between the promissory note andCompany’s outstanding shares of common stock issued.after giving effect to such conversion. The Company can force conversion of the Convertible Notes at any time if the weighted average price of the Company’s common stock for ten consecutive trading days equals or exceeds $3.50, subject to the share limitations described above. In addition totalto default interest of 10% accruing on the Convertible Notes, the holders may require the Company to redeem a portion or all of the outstanding Convertible Notes.
Events of default for the Convertible Notes are defined in the note agreements and include the following:
| · | Failure of the Company to file a registration statement, and have declared effective to register the shares of the Company’s common stock within a specified period (the Company has met this requirement as of September 26, 2022) | |
| · | Suspension of trading, or failure to be listed, of the Company’s common stock on an eligible market, as defined, for a period of two consecutive trading days or an aggregate of ten trading days in a 365 day period | |
| · | Failure to deliver shares of the Company’s common stock within five days following a conversion notification | |
| · | Failure to reserve shares of the Company’s common stock for the conversion of the Convertible Notes and Note Warrants | |
| · | Any acceleration prior to maturity of any indebtedness of the Company, declaration of bankruptcy, or court ordered bankruptcy | |
| · | Final judgment or judgments for payment aggregating in excess of $250,000 are rendered against the Company not covered by insurance or indemnity and are not discharged or stayed pending appeal within 60 days of judgment | |
| · | Breach of any representation, warranty or covenant by the Company to the transaction documents of the Convertible Notes and Note Warrants | |
| · | Any material damage to, or loss, theft or destruction of a material amount of the property of the Company | |
| · | Failure to remove any restrictive legends on any shares of the Company’s common stock issued to the holders of the Convertible Notes | |
| · | Electronic transfer of shares of the Company’s common stock is not available |
As of March 31,2023, the Company is in compliance with all covenants. The Convertible Notes require the Company to have unrestricted and unencumbered cash on deposit of $10,000,000 if the outstanding principal (and interest, if any) of the Convertible Notes is $15,000,000 or greater as of September 30, 2023 and December 31, 2023. The cash on deposit requirement is reduced dollar for dollar to the extent that the outstanding principal (and interest, if any) of the Convertible Notes is less than $15,000,000 on each of these dates.
The Note Warrants expire on August 24, 2027. The Note Warrants contain certain conversion limitations, providing that a holder thereof may not exercise such Note Warrant to the extent that, if after giving effect to such conversion, the holder or any of its affiliates would beneficially own in excess of 4.99% of the outstanding shares of the Company’s common stock immediately after giving effect to such exercise. The Note Warrants provide the holders the right to exercise the warrants on a non-cash basis if the Company does not have an effective registration statement for the underlying shares of common stock. The Company evaluated the provisions of the Note Warrants and concluded that they should be classified as equity.
| 16 |
The Company incurred debt issuance costs of $161,0003,316,409, which includes $616,730 were allocatedfor the fair value of the warrants issued to the promissory note and shareholders’ equityplacement agent of $96,000 and $65,000, respectively.the Convertible Notes as further described in Note 8. The promissory notes were repaid on October 8, 2021, withCompany allocated the net proceeds received from the Company’s initial public offeringissuance of the Convertible Notes and Note Warrants based on the relative fair values of each resulting in net proceeds of $15,122,345 being allocated to the Convertible Notes recorded as a current liability in the balance sheet and net proceeds of $6,561,247 being allocated to the Note Warrants which was recorded in equity. The Company will record non-cash interest expense over the term of the Convertible Notes to accrete the allocated value of the Convertible Notes to the aggregate principal amount of $2,007,33327,173,913, which includes using the effective interest duemethod and an interest rate of 39.6%. As of March 31, 2023, no conversions of the Convertible Notes or exercise of the Note Warrants or warrants issued to the placement agent had occurred.
The following is a summary of the Convertible Notes as of March 31, 2023:
| Summary of convertible notes | ||||
| Principal amount | $ | 27,173,913 | ||
| Unamortized discount and issuance costs | (8,043,529 | ) | ||
| Net carrying amount | $ | 19,130,384 | ||
| Fair value (Level 2) | $ | 24,889,879 | ||
Interest expense recorded for the period the promissory notes were outstanding (see Note 11)three months ended March 31, 2023 was $1,776,636.
NOTE 57 – RELATED PARTY TRANSACTIONS
During the period from February 21, 2020 (inception) through December 31, 2020,2022, the Company entered intoissued purchase orders and made prepayments for prototype parts of $21,860 to a notes payable agreement with a companyvendor that Pink Possum, LLC (“Pink Possum”) an entity controlled by a founder and directorMr. Okonsky, one of the Company which were secured by all assetsCompany’s founders, Chairman of the Company, for cash proceedsBoard and Chief Technology Officer, holds an equity interest of $75,000. The notes were due October 1, 2020, and were repaid in full25% as of DecemberMarch 31, 2020. The Company also received cash proceeds2023. This vendor is expected to provide additional prototype and product parts for a prototype of $5,000 from a company controlled by the Company’s Chairman and founding stockholder which was unsecured, due on demand and non-interest bearing. The amount was repaid in full prior to December 31, 2020.
A related party paid expenses of $63,083 on behalfan upgraded version of the Company. These advances were unsecured, and due on demand. The Company repaid $63,083 plus interest of $7,624 during the period from February 21, 2020 (inception) through December 31, 2020.
On October 1, 2020, the Company entered into an agreement with a consultant to serve as Chief Operating Officer and to manage the Company’s product development efforts. The consultant provided statements of work for the various projectsStag expected to be executed and chargedreleased in the Company hourly rates for his services. The Company also agreed to compensate a company owned by the consultant and his spouse $5,560 per month for the use of a warehouse and office space on a month-to-month basis. Subsequent to December 31, 2020, the Company amended the agreement to increase the rental cost to $11,120 per month, with a 90-day cancellation provision. In May 2021, the consultant became a salaried employee of the Company. As of September 30, 2021, the Company continues to rent the warehouse and office space under the same terms. Total expense recognized for this lease for the three and nine months ended September 30, 2021, were $100,080 and $33,360future.
In November 2020, the Company entered into an operating lease with an entity controlled by the Company’s two founders for its future headquarters and production facility in Liberty Hill, Texas. The lease hashad a lease term of 5 years, and monthly payments ranging from approximately $15,000 per month to $17,000 per month over the lease term.term and gave the Company access to the land for use in testing its vehicles prior to the construction of any facilities. In February 2021, the Company entered into an amendment of the lease related to its future headquarters to expand the leased premises. The Company paid an additional security deposit of $139,230 and additional prepaid rent of $315,588. The total minimum lease payments under the amended lease totaltotaled approximately $3,930,170.
In October 2021, the Company began discussions for an additional amendment to the lease, in anticipation of manufacturing the Stag at this location, which would have resulted in the monthly payment increasing to $100,000 for the first year of the lease and increasing annually throughout the term of the lease to $107,000 in the final year. Monthly payments for the initial lease and the amended agreement beginwould have begun at the time a certificate of occupancy iswas received by the landlord, which is expectedlandlord.
The Company evaluated the cost of this facility in relation to other lower cost options, including having a third-party manufacturer the Stag, and determined that it would be in the first quarterbest interest of 2023.the Company to terminate this lease. On April 27, 2022, the Company informed the landlord that we would be terminating the lease. On May 27, 2022, the landlord notified the Company that the landlord would refund $85,756 of the prepaid rent and security deposit balance of $601,818 paid by the Company. This refund would be paid to the Company once the landlord has sold the land and the landlord will release the Company from any remaining obligations under the lease and amendments. The unrefunded portion of the prepaid rent and security deposit relates to some survey, architecture and construction design costs that were incurred by the landlord prior to the Company terminating the lease. The Company has recognized a loss on the termination of this lease of $247,525 in the year ended December 31, 2022.
Total amortization expense for the right-of-use asset recorded for the initial lease for the three months ended March 31, 2022 was $27,212.
| 17 |
In June 2021, the Company entered into an agreement with a company controlled by the Company’s Chairman and co-founder to lease office space for $2,000 per month for a period of one year. In May 2022, the Company informed the landlord that it would terminate this lease, and the landlord confirmed that the lease terminated effective September 1, 2022. Total expense recorded for this lease for the three months ended March 31, 2022 was $6,000.
On August 28, 2020, the Company entered into consulting agreements with Pink Possum, LLC (“Pink Possum”) an entity controlled by Mr. Okonsky, and Highbridge Consultants, LLC (“Highbridge”), an entity controlled by Mr. Adrian James, a co-founder of the Company, pursuant to which Messrs. Okonsky and James provide the Company with services. In consideration for entering into the consulting agreements, the Company issued the two entities ten-year warrants to purchase the Company’s common stock at an exercise price of $0.004 per share. The number of shares of common stock issuable pursuant to the warrants was based on the number of shares of the Company’s common stock outstanding at the time of exercise and provided that Pink Possum and Highbridge would receive 18.75% and 25%, respectively, of the Company’s shares of common stock outstanding at the time of exercise on a fully diluted basis. On March 26, 2021 and March 25, 2021, respectively, Pink Possum and Highbridge entered into amendments to the consulting agreements agreeing to exchange the original warrants for new ten-year warrants to purchase and shares, respectively, of common stock at an exercise price of $. During the year ended December 31, 2021, the Company recognized compensation expenses of $5.6 million and $7.4 million for the warrants issued to Pink Possum and Highbridge, respectively. On December 20, 2021, Highbridge exercised all of its warrants on a cashless basis and the Company issued shares of common stock to Highbridge.
In addition, pursuant to the consulting agreements, upon the occurrence of a Fundamental Transaction (as defined below) for an aggregate gross sales price of $100.0 million or more, each entity will receive a cash payment equal to 1% of such gross sales price. For the purposes of the consulting agreements, “Fundamental Transaction” means any of the following: (i) a consolidation or merger involving the Company if the holders of the voting securities of the Company that are outstanding immediately prior to the consummation of such consolidation or merger do not, immediately after the consummation of such consolidation or merger, hold voting securities that collectively possess at least a majority of the voting power of all the outstanding securities of the surviving entity of such consolidation or merger or such surviving entity’s parent entity; (ii) a transfer or issuance (in a single transaction or series of related transactions) by one or more of the Company and its stockholders to one person or to any group of persons acting in concert, of shares of the Company’s capital stock then collectively possessing 50% or more of the voting power of all then outstanding shares of the Company’s capital stock (computed on an as-converted to common stock basis); or (iii) any sale, license, lease, assignment or other disposition of all or substantially all of the assets of the Company. Furthermore, commencing upon the completion of the Company’s initial public offering of the shares of our common stock, if the Company’s market capitalization exceeds $300.0 million for a period of 21 consecutive trading days, each of the entities will receive an additional cash payment equal to $15.0 million; provided that the Company will have the right, in its sole discretion, to make the foregoing $15.0 million payment by the issuance of shares of the Company’s common stock. The foregoing amounts will be payable to the entities if the above milestones occur any time prior to the ten-year anniversary of the original consulting agreements, or August 28, 2030.
In December 2022, the Company entered into an employment agreement with Mr. Okonsky whereby Mr. Okonsky became an employee on January 2, 2023 and the consulting agreement with Pink Possum was terminated. However, the warrants to Pink Possum, and the provisions for a Fundamental Transaction and the market capitalization thresholds and related payments owed to Pink Possum if these were to occur remain in effect subsequent to the employment agreement.
NOTE 68 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue up to shares of common stock with a par value of $. The Company is seeking shareholder approval for an increase in the authorized shares of common stock from 100,000,000 to . The shareholders will vote on this proposal at the annual shareholders meeting scheduled for May 24, 2023. In addition, the Company is authorized to issue shares of preferred stock with a par value of $. The specific rights of the preferred stock, when so designated, shall be determined by the board of directors.
Common stock
During the period ending September 30, 2020, the Company sold shares of common stock to founders for cash proceeds of $10,833. The Company also issued shares of common stock to an individual for services and recognized $2,088 of expense related to this grant. On October 8, 2021, the Company completed its initial public offering and sold shares of common stock for net proceeds of approximately $15 million and on October 29, 2021, the Company sold an additional shares for net proceeds of $1.1 million (see Note 11).
SAFE Agreements
During the period ended December 31, 2020, the Company entered into SAFE agreements (Simple Agreement for Future Equity) with investors through an exchange for cash investments totaling $2,000,000. Upon a future equity financing, the SAFE agreements would convert into the same securities in that equity financing at the lower of the price per share of the funding, or a price per share based on a $5 million company valuation using a fully diluted common stock basis. The SAFE agreements had no interest rate or maturity date, and the SAFE investors had no voting right prior to conversion. The SAFE agreements were recorded as a liability of $2,000,000 as of December 31, 2020. In January 2021, upon closing of the Series A preferred stock offering discussed below, the amount invested under these SAFE agreements were converted into shares of Series A Preferred Stock.
In January 2021, the Company completed a WeFunder SAFE offering which was convertible into Preferred Stock upon future financing events. The Company received gross proceeds of $2,258,940 and paid expenses of $53,500, reflected as costs of capital. In connection with the Series A Preferred stock offering as discussed below, the WeFunder SAFE investments were converted into shares of Series A Preferred Stock.
PreferredCommon Stock
In 2021,On February 1, 2022, the Company designatedsold shares of preferred stock as Series A Preferred Stock. The Series A Preferred Stock has a par value of $0.0001, has no voting rights, no dividends and each share will automatically convert into 2.5 shares ofits common stock in a public offering at $3.00 per share. The Company received net proceeds of the Company at the time$18,089,117 after underwriter commissions and expenses of $1,910,816. The underwriter was also issued a warrant to purchase shares of the Company’s initial publiccommon stock at an exercise price of $3.75 per share that expires five years from the date of issuance. The underwriter agreement provided the underwriter with a right of first refusal for any additional securities offerings within twelve months of this offering. In February 2021,
As discussed in Note 6 above, the Company completed an offering of shares of Series A Preferred Stockissued the Convertible Notes and received gross proceeds of $2,669,978.Note Warrants, along with the warrants to the placement agent in August 2022. The Company paid expenses of $205,470 relatedreceived consent from the underwriter to issue such securities. In addition, the offering including issuingCompany was required to one financial broker dealerreserve shares of common stock for future issuance of shares for the conversion of the Convertible Notes and exercise of the Note Warrants and fully vested warrants with a 5 year exercise term to purchase common stock with an exercise price of $2.57.
In 2021, the Company designated 1,500,000603,864 shares of preferred stock as Series B Preferred Stock, with a par value of $0.00001 per share and a stated value of $ per share. The Series B Preferred Stock will receive dividends equivalent to any such dividends paid on common stock infor the future, has no voting rights, and each share will automatically convert into 2.5 shares of common stock upon completionexercise of the Company’s initial publicplacement agent warrants. The placement agent agreement provided the placement agent with the right of first refusal for any additional securities offerings within twelve months of this offering. In May 2021, the Company completed an offering of shares of Series B Preferred Stock and received gross proceeds $10,505,357. The Company paid expenses of $890,026 related to the offering, including issuing to two financial broker dealers shares of common stock and fully vested warrants to purchase common stock with a 5 year exercise term and an exercise price of $3.80.
The Series A and Series B Preferred stock was converted to shares of common stock upon the closing of the Company’s initial public offering (see Note 11).
Warrants
During the period for the three and nine months ended September 30, 2021,As discussed in Note 6, the Company issued warrants to consultantsthe Note Warrants, which are fully vested, to purchase the Company’s common stock. During the three months and period from February 21, 2020 (inception) through September 30, 2020, the Company issued warrants to purchaseshares of the Company’s common stock to consultants. The common stock warrants issued in 2021 have an exercise price ranging from $0.245 - $1.00 and the warrants issued in 2020 haveat an exercise price of $0.004 per share. All$2.85. The Note Warrants expire five years from the issuance date. Also, the Company issued to the placement agent of the Convertible Notes, fully vested warrants haveto purchase shares of the Company’s common stock at an exercise termprice of 10 years,$3.5625. The warrants were not exercisable until February 24, 2023 and certain 2020 warrants vest over periods of up to eighteen months while all 2021 warrants are fully vested. expire on February 24, 2028. The Company estimated the fair valuevalued all of the 2020these warrants using the fair valueclosing price of itsthe Company’s common stock based on the most recent fundraising at $1.88 per share. The Company valued the 2021 warrants using an estimated fair valueAugust 24, 2022 of the shares of common stock between $0.76 – $1.18,$2.44, volatility of 105%79.81% based on peer companies, risk free interest rate of 0.85%3.03%, no dividends and an estimated life of years.
Additionally, the Company’s two founders, whom are both directors and one of which is the Chairman of the Board, each entered into an anti-dilution warrant with the Company. In the event of their ownership of the Company’s fully diluted capitalization being less than 25% or 18.75%, each individual would have received common stock warrants with an exercise price of $0.0041 to purchase sufficient shares to return them to those ownership percentages. The warrants were fully vested upon grant and have an exercise period of 10 years from the date of grant. As of December 31, 2020, no warrants were owed to the two founders. As discussed below, subsequent to December 31, 2020, the anti-dilution warrants were exchanged for a fixed number of warrants.
In March 2021, the Company agreed to exchange the two anti-dilution warrants that were issued to Company founders for a total of warrants to purchase shares of common stock at an exercise price of $0.98 for a period of 10 years. In connection with this exchange, the Company amended its existing consulting agreements with the founders, to allow for the payment of compensation totaling $30,000,000 in the event that the Company’s market capitalization exceeds $300,000,000 for 21 consecutive trading days. The Company will have the option to settle the amount by issuing shares of common stock based on the closing price of the Company’s stock at the start of the 21-day period. In addition to this payment, each of the two founders will continue to receive a cash payment equal to 1% of the gross sale price in the event of a change of control of the Company with a sale price of at least $100,000,000. In connection with the exchange, the Company recognized expense of $13,031,989 for the estimated fair value of the warrants on a Black-Scholes option pricing model utilizing the following assumptions: 1) volatility of 106% based on a peer group of companies; 2) risk-free rate of 1.67%; 3) dividend rate of 0.0%; and 4) an expected term of 10 years.
During the three and nine months ended September 30, 2021,March 31, 2023 and 2022, the Company recognized expense of $ and $, respectively, related to common stock warrants. DuringNo additional expense will be recognized in the three months ended September 30, 2020, and the period February 21, 2020 (inception) through September 30, 2020, the Company recognized expensefuture for any warrants outstanding as of $ related to common stock warrants. The Company expects to recognize $14,605 over the remaining vesting period of these warrants.March 31, 2023.
The following is the activity related to common stock warrants during the ninethree months ended September 30, 2021: March 31, 2023:
| Schedule of warrant activity | |||||||||||||||||||||||||||||||
| Common Stock Warrants | Common Stock Warrants | ||||||||||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Weighted average Remaining Life in years | Intrinsic Value | Shares | Weighted Average Exercise Price | Weighted Average Remaining Life in years | Intrinsic Value | ||||||||||||||||||||||||
| Outstanding at January 1, 2021 | 151,590 | $ | 0.004 | 9.17 | |||||||||||||||||||||||||||
| Outstanding at January 1, 2023 | 15,085,618 | $ | 2.33 | ||||||||||||||||||||||||||||
| Granted | 11,427,052 | 1.04 | 9.35 | – | $ | – | |||||||||||||||||||||||||
| Cancelled | 0 | $ | – | – | |||||||||||||||||||||||||||
| Canceled | – | $ | – | ||||||||||||||||||||||||||||
| Expired | 0 | $ | – | – | – | $ | – | ||||||||||||||||||||||||
| Exercised | 0 | $ | – | – | – | $ | – | ||||||||||||||||||||||||
| Outstanding at September 30, 2021 | 11,578,642 | $ | 1.03 | 9.34 | $ | 45,713,770 | |||||||||||||||||||||||||
| Exercisable at September 30, 2021 | 11,578,642 | $ | 1.03 | $ | 46,010,840 | ||||||||||||||||||||||||||
| Outstanding at March 31, 2023 | 15,085,618 | $ | 2.33 | $ | 2,593,084 | ||||||||||||||||||||||||||
| Exercisable at March 31, 2023 | 15,085,618 | $ | 2.33 | $ | 2,593,084 | ||||||||||||||||||||||||||
| 19 |
In January 2021, the Company’s board of directors adopted the Volcon, Inc. 2021 Stock Plan, (the “2021 Plan”). The 2021 Plan is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, and restricted stock unit awards to employees, members of the board of directors and consultants (including restricted stock units issued prior to the adoption of the plan as further discussed below). The Company hasinitially reserved a total of shares of the Company’s common stock for issuance under the 2021 Plan,Plan. On July 26, 2022, the Company’s stockholders approved an increase of shares of the Company’s common stock for issuance under the 2021 plan, which may be adjusted for changes in capitalization and certain corporate transactions. To the extent that an award, if forfeitable, expires, terminates or lapses, or an award is otherwise settled in cash without the delivery of shares of common stock to the participant, then any unpaid shares subject to the award will be available for future grant or issuance under the 2021 Plan. Shares available for issuance under the 2021 Plan as of September 30, 2021,March 31, 2023, were . shares. Awards vest according to each agreement and as long as the employee remains employed with the Company or the consultant continues to provide services in accordance with the terms of the agreement. The Company has granted awards with time-based vesting and performance-based vesting features.
Restricted Stock Units
Beginning in October 2020, the Company entered into various agreements with employees where the Company agreed to award a total of shares of restricted stock units (RSUs) which vest equally over a period of three years. The Company estimated the fair value of the shares of common stock using the estimated fair value of its common stock based on the most recent fundraising at $1.88 per share.
In July 2021, the Company’s CEO resigned effective July 30, 2021. The share-based awards of RSUs and stock options awarded to the former CEO were forfeited and were returned to the shares available for issuance under the 2021 Plan and all previously recognized compensation expense for his RSUs and stock options was reversed in the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2021, the Company recognized (benefit) expense of $ and $, respectively, for RSUs. The Company expects to recognize additional compensation expense of $ related to RSUs assuming all awards outstanding at September 30, 2021 will vest.
The following is the restricted stock unit activity for the ninethree months ended September 30, 2021: March 31,2023
| Schedule of restricted stock unit activity | |||||
| Outstanding January 1, | |||||
| Granted | |||||
| Vested | |||||
| ( | ) | ||||
| Outstanding March 31, 2023 | 50,000 | ||||
| (1) | 25,000 RSUs were subject to cancellation due to termination of employment. However, the Company entered into a modification to allow the employee to fully vest in these RSUs as part of a severance agreement. The Company recorded additional expense of $31,487 during the three months ended March 31, 2023 related to this modification. |
In January 2022, the Company modified the vesting terms of 100,000 RSUs that had vested as of December 31, 2021 to extend the vesting through May 15, 2022. The Company granted an additional RSUs to the holders of these RSUs that vesting was extended and these additional RSUs vested as of May 15, 2022. The Company recorded additional expense of $ during 2022 related to these modifications.
For the three months ended March 31, 2023 and 2022, the Company recognized expenses for RSUs of $ and $, respectively. The Company expects to recognize additional compensation expenses of $ related to RSUs assuming all awards outstanding at March 31, 2023 will vest.
Performance Shares
In January 2021,On March 1, 2022, the Board of Directors authorized common shares to be reserved under the 2021 Plan for issuance to employees upon achieving multiple performance milestones. The allocationCompensation Committee of the numberboard of shares to be awarded was to be determined upon achievement of all the milestones. In July 2021, the Board of Directorsdirectors approved a grant of shares sincefor the achievement of some of the Company’s 2021 performance milestones, were met. Theand the Company recognized share-based compensation expenseexpenses of $ related to the grant of these shares.shares in the quarter ended March 31, 2022. Certain individuals whose employment terminated subsequent to December 31, 2021 forfeited their share grants totaling shares and such shares are available for future issuance under the 2021 Plan.
| 20 |
In 2022 the compensation committee approved reserving 250,000 shares from the 2021 Plan to issue based on achievement of the Company’s 2022 performance milestones to employees who are employed in 2022 and are active employees on the date of approval in 2023 by the compensation committee. On February 6, 2023 the compensation committee of the board of directors approved a grant of shares ( were issued due a forfeiture of shares and shares withheld for payment of employee withholding taxes) for the achievement of some of the Company’s 2022 performance milestones. The Company recognized share-based compensation expenses of $ related to the grant of these shares in the quarter ended March 31, 2023. The compensation committee also approved reserving the remaining 95,017 not issued for 2022 performance milestones for issuance to active employees on the date the first Stag is shipped to a customer.
In addition, the compensation committee also approved reserving 250,000 shares from the 2021 Plan to issue to employees based on achievement of the Company’s 2023 performance milestones to employees who are employed in 2023 and are active employees on the date of approval in 2024 by the compensation committee.
Stock Options
The following is thesummarizes activity relating to common stock options to employees and consultants for services during the ninethree months ended September 30, 2021:March 31, 2023:
| Schedule of stock option activity | ||||||||||||||||||||||||||||||||
| Common Stock Options | Common Stock Options | |||||||||||||||||||||||||||||||
| Shares | Weighted Average Exercise Price | Weighted average Remaining Life in years | Intrinsic Value | Shares | Weighted Average Exercise Price | Weighted Average Remaining Life in years | Intrinsic Value | |||||||||||||||||||||||||
| Outstanding at January 1, 2021 | 0 | $ | 0 | |||||||||||||||||||||||||||||
| Outstanding at January 1, 2023 | 3,288,830 | $ | 3.08 | |||||||||||||||||||||||||||||
| Granted | 1,892,375 | $ | 2.72 | – | – | 238,000 | $ | 1.46 | ||||||||||||||||||||||||
| Forfeited | (218,125 | ) | $ | 1.00 | – | – | (96,334 | ) | $ | 2.96 | ||||||||||||||||||||||
| Exercised | 0 | $ | 0 | – | 0 | (25,000 | ) | $ | 1.00 | |||||||||||||||||||||||
| Outstanding at September 30, 2021 | 1,674,250 | $ | 1.73 | $ | 5,503,000 | |||||||||||||||||||||||||||
| Exercisable at September 30, 2021 | 0 | $ | 0 | – | $ | 0 | ||||||||||||||||||||||||||
| Outstanding at March 31,2023 | 3,405,496 | $ | 2.99 | $ | 351,239 | |||||||||||||||||||||||||||
| Exercisable at March 31, 2023 | 1,143,083 | $ | 3.10 | $ | 155,000 | |||||||||||||||||||||||||||
The Company valued the options using the closing stock price of the Company’s common stock on the date of grant, an estimated fair value of the shares of common stock between $ – $, volatility between %78.5% - %79.5% based on peer companies, risk free interest rate between %3.64% - %3.94%, no dividends and an estimated life of years. During the three ended March 31, 2023 and nine months ended September 30, 2021,2022, the Company recognized expenseshare-based compensation expenses of $, and $, respectively, related to these common stock options. The Company expects to recognize additional compensation expenseexpenses of $ related to these common stock options assuming all awards will vest.
| 21 |
Total stock-based compensation recorded for the three ended March 31, 2023 and nine months ended September 30, 20212022 for all stock based compensation awards, including warrants, has been recorded as follows:
| Schedule of stock-based compensation expense | ||||||||
Three Months September 30, 2021 | Nine Months September 30, 2021 | |||||||
| Cost of Goods Sold | $ | 188,860 | $ | 269,266 | ||||
| Sales and Marketing | 160,622 | 237,028 | ||||||
| Product Development | 354,439 | 379,160 | ||||||
| General and Administrative | 145,804 | 13,370,865 | ||||||
| Total | $ | 849,725 | $ | 14,256,318 | ||||
| Schedule of stock-based compensation expense | ||||||||
Three Months March 31, 2023 | Three Months March 31, 2022 | |||||||
| Cost of Goods Sold | $ | 206,477 | $ | 222,507 | ||||
| Sales and Marketing | 311,759 | 273,326 | ||||||
| Product Development | 208,594 | 346,144 | ||||||
| General and Administrative | 303,605 | 733,188 | ||||||
| Total | $ | 1,057,435 | $ | 1,575,165 | ||||
The basic net loss per common share is calculated by dividing the Company'sCompany’s net loss available to common shareholdersstockholders by the weighted average number of common shares during the year. The diluted net loss per common share is calculated by dividing the Company'sCompany’s net loss available to common shareholdersstockholders by the diluted weighted average number of common shares outstanding during the year. The diluted weighted average number of common shares outstanding is the basic weighted number of common shares adjusted for any potentially dilutive debt or equity. Common shares consisting ofDiluted net loss per common stock warrants, stock options and restricted stock units totaling 13,641,017 shares as of September 30, 2021, and Series A and Series B preferred stock of 1,191,388 and 1,105,827, respectively, convertible into shares of common stock as of September 30, 2021, and any potential shares issuable under the anti-dilution warrants discussed above were excluded from the calculation of dilutedshare is equal to basic net loss per share due to their antidilutive effect. There were nothe Company’s net loss and any potentially issuable shares are anti-dilutive.
| Schedule of earnings per share | ||||||||
| Three Months Ended | Three Months Ended | |||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Numerator: | ||||||||
| Net loss | $ | (7,299,469 | ) | $ | (8,612,345 | ) | ||
| Denominator: | ||||||||
| Denominator for basic and diluted net loss per common share - weighted average of common shares | 24,535,131 | 21,745,089 | ||||||
| Basic and diluted net loss per common share | $ | (0.30 | ) | $ | (0.40 | ) | ||
Common shares consisting of shares potentially dilutive instruments outstanding as of September 30, 2020. three month ended March 31, 2023 and 2022 are as follows:
| Schedule of diluted net loss per share due to their antidilutive effect | ||||||||||||||||
| Three months | Three months | Nine months | Period ended | |||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss | $ | (5,890,555 | ) | $ | (304,559 | ) | $ | (25,345,840 | ) | $ | (376,657 | ) | ||||
| Denominator: | ||||||||||||||||
| Denominator for basic and diluted net loss per common share - weighted average of common shares | 2,303,508 | 125,687 | 2,121,129 | 51,520 | ||||||||||||
| Basic and diluted net loss per common share | $ | (2.55 | ) | $ | (2.42 | ) | $ | (11.95 | ) | $ | (7.31 | ) | ||||
| Schedule of anti-dilutive shares | |||||||
| 2023 | 2022 | ||||||
| Convertible Notes | 12,077,295 | – | |||||
| Warrants | 15,085,618 | 5,501,293 | |||||
| Stock options | 3,405,497 | 2,369,729 | |||||
| Restricted stock units | 50,000 | 335,000 | |||||
| Total | 30,618,410 | 8,206,022 | |||||
| 22 |
NOTE 911 – INCOME TAXES
Deferred taxes are determined by applying the provisions of enacted tax laws and rates for the jurisdictions in which the Company operates to the estimated future tax effects of the differences between the tax basis of assets and liabilities and their reported amounts in the Company's financial statements. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax benefits will not be realized.
Due to losses since inception and for all periods presented, no income tax benefit or expense has been recognized as a full valuation allowance has been established for any tax benefit that would have been recognized for the loss in any period presented.
Significant components of the Company's deferred tax assets and liabilities at March 31, 2023 and December 31, 2022 are as follows:
| Schedule of deferred tax assets and liabilities | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Deferred tax assets | ||||||||
| Net operating losses | $ | 2,634,433 | $ | 242,000 | ||||
| Depreciation and amortization | 28,481 | 0 | ||||||
| Research & development credit | 54,571 | 0 | ||||||
| Lease liability | 481,554 | 0 | ||||||
| Stock-based compensation | 2,858,033 | 0 | ||||||
| Accrued expenses | 32,417 | 0 | ||||||
| Other | 336 | 0 | ||||||
| Total | 6,089,825 | 242,000 | ||||||
| Valuation allowance | (5,607,482 | ) | (242,000 | ) | ||||
| Net deferred tax asset | (482,343 | ) | 0 | |||||
| Deferred tax liabilities | ||||||||
| Right of use assets | (482,343 | ) | 0 | |||||
| Net Deferred tax liabilities | $ | 0 | $ | 0 | ||||
| Schedule of deferred tax assets and liabilities | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
| Deferred tax assets | ||||||||
| Net operating losses | $ | 10,206,155 | $ | 9,106,430 | ||||
| Depreciation and intangible assets | 1,763,042 | 1,502,868 | ||||||
| Research & development credit | 1,457,766 | 1,308,956 | ||||||
| Lease liability | 304,100 | 322,167 | ||||||
| Inventory | 1,283,975 | 1,290,968 | ||||||
| Stock-based compensation | 3,196,761 | 3,103,037 | ||||||
| Accrued expenses | 416,063 | 233,284 | ||||||
| Capital loss carryover | 276,522 | 261,922 | ||||||
| Other | 11,962 | 177,074 | ||||||
| Total | 18,916,346 | 17,306,705 | ||||||
| Valuation allowance | (18,223,498 | ) | (16,661,612 | ) | ||||
| Net deferred tax asset | 692,848 | 645,093 | ||||||
| Deferred tax liabilities | ||||||||
| Prepaid expenses | (395,503 | ) | (328,836 | ) | ||||
| Right-of-use assets | (297,345 | ) | (316,257 | ) | ||||
| Total net deferred taxes deferred tax liabilities | $ | – | $ | – | ||||
Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the loss carry forwards and other temporary differences will not be realized in the foreseeable future. The Company believes that carryforward limitations will be applied to the historical net operating losses due to the recent change of control transition. The Company's cumulative net operating loss carry forward of approximately $12,545,00048.6 million as of September 30, 2021,March 31,2023, may be limited in future years depending on future taxable income in any given fiscal year. The net operating losses can be carried forward indefinitely.
The Company has recorded no liability for income taxes associated with unrecognized tax benefits at the date of adoption and has not recorded any liability associated with unrecognized tax benefits. Accordingly, the Company has not recorded any interest or penalty in regard to any unrecognized benefit.
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NOTE 1012 – LEASES
The Company did not have any leases during the period from February 21, 2020 (inception) to September 30, 2020. The components of lease cost for operating leases for the three and nine months ended September 30, 2021,March 31, 2023 and 2022 were as follows:
| Schedule of lease cost for operating leases | ||||||||||||||||
Three Months Ended September 30, 2021 | Nine months Ended September 20, 2021 | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |||||||||||||
| Lease Cost | ||||||||||||||||
| Operating lease cost | $ | 121,932 | $ | 252,951 | $ | 117,249 | $ | 158,672 | ||||||||
| Short-term lease cost | 61,226 | 132,697 | 59,790 | 17,120 | ||||||||||||
| Variable lease cost | 0 | 0 | – | – | ||||||||||||
| Sublease income | 0 | 0 | – | – | ||||||||||||
| Total lease cost | $ | 183,158 | $ | 385,648 | $ | 177,039 | $ | 175,792 | ||||||||
Supplemental cash flow information related to leases for the ninethree months ended September 30, 2021,March 31, 2023 and 2022, was as follows:
| Schedule of supplemental cash flow information related to leases | ||||||||||||
| September 30, 2020 | March 31, 2023 | March 31, 2022 | ||||||||||
| Other Lease Information | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
| Operating cash flows from operating leases | $ | 194,175 | $ | 86,031 | $ | 116,716 | ||||||
| Amortization of right of use assets | $ | 90,057 | $ | 158,672 | ||||||||
The following table summarizes the lease-related assets and liabilities recorded on the balance sheet at September 30, 2021March 31, 2023 and December 31, 2020: 2022:
| Schedule of lease-related assets and liabilities | ||||||||||||||||
| September 30, 2021 | December 31, 2020 | March 31, 2023 | December 31, 2022 | |||||||||||||
| Lease Position | ||||||||||||||||
| Operating Leases | ||||||||||||||||
| Operating Leases: | ||||||||||||||||
| Operating lease right-of-use assets | $ | 2,296,872 | $ | 842,357 | $ | 1,415,930 | $ | 1,505,987 | ||||||||
| Right of use liability operating lease short term | 328,337 | 141,943 | ||||||||||||||
| Right of use liability operating lease long term | 1,964,779 | 614,414 | ||||||||||||||
| Right-of-use liabilities operating leases short-term | 401,553 | 391,117 | ||||||||||||||
| Right-of-use liabilities operating leases long-term | 1,046,544 | 1,143,011 | ||||||||||||||
| Total operating lease liabilities | $ | 2,293,116 | $ | 756,357 | $ | 1,448,097 | $ | 1,534,128 | ||||||||
The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company recognized an initial right of use asset and lease liability of $1,707,466 for leases entered into in the nine months ended September 30, 2021.
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| Schedule of right of use asset and lease liability | |||||
| Lease Term and Discount Rate | March 31, 2023 | ||||
| Weighted-average remaining lease term (years): | |||||
| Operating leases | |||||
| Weighted-average discount | |||||
| Operating leases | |||||
The following table provides the maturities of lease liabilities at September 30, 2021: March 31, 2023:
| Schedule of maturities of lease liabilities | ||||||||
| Operating | Operating | |||||||
| Leases | Leases | |||||||
| Maturity of Lease Liabilities at September 30, 2021 | ||||||||
| Remainder of 2021 | $ | 100,632 | ||||||
| 2022 | 759,522 | |||||||
| 2023 | 1,184,356 | |||||||
| Remainder of 2023 | $ | 345,348 | ||||||
| 2024 | 1,143,532 | 471,638 | ||||||
| 2025 | 1,118,146 | 485,702 | ||||||
| 2026 and thereafter | 910,289 | |||||||
| 2026 | 340,591 | |||||||
| Total future undiscounted lease payments | 5,216,476 | 1,643,279 | ||||||
| Less: Interest | (599,568 | ) | (195,183 | ) | ||||
| Present value of lease liabilities | $ | 4,616,908 | $ | 1,448,096 | ||||
Note that amounts above include future payments for a lease related to a facility to be constructed in Liberty Hill, Texas by an entity associated with the Company’s founders (see Note 5)
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NOTE 11 – SUBSEQUENT EVENTSITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On October 8, 2021,The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K, which contains audited financial statements of the Company completed its initial public offeringas of and sold 3,025,000 shares of its common stock at $5.50 per share. The Company received net proceeds of $15,040,125 after underwriter commissions and expenses of $1,597,375. The underwriting agreement providedfor the underwriteryear ended December 31, 2022, previously filed with the option to sell an additional 226,875 shares (the “Overallotment”) which can be soldSecurities and Exchange Commission. Results for up to 45 days subsequent to the completionthree months ended March 31, 2023 are not necessarily indicative of results for the year ending December 31, 2023 or any future period.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the initial public offering at $5.50 per share. The underwriter was also issued a warrant to purchase 151,250 sharesSecurities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Company’s common stock at $6.88 per share.Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.
In addition, from time to time, we or our representatives may make forward-looking statements orally or in writing. We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us. Such forward-looking statements relate to future events or our future performance, including: our financial performance and projections; our growth in revenue and earnings; and our business prospects and opportunities. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “hopes” or the negative of these or similar terms. In evaluating these forward-looking statements, you should consider various factors, including: our ability to change the direction of the Company; our ability to keep pace with new technology and changing market needs; our capital needs, and the competitive environment of our business. These and other factors may cause our actual results to differ materially from any forward-looking statement. Forward-looking statements are only predictions. The warrant expires five yearsforward-looking events discussed in this document and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us. We are not obligated to publicly update or revise any forward-looking statement, whether as a result of uncertainties and assumptions, the forward-looking events discussed in this document and other statements made from time to time by us or our representatives might not occur.
While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Other sections of this Form 10-Q describe additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of issuance.
The Company’s Series Athis Form 10-Q to conform our prior statements to actual results or revised expectations, and Series B Preferred Stock was convertedwe do not intend to 5,743,175 shares of common stock upon completion of the initial public offering. Shares issued upon conversion are subject to a lockup period of 180 days, upon which one-third of the shares can be sold, after an additional 30 days, another one-third of the shares can be sold, and after 30 more days, all shares can be sold.
On October 26, 2021, the Company received notification that the underwriter was exercising its Overallotment and on October 29, 2021, the Company sold the additional shares and received net proceeds of $1,135,509. The underwriter was also issued a warrant to purchase 11,344 shares of the Company’s common stock at $6.88 per share. The warrant expires five years from the date of issuance.
As of November 10, 2021, the Company has received exercise notices from warrant holders, other than the Company’s founders and the underwriter, representing 317,018 shares of common stock, that they are exercising their warrants on a cashless basis for 236,220 shares of common stock, of which 170,257 shares are subject to the same lockup period as the common shares issued upon conversion of the preferred stock.
On November 12, 2021, the Company’s chief operating officer submitted his resignation to the Company to pursue a full-time role as chief executive officer of Monday Motorbikes. He will continue support the Company as needed through a 30-day transition period.do so.
Forward-looking statements include, but are not limited to, statements about:
| · | ||
| · | our ability to successfully implement and effectively manage our outsourced manufacturing, design and development model and achieve any anticipated benefits; | |
| · | the ability of third-party manufacturers to produce our vehicles in accordance with our design and quality specifications, with sufficient scale to satisfy customers and within a reasonable cost; | |
| · | anticipated timing for the manufacture, design, production, shipping and launch of our vehicles; | |
| · | the inability of our suppliers to deliver the necessary components for our vehicles at prices and volumes acceptable to our third-party manufacturers; | |
| · | our ability to establish a network of dealers and international distributors to sell and service our vehicles on the timeline we expect; | |
| · | whether our vehicles will perform as expected; | |
| · | our facing product warranty claims or product recalls; | |
| · | our facing adverse determinations in significant product liability claims; | |
| · | customer adoption of electric vehicles; | |
| · | the development of alternative technology that adversely affects our business; | |
| · | the impact of COVID-19 on our business; | |
| · | increased government regulation of our industry; | |
| · | tariffs and currency exchange rates; and | |
| · | the conflict with Russia and the Ukraine and the potential adverse effect it may have on the availability of batteries for our vehicles. |
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes appearing elsewhere in this Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Form 10-Q.
Overview
We are an all-electric, off-road powersports vehicle company developing and building electric two and four-wheel motorcycles and utility terrain vehicles, (UTVs),or UTVs, also known as side-by-sides.side-by-sides, along with a complete line of upgrades and accessories. In October 2020, we launchedbegan building and testing prototypes for our future offerings with two off-road motorcycles – the Grunt and the Runt. We are currently taking orders on our websiteOur motorcycles feature unique frame designs protected by design patents. Additional utility and design patents have been filed for these initial offerings and began delivering the Grunts in the third quarterother aspects of 2021. We expect to begin delivering Runts in the second quarter of 2022. Also in 2022, we expect to introduce a prototype of the Volcon Stag which we expect to be available for sale in the first half of 2023. The Stag will be followed with the introduction the Beast, of a higher performance, longer range UTV which will be available for sale in the first half of 2024.
We are assembling the Grunt in a leased production facilities in Round Rock, Texas. We will be leasing a dedicated, built-to-suit manufacturing facility on 53 acres in Liberty Hill, Texas, 25 miles northwest of downtown Austin from an entity controlled by our founders. We expect to begin production at this facility in the first quarter of 2023.Volcon’s vehicles.
We initially intendedbegan to sell and distribute our vehiclesthe Grunt and related accessories in the U.S.United States on a direct-to-consumer sales platform. We are currently negotiating dealership agreements with retail partnersterminated our direct-to-consumer sales platform in November 2021. Prior to display and sellthe termination of our vehicles and accessories. These retail partners will also provide warranty and repair services to our customers.
As of September 30, 2021,direct-to-consumer sales platform, U.S. customers have made deposits for 277360 Grunts (net of cancellations) and five Runts, plus accessories and a deliverdelivery fee representing total deposits of $1.9$2.2 million. These orders arewere cancelable by the customer until the vehicle iswas delivered and after a 14-day acceptance period, therefore the deposits have beenwere recorded as deferred revenue. Based onAs of June 30, 2022, we had completed shipping of all Grunts sold through our current production capacity,direct-to-consumer sales platform. Due to delays in developing the Runt, we believe we will deliverrefunded the deposits made for all of the Grunts by March 2022.Runts.
Beginning in November 2021, we began negotiating dealership agreements with powersports dealers to display and sell our vehicles and accessories. Customers can now, or will soon be able to, buy our vehicles and accessories directly from a local dealership. Some of these dealers will also provide warranty and repair services to customers. Through March 31, 2023, we have 143 active dealers. Upon sale of a Grunt the dealer may order an additional Grunt. We planexpect to be able to offer the dealers a financing option, or “floor plan” to make larger purchases of our vehicles, but we do not currently have this financing option available. We have agreements with third-party financing companies to provide financing to qualified customers of each dealer. There is no recourse to the Company or the dealer if the dealer’s customer defaults on the financing agreement with this third-party.
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As of March 31, 2023, we have signed agreements with six importers in Latin America and one importer for the Caribbean Region, collectively referred to herein as the LATAM importers, to sell our vehicles and accessories globally in a three-phase rollouttheir assigned countries/markets. In June 2022, we signed an exclusive distribution agreement with Torrot Electric Europa S.A., referred to herein as Torrot, to distribute their electric motorcycles for youth riders in Latin America. We will use our LATAM importers to sell Torrot’s products in Latin America.
In October 2022, we signed an expanded agreement with Torrot to also be the exclusive distributor of export sales–Torrot and Volcon co-branded youth electric motorcycles in the United States as well as Latin AmericaAmerica. This agreement supersedes the original Torrot agreement and once all Torrot branded inventory is sold, we will no longer distribute Torrot branded motorcycles. Finally, in December 2022, we signed an expanded agreement with Torrot to be the exclusive distributor of Volcon co-branded youth electric motorcycles in Canada.
We expect to expand our global sales of our vehicles and accessories beyond our current LATAM importer base. We expect to sign more LATAM importers in 2021,2023 and expect to begin selling in Canada Europe, and Africa in 2022 and Southeast Asia plus Australia in 2023. ExportWe expect export sales areto be executed with individual importers in each country that buy vehicles by the container. Each importer will sell vehicles and accessories to local dealers or directly to customers. Local dealers will provide warranty and repair services for vehicles purchased in their country.
AsIn July 2022, we expanded our offerings with the introduction of the first of our Volcon UTV models, the Stag, which we anticipate will be available for delivery to customers possibly as early as the first half of 2023, followed by additional models of the Stag expected in 2024 and 2025 and the introduction of a higher performance, longer range UTV (to be named) which we expect to begin delivering in 2025. The Stag will be manufactured by a third-party and incorporate electrification units, which include batteries, drive units and control modules provided by General Motors. Beginning in June 2022 we have taken non-binding pre-production orders which are cancelable prior to delivery.
Through August 2022 we assembled the Grunt in a leased production facility in Round Rock, Texas. In August 2022 we announced that we will outsource the manufacturing of the Grunt to a third-party manufacturer, which we anticipate will reduce costs and improve profitability on the Grunt. We also outsourced the manufacturing of the 2023 Grunt EVO to the same third-party manufacturer. The 2023 Grunt EVO will replace the Grunt and has a belt drive rather than a chain drive as well as an updated rear suspension. We have received prototypes of the Grunt EVO in the first quarter of 2023 and expect to begin sales in the second quarter of 2023.
In September 30, 2021,2022, we reduced our headcount in our product development and administration departments as we outsourced the design and development of certain components of our vehicle development. We also hired our Chief Marketing Officer and expect to hire additional sales and marketing employees and increase marketing activities to further support our brand and products.
We began taking pre-orders for an E-Bike, the Brat, in September 2022 and shipments to customers began in the fourth quarter of 2022. The Brat is being manufactured by a third-party. In January 2023, we began selling the Brat directly to consumers through our website. Consumers who order the Brat from our website can have the Brat shipped to their specified destination.
In November 2022, we finalized an agreement for a third-party to manufacture the Runt. We received prototypes of the Runt in the first quarter of 2023 and expect to begin sales in the second quarter of 2023.
The estimated fulfillment of all orders we have received assumes that our third-party manufacturers can successfully meet our order quantities and deadlines. If they are unable to satisfy orders from Latin America importers for 92 Grunts. Payment for these orders is due prior to shipment and are cancelable until shipped. Based on a timely basis, our current production capacity, we believe we will be able to fulfill all pending orders by March 2022.customers may cancel their orders.
Results of Operations
We were formed on February 21, 2020. OperationsThe following financial information is for the period from February 21, 2020 (inception) to September 30, 2020, and the three months ended September 30, 2020 are not materially different; therefore, the financial information for 2020 below is from the inception through September 30, 2020.March 31, 2023 and 2022.
| Three Months Ended | ||||||||||||||||||||
| March 31, 2023 | March 31, 2022 | |||||||||||||||||||
| February 21, 2020 (inception) to September 30, 2020 | Three months ended September 30, 2021 | Nine months ended September 30, 2021 | ||||||||||||||||||
| Revenue | $ | – | $ | 75,067 | $ | 75,067 | $ | 1,170,458 | $ | 1,184,502 | ||||||||||
| Cost of goods sold | – | 1,176,691 | 1,176,691 | (1,229,981 | ) | 3,527,715 | ||||||||||||||
| Gross margin | – | (1,101,624 | ) | (1,101,624 | ) | (59,523 | ) | (2,343,213 | ) | |||||||||||
| Operating expenses: | ||||||||||||||||||||
| Sales and marketing | 26,946 | 1,123,206 | 1,937,745 | 1,789,370 | 1,014,906 | |||||||||||||||
| Product development | 331,621 | 3,021,207 | 7,595,581 | 1,786,351 | 2,495,712 | |||||||||||||||
| General and administrative | 18,090 | 586,492 | 14,634,037 | |||||||||||||||||
| General and administrative expenses | 1,890,091 | 2,794,940 | ||||||||||||||||||
| Total operating expenses | 376,657 | 4,730,906 | 24,167,363 | 5,465,812 | 6,305,558 | |||||||||||||||
| Loss from operations | (376,657 | ) | (5,832,529 | ) | (25,268,987 | ) | (5,525,335 | ) | (8,648,771 | ) | ||||||||||
| Interest and other expense | – | (46,025 | ) | (76,853 | ) | (1,774,134 | ) | 36,426 | ||||||||||||
| Net loss | $ | (376,657 | ) | $ | (5,878,554 | ) | $ | (25,345,840 | ) | $ | (7,299,469 | ) | $ | (8,612,345 | ) | |||||
Due to recurring losses there is no provision for income taxes for any period presented.
Revenue
Revenue for the three and nine months ended September 30, 2021,March 31, 2023, was $75,067$1,170,458 which represents sales of Grunts of $170,388, Brats of $657,516, Volcon Youth of $212,365 and accessories and parts of $127,496, compared to revenue of $1,184,502 which represents sales of Grunts of $1,165,712 and accessories and parts of $18,790 for the sale of 11 Grunts.three months ended March 31, 2022.
Cost of goods soldGoods Sold
Cost of goods sold for the three and nine months ended September 30, 2021, was $1,176,691. Costs includeMarch 31, 2023 were $1,229,981 including labor costs of $476,027$402,104 for employees and contractors performing parts purchasing, assembly and quality control testing of Grunts and stock-based compensation of $188,860$206,477 for share basedshare-based awards for employees. Part costs for Grunts sold during the period was $165,842. We paid $53,507 for fees owed to cancel purchase orders to reduce raw material quantities ordered to expected demand. Facilities costs were $122,311 for our warehouse facility and third-party warehousing costs. Net inbound and outbound shipping costs, duties and tariffs for inventory purchases and shipments to customers was a credit of $278,774 primarily due to the reversal of an accrual for shipping costs and tariffs expected to be incurred to ship our Grunt raw materials and work-in-process inventory to our third-party manufacturer in Mexico which was no longer needed once manufacturing was moved to Arizona.
| 29 |
Cost of goods sold for the three months ended March 31, 2022, was $3,527,715. Costs include labor costs of $685,162 for employees and contractors performing assembly and quality control testing of Grunts and stock-based compensation of $223,077 for share-based awards for employees. Part costs for Grunts sold during the periods were $152,830.period was $1,190,248. Facilities costs were $48,321$172,463 for our manufacturing facility and inventory warehouse.warehousing costs. Shipping costs and duties/tariffs for inventory purchases were $900,393.
InBeginning in the next 6-9 monthssecond quarter of 2023 we could experience manufacturing delays due to shipping constraints in our supply chain. We expect revenue and cost of goods sold to increase as we sell higher quantitiesfurther due to the expected sales of Grunts, but we expect the Grunt EVO, Runt and Stag. Our cost per Grunt EVO and Runt is fixed in our contract with the third-party manufacturer. We have identified suppliers who can deliver Grunt EVO parts at a lower cost than we have historically paid for the same or similar Grunt part, as many are interchangeable, and we have provided these vendors to decrease as we gain efficienciesour third-party manufacturer for their consideration in sourcing parts. Additional cost savings may be realized if the manufacturing process andthird-party manufacturer can source or manufacture parts at a lower cost.
Other than the cost of parts is reduced asthe batteries, we purchasehave a fixed cost per unit for the Stag in our contract with our third-party manufacturer. However, not all components have been fully sourced and additional costs for these components or price increases from suppliers for components already sourced could result in a higher volumescost per unit and source additional suppliers.we may not be able to increase the price we sell each unit to our customers which could negatively impact our expected margin.
Sales and marketingMarketing Expense
Sales and marketing expenses relate to costs to increase exposure and awareness for our products and developing our network of U.S. dealers and international distributors. Sales and marketing expenses for the period ended September 30, 2020, were not significant as we did not have significant operations during this period as there were no sales and marketing employees. Sales and marketing expense were $1,123,206 and $1,937,745 for the three and nine months ended September 30, 2021, respectively.
For the three months ended September 30, 2021,March 31, 2023, sales and marketing expenses were $1,789,370 and include $588,321 for promoting our products and brand, $723,362 for employee payroll costs, stock-based compensation expense of $311,759 for share-based awards granted to employees and consultants, $38,452 related to facilities costs, and travel costs of $71,243 primarily related to costs incurred for travel to build our dealer and distributor network.
Sales and marketing expenses were $1,014,906 for the three months ended March 31, 2022 and were primarily related to expenses associated with promoting our products and brand of $459,996, professional fees of $192,468, composed primarily of legal fees of $152,498 to develop our dealer agreements and evaluate compliance with dealer laws across the United States,$176,696, employee payroll costs of $179,279, and$431,183, stock-based compensation of $160,622$272,756 for share based awards granted to employees. For the nine months ended September 30, 2021, sales and marketing expenses were primarily related to expenses associated with promoting our products and brand of $788,840, professional fees of $272,042, primarily composed of legal fees of $153,784 to develop our dealer network and evaluate compliance with dealer laws across the United States, employee payroll costs of $420,994, and stock-based compensation of $237,028 for share basedshare-based awards granted to employees and consultants.consultants, $74,106 of facilities costs, primarily to operate our dealership in Denver, Colorado and travel costs of $40,217 primarily related to costs incurred for travel build our dealer network.
We expect sales and marketing expenseexpenses to increase as we expand our U.S. dealer and international distributor networks and promote our brand and products.
General and Administrative Expense
General and administrative expenses relate to costs for our finance, accounting and administrative functions to support the development, manufacturing and sales of our products. General
For the three months ended March 31, 2023, general and administrative expenses were $1,890,091 and were primarily related to expenses associated with employee payroll costs of $612,981, stock-based compensation of $330,605 for the period ended September 30, 2020, were not significant as we did not have significant operations during this period as there were no employees. Generalshare-based awards granted to employees and administrative expense were $586,492consultants, professional fees of $275,741 including legal fees of $86,975 for SEC attorney and $14,634,037 for the threeother legal services and nine months ended September 30, 2021, respectively.tax and accounting fees of $155,350, software costs of $151,457, and insurance costs of $349,972.
For the three months ended September 30, 2021,March 31, 2022, general and administrative expenses were $2,794,940 and were primarily related to expenses associated with employee payroll costs of $179,321,$733,660, stock-based compensation of $145,804 $742,610 for share basedshare-based awards granted to employees and consultants and, professional fees of $165,742, including professional fees related to employee recruitment of $108,177. For the nine months ended September 30, 2021, general and administrative expenses were primarily related to employee payroll costs of $431,304, stock-based compensation of $13,370,864 (consisting of $13.0 million due to warrants issued to our founders in March 2021 and $338,875 due to share based awards granted to employees and consultants), and professional fees of $661,570,$825,259, including legal fees of $175,115,$488,831, tax and accounting fees of $232,354 and$189,876, recruiting fees of $189,177.$101,170 and IT consulting, outsourcing and other fees of $25,290 and insurance costs of $333,441.
We expect general and administrative expenses other than stock-based compensation related to the founder warrants, to increase over the next several quarters as we expect costs such as product liability insurance to increase staffingdue to support sales, manufacturing,new product developmentofferings and increased costs due to comply with public company reporting and compliance requirements.
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Product Development Expense
Product development expenses relate to development and testing of our products and process to manufacture these products. Product development expense was not significant for the period from February 21, 2020 (inception) through September 30, 2020, as we did not have any employees as of September 30, 2020. Product development expenses for the three and nine months ended September 30, 2021, were $3,021,207 and $7,595,581, respectively.
Product development expenses forFor the three months ended September 30, 2021, areMarch 31, 2023, product development expenses totaled $1,786,351 and primarily relate to expenses associated with employee payroll costs of $893,266,$507,676, stock-based compensation of $543,299$208,592 for share basedshare-based awards granted to employees and consultants, professional fees of $366,530$81,651 for product design,digital consultants, $37,500 for recruiting fees, research and development costs of $266,829, prototype parts and tooling costs of $1,664,529$543,616, facilities cost of $47,823 and facilities costs of $104,885. $50,634 for supplies, parts and software.
Product development expenses inwere $2,495,712 for the ninethree months ended September 30, 2021, areMarch 31, 2022 and were primarily related to expenses associated with employee payroll costs of $1,341,112,$850,390, stock-based compensation of $459,566$336,722 for share basedshare-based awards granted to employees and consultants, professional fees of $955,391, including $790,676$224,706 for product design and $151,925$95,130 for employee recruitment, prototype parts and tooling costs $4,068,523 andof $774,823, facilities cost of $265,398.$82,131 and software fees, small equipment, tools and shop supplies of $50,019.
We expect product development costs related to increaseemployee costs to remain consistent with the expense level of the three months ended March 31, 2023 since we have outsourced certain design and development of our new vehicle models in the futurefourth quarter of 2022. We expect cost increases due to outsourced design and development costs and costs related to prototype costs for the Stag, Grunt EVO and Runt. Prototype costs, especially for the Stag, will be significant as our product development activities expand for new vehicle models.we begin receiving Stag units that will be used to validate engineering and manufacturing design and costs incurred to perform testing to ensure the vehicles meet regulatory compliance requirements where we expect to sell these vehicles.
Interest and Other Expenses
Interest and other income/expenses for the three months ended March 31, 2023 were $1,774,134. Non-cash interest expense of $1,776,636 was recognized for the amortization of debt issuance costs and accretion of principal on the Convertible Notes issued in August 2022. Interest expense for the three and nine months ended September 30, 2021, primarily relatesMarch 31, 2022 was not significant.
We expect interest expense to increase in the future as we recognize interest on the Convertible Notes issued in August 2022. These notes were issued at an original issuance discount (“OID”) of 8% and due to the warrants also issued in connection with these notes, the allocation of proceeds between the Convertible Notes and warrants resulted in the notes being recorded at a significantly greater discount than the stated 8% OID. This discount, along with the OID will be accreted to interest on our notes payable usedexpense over the term of the Convertible Notes and does not result in any cash payments to purchase two vehicles and accretion onbe made unless the promissory notes issuedCompany has an event of default as discussed in September 2021.Note 6 to the financial statements.
Net Loss
Net loss for the three months ended September 30, 2020, and the period from February 21, 2020 (inception) through September 30, 2020,March 31, 2023, was $304,559 and $376,657, respectively,$7,299,469, compared to $5,878,554 and $25,345,840to $8,612,345 for the three and nine months ended September 30, 2021, respectively.March 31, 2022.
Liquidity and Capital Resources
On September 30, 2021,March 31, 2023, we had cash and restricted cash of $2.7$4.8 million, including $0.5 million of restricted cash, and we had working capital deficit of $3.0$7.1 million. Since inception in February 2020, we have funded our operations from proceeds from debt and equity sales.
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Cash used in operating activities
Operating activities for the period from February 21, 2020 (inception) to September 30, 2020, mainly included research and development costs, and professional fees for consultants and attorneys for the formation of the Company and early product development efforts. Some of these costs were paid for by the founders on behalf of the Company. Net cash used in operating activities was $13.3$6.5 million for the ninethree months ended September 30, 2021,March 31, 2023 and includes all of our operating costs except stock-based compensation, write-down of inventory, depreciation and amortization, non-cash interest expense for the amortization of debt issuance costs and accretion of principal on Convertible Notes, and gain on sale assets and leases. Cash used in operating activities includes a decrease in accounts receivable of $0.2 million for collections net of sales, increases in inventory of $0.5 million and inventory deposits of $0.8 million as we made purchases and deposits for Brats and Volcon Youth motorcycles, a decrease of $0.5 million for both accounts payable and accrued liabilities due to timely payment of outstanding amounts due and a reversal of an accrual for anticipated shipping and tariffs related to shipping raw material and subassembly inventory to our third-party manufacturer in Mexico as final assembly was moved to Arizona.
Net cash used in operating activities was $9.4 million for the three months ended March 31, 2022 and includes all of our operating costs except stock-based compensation, write down of inventory and prepaid inventory and depreciation and amortization. Cash used in operating activities includes increases in inventory and prepaidof $1.5 million offset by a reduction in inventory totaling $5.3deposits of $0.4 million as we purchased more inventory in the three months ended March 31, 2022 and made payments andfewer deposits based on the timing of inventory purchases domestically versus internationally to purchase raw materials to begin production of the Grunt in September 2021build Grunts for delivery to customers, cash provided by customer depositsa decrease of $2.3$1.2 million as we recognized revenue for shipments to direct to consumer customers in the three months ended March 31, 2022, and an increase of $0.5 million due to higher accrued liabilities due to the timing of invoices received from vendors and an increase in accounts payableprepaid expenses of $1.2 million.$0.7 million primarily due to payment of legal counsel retainers of $0.3 million and a payment of $0.1 million made to increase director and officer liability insurance due to the public stock offering that occurred in February 2022.
Cash used in investing activities
Net cash used in investing activities was $0.7$0.2 million for the ninethree months ended September 30, 2021,March 31, 2023, consisting of $0.3 million of purchases of equipment and mainly includedtooling offset by proceeds received of $0.1 million for the sale of two vehicles. Net cash used in investing activities was $0.2 million for the three months ended March 31, 2022, consisting of purchases of equipment and tooling related to our Grunt manufacturing and product development and certain intangible assets. Cash uses from investing activities for the period ended September 30, 2020, was not significant.development.
Cash provided by financing activities
Cash used financing activities for the three months ended March 31, 2023, was less than $0.1 million and was related to proceeds used from the sale of vehicles to pay off notes payable and proceeds received from the exercise of stock options. Cash provided from financing activities for the period ended September 30, 2020,March 31, 2022, was $1.6$18.1 million and was related to proceeds received from the SAFEpublic offering that was partially completed at September 30, 2020. Net cash provided by financing activities was $16.1 million for the nine months ended September 30, 2021.
In January 2021, we completed a WeFunder SAFE offering which was convertible into preferred stock upon future financing events. We received gross proceeds of $2,258,940 and paid expenses of $53,500.
In February 2021, we completed an offering of our Series A preferred stock. We received gross proceeds of $2,669,978 and issued 415,287 shares of Series A preferred stock. We paid commissions and expenses of $205,470 and issued 79,750 shares of common stock and warrants to purchase 79,750 shares of common stock with an exercise price of $2.57 to placement agents in connection with the offering. This equity financing resulted in the SAFE investments of $2.0 million as of December 31, 2020, converting into 424,269 shares of Series A preferred stock and the WeFunder SAFE investments converting into 351,832 shares of Series A preferred stock.
From April 2021 to September 2021, we sold 1,105,827 shares of Series B preferred stock at $9.50 per share resulting in gross proceeds of $10.5 million. We paid commissions and expenses of $890,026 and issued 123,295 shares of common stock and warrants to purchase 197,272 shares of common stock with an exercise price of $3.80 to placement agents in connection with the offering.
On September 10, 2021, the Company entered into an agreement with a lender for a 6% promissory note of $2 million. The promissory note has a maturity date of one year from inception or immediately upon the completion of this offering. For providing the above promissory note, the Company agreed to issue 266,664 shares of our common stock and agreed to pay $35,000 of the placement agent’s and investor’s legal costs and paid a 6% commission to the placement agent, who is the underwriter of this offering. Such payment is cash compensation for providing services for a private placement in accordance with FINRA Rule 5110 Supplementary Material .01(b)(2).February 2022 where we sold 6,666,667 shares at $3.00 per share.
Our continuation as a going concern is dependent upon our ability to attain profitable operations and if necessary, obtain continued financial support from our stockholders, necessary equity financing to continue operations and the attainmentissuance of profitable operations.debt or equity. As of September 30, 2021,March 31, 2023, we had incurred an accumulated deficit of $26.7$83.0 million since inceptioninception. Additionally, one of the covenants for our Convertible Notes requires us to have $10 million of cash on hand if principal (and interest, if any) of $15 million or more of the Convertible Notes is outstanding as of September 30, 2023 and have generated less than $0.1 million in revenue. Additionally, managementDecember 31, 2023 (subject to adjustment if the principal (and interest, if any) is below $15 million).
Management anticipates that our cash on hand as of September 30, 2021, is insufficientMarch 31, 2023 plus the cash expected to be generated from operations will not be sufficient to fund planned operations and maintain required cash balances for the Convertible Notes beyond one year from the date of the issuance of the financial statements as of and for the three and nine months ended September 30, 2021.March 31, 2023. There can be no assurance that such additional funding would be available to the Company on acceptable terms, or at all. These factors raise substantial doubt regarding our ability to continue as a going concern.
On October 8, 2021, and October 29, 2021, the Company completed its initial public offering and sold 3,025,000 and 226,875 shares of its common stock at $5.50 per share. The Company received net proceeds of $16.6 million after underwriter commissions and expenses of $1,7 million. The Company expects to incur additional expenses of approximately $150,000 related to this offering. The underwriter was also issued 151,250 warrants to purchase the Company’s common stock at $6.88 per share.
The proceeds from initial public offering, along with proceeds from sales of the Grunt and related accessories which began in September 2021, and Runts and related accessories which are expected to begin in the second quarter of 2022, may not provide sufficient capital to fund operations beyond one year from the date of the issuance of the financial statements as of and for the three and nine months ended September 30, 2021, due to the ongoing development of our vehicles. We may be required to raise additional proceeds to fund our operations and there is no guarantee that we will be able to raise funding with favorable terms, if at all.
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JOBS Act Accounting Election
The recently enacted JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
We have implemented all new accounting pronouncements that are in effect and may impact our financial statements and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
Critical Accounting Policies
Use of Estimates in Financial Statement Presentation
The preparation of the financial statements in conformity with generally acceptedNo critical accounting principles in the United States of America (“U.S. GAAP”) requires management to makepolicies or estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilitiesexisted as of the dates of the financial statements and the reported amounts of expenses during the reporting periods.March 31, 2023.
Making estimates requires management to exercise judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, actual results could differ significantly from those estimates.
Revenue recognition
Revenue is recognized when we transfer control of the product to the customer and a 14-day acceptance period has expired or the customer has acknowledged acceptance prior to the end of the 14-day acceptance period. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring control of our vehicles, parts and accessories. Consideration that is received in advance of the transfer of goods is deferred until delivery has occurred. Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. If a right of return exists, we adjust revenue for the estimated effect of returns. Until we develop sales history, we will estimate expected returns based on industry data for sales returns as a percent of sales, type of product, and a projection of this experience into the future. Our sales do not have a financing component.
Sales promotions and incentives. We provide for estimated sales promotion and incentive expenses, which are recognized as a component of sales in measuring the amount of consideration we expect to receive in exchange for transferring goods or providing services. Examples of sales promotion and incentive programs include distributer fees and volume incentives. Sales promotion and incentive expenses are estimated based on current programs for each product line. We record these amounts as a liability in the balance sheet until they are ultimately paid. Adjustments to sales promotions and incentives accruals are made as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
Shipping and handling charges and costs. We record shipping and handling charged to the customer and related shipping costs as a component of cost of sales when control has transferred to the customer.
Product warranties
We provide a one-year warranty on our vehicles, and a two-year warranty on the battery pack. We accrue warranty reserves at the time a vehicle is delivered to the customer. Warranty reserves include our best estimate of the projected cost to repair or to replace any items under warranty, based on actual warranty experience as it becomes available and other known factors that may impact our evaluation of historical data. We review our reserves quarterly to ensure that our accruals are adequate in meeting expected future warranty obligations, and we will adjust our estimates as needed. Factors that could have an impact on the warranty reserve include the following: changes in manufacturing quality, shifts in product mix, changes in warranty coverage periods, product recalls and changes in sales volume. Warranty expense is recorded as a component of cost of revenues in the statement of operations. The portion of the warranty provision which is expected to be incurred within 12 months from the balance sheet date will be classified as current, while the remaining amount will be classified as long-term liabilities.
Income taxes
Deferred taxes are determined utilizing the “asset and liability” method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We provide a valuation allowance, when it is more likely than not that deferred tax assets will not be realized in the foreseeable future.
The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.
Stock-based compensation
We measure the total amount of employee stock-based compensation expense for a grant based on the grant date fair value of each award and recognizes the stock-based compensation expense on a straight-line basis over the requisite service period of an award. Stock-based compensation is based on unvested outstanding awards. We have elected to recognize forfeitures when realized.
Off-balance Sheet Arrangements
As of September 30, 2021, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to theour Chief Executive Officer, who serves as our principal executive officer, and Chief Financial Officer, who serves as our principal financial officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervisionssupervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were not effective as of September 30, 2021.March 31, 2023 to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures as we have previously missed filing certain forms timely and we have not implemented and tested controls and procedures to conclude that we have remediated this deficiency. Notwithstanding this conclusion, we believe that our unaudited consolidated financial statements contained in this Quarterly Report fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects. Management is working to identify corrective actions for the weakness and will periodically re-evaluate the need to add personnel and implement improved review procedures.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the three months ended September 30, 2021,March 31, 2023, that have materially affected, or are reasonablereasonably likely to materially effect,affect, our internal controls over financial reporting.
Due to a transition period established by SEC rules applicable to newly public companies, our management is not required to evaluate the effectiveness of our internal control over financial reporting until after the filing of our Annual Report on Form 10-K for the year ended December 31, 2022. As a result, this Quarterly Report on Form 10-Q does not address whether there have been any changes in our internal control over financial reporting.
PART II -— OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time in the ordinary course of our business, we may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable. We have insurance policies covering potential losses where such coverage is cost effective.
We are not at this time involved in any legal proceedings.
Investing in our common stock involves a high degree of risk. You should carefully consider each of the following risks, together with the financial statements and the related notes, before making a decision to buy our common stock. If any of the following risks actually occurs, our business could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to the Company’s Business, Operations, and Industry
Our losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.
We do not have sufficient existing cash and cash equivalents, even giving effect to the proceeds from the securities offerings completed in October 2021, to fund our operations for the twelve months following the filing of the September 30, 2021, financial statements. Our independent registered public accounting firm has included an explanatory paragraph in its report on our financial statements as of December 31, 2020, and for the period from February 21, 2020 (inception) to December 31, 2020, stating that our recurring losses from operations since inception and required additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. If we are unable to obtain sufficient funding, we could be forced to delay the rollout of our vehicles, and our financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.
Our independent auditor registered public accounting firm previously identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses or we or our auditor identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and stock price.
In connection with the preparation and audit of our consolidated financial statements for the period ended December 31, 2020, our auditor identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. These material weaknesses are as follows:
We have begun efforts to remediate these material weaknesses including hiring a chief financial officer and a controller and have begun developing written policies and procedures. While we believe these efforts will remediate the material weaknesses, we may not be able to complete our evaluation, testing or any required remediation in a timely fashion, or at all. We cannot assure you that the measures we have taken to date and may take in the future, will be sufficient to remediate the control deficiencies that led to our material weaknesses in internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error and the risk of fraud. If we are unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods required of public companies could be adversely affected which, in turn, may adversely affect our reputation and business and the market price of our common stock. In addition, any such failures could result in litigation or regulatory actions by the SEC or other regulatory authorities, loss of investor confidence, delisting of our securities and harm our reputation and financial condition, or diversion of financial and management resources from the operation of our business.
We are an early-stage company, and although orders of our initial vehicles have commenced, we have delivered a limited number of vehicles to customers.
We formed our corporation in February 2020. Since formation, we have focused on designing our initial vehicles, the Grunt and the Runt, and commencing the marketing of such vehicles by accepting reservations on our website. As of September 30, 2021, we have delivered 11 vehicles to customers. We may never achieve commercial success. We have no meaningful historical financial data upon which we may base our projected revenue and operating expenses. Our limited operating history makes it difficult for potential investors to evaluate our products or prospective operations and business prospects. We are subject to all the risks inherent in business development, financing, unexpected expenditures, and complications and delays that often occur in a new business. Investors should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
As we have increased our production, we have experienced delays or other complications in the design, manufacture, launch and production ramp of our vehicles and our future planned vehicles which could harm our brand, business, prospects, financial condition and operating results.ITEM 1A. RISK FACTORS
We may encounter unanticipated challenges, such as supply chain constraints, that lead to initial delays in producing our vehicles. We have experienced longer lead times with certain suppliers to obtain parts, especially those imported where shipping delays from out bound and inbound ports have caused delays or required us to use air freight and incur higher shipping costs. These challenges may be more significant for our Stag and Beast vehicles as we have not finalized the designs for these vehicles or begun to establish the assembly lines for these prospective vehicles. Any significant delay or other complication in the production of our vehicles or the development, manufacture, and production ramp of our future vehicles such as the Stag and Beast, including complications associated with expanding our production capacity and supply chain or obtaining or maintaining regulatory approvals, and/or coronavirus impacts, could materially damage our brand, business, prospects, financial condition and operating results.
We may be unable to meet our growing production plans and delivery plans, any of which could harm our business and prospects.
Our plans call for achieving and sustaining significant increases in vehicles production and deliveries. Our ability to achieve these plans depends upon a number of factors, including our ability to utilize our current manufacturing capacity, achieve the planned production yield and further increase capacity as planned while maintaining our desired quality levels and optimize design and production changes, and our suppliers’ ability to support our needs. We have experienced delays in increasing production volume due to lower production yields resulting in delayed customer shipments. We are currently developing improved production processes to increase efficiencies and production yields, although there is no assurance we will be successful in these efforts. If we are unable to realize our plans, our brand, business, prospects, financial condition and operating results could be materially damaged.
We are dependent on our suppliers, the majority of which are single-source suppliers, and the inability of these suppliers to deliver necessary components of our products according to our schedule and at prices, quality levels and volumes acceptable to us, or our inability to efficiently manage these components, could have a material adverse effect on our financial condition and operating results.
Our vehicles contain numerous purchased parts which we source globally from direct suppliers, the majority of whom are currently single-source suppliers. Any significant unanticipated demand would require us to procure additional components in a short amount of time. While we believe that we will be able to secure additional or alternate sources of supply for most of our components in a relatively short time frame, there is no assurance that we will be able to do so or develop our own replacements for certain highly customized components of our products.
If we encounter unexpected difficulties with key suppliers such as our battery and chassis suppliers, and if we are unable to fill these needs from other suppliers, we could experience production delays and potential loss of access to important technology and parts for producing, servicing and supporting our vehicles. This limited, and in many cases single source, supply chain exposes us to multiple potential sources of delivery failure or component shortages for the production of our vehicles. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to design changes and delays in product deliveries to our customers, which could hurt our relationships with our customers and result in negative publicity, damage to our brand and a material and adverse effect on our business, prospects, financial condition and operating results.
Changes in our supply chain may result in increased cost. If we are unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer.
There ishave been no assurance that our suppliers will ultimately be ablematerial changes to meet our cost, quality and volume needs, or do so at the times needed. Furthermore, as the scale of our production increases, we will need to accurately forecast, purchase, warehouse and transport to our manufacturing facilities components at much higher volumes than we have experience with. If we are unable to accurately match the timing and quantities of component purchases to our actual needs, or successfully implement automation, inventory management and other systems to accommodate the increased complexity in our supply chain, we may incur unexpected production disruption, storage, transportation and write-off costs, which could have a material adverse effect on our financial condition and operating results.
The duration and scope of the impacts of the COVID-19 pandemic are uncertain and has adversely affect our supply chain and may in affect our operations, distribution, and demand for our products.
If we were to encounter a significant disruption due to COVID-19 at one or more of our suppliers, we may not be able to satisfy customer demand for a period of time. We have recently experienced delays and extended delivery dates with respect to the computer chips we utilize for our vehicles. Although we believe these delays will not affect our ability to deliver our initial vehicles, they may restrict our ability to deliver vehicles in the future. Furthermore, the impact of COVID-19 on the economy, demand for our products and impacts to our operations, including the measures taken by governmental authorities to address it, may precipitate or exacerbate other risks and/or uncertainties, including specifically many of the risk factors set forth herein,included in the Form 10-K filed with the SEC on March 7, 2023, which may have a significant impact on our operating results and financial condition, although we are unable to predict the extent or nature of these impacts at this time.
We are currently taking orders for the Grunt, and if this vehicle fails to perform as expected, our reputation could be harmed and our ability to develop, market and sell our vehicles could be harmed.
If our vehicles were to contain defects in design and manufacture that cause them not to perform as expected or that require repair or take longer than expected to deliver, our ability to develop, market and sell our vehicles could be harmed. While we intend to perform internal testingis accessible on the vehicles we assemble, as a start-up company our frame of reference by which to evaluate detailed long-term quality, reliability, durability and performance characteristics of our vehicles is based on industry metrics rather than historical data. Although we have procedures to test all of our vehicles for defects, there can be no assurance that we will be able to detect and fix all defects in our products prior to their sale to consumers. Any product defects, delays, or other failure of our products to perform as expected could harm our reputation and result in delivery delays, product recalls, product liability claims, significant warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and prospects.
Our success will depend on our ability to economically produce our vehiclesSEC’s website at scale, and our ability to produce vehicles of sufficient quality and appeal to customers on schedule and at scale is unproven.www.sec.gov.
Our business success will depend in large part on our ability to economically produce, market and sell our vehicles at sufficient capacity to meet the demands of our customers. We will need to scale our production capacity in order to successfully implement our business strategy, and we plan to do so in the future by, among other things, completing the build-out of an additional facility we leased in August 2021 in Round Rock, Texas and our Liberty Hill, Texas assembly facility when it is constructed.
We have no experience in large-scale production of our vehicles, and we do not know whether we will be able to develop efficient, automated, low-cost production capabilities and processes, such that we will be able to meet the quality, price, and production standards, as well as the production volumes, required to successfully market our vehicles and meet our business objectives and customer needs. Any failure to develop and scale our production capability and processes could have a material adverse effect on our business, results of operations or financial condition.
We may not succeed in establishing, maintaining and strengthening our brand, which could materially and adversely affect customer acceptance of our products, which could in turn materially affect our business, results of operations or financial condition.
Our business and prospects heavily depend on our ability to develop, maintain and strengthen the Volcon brand. If we are unable to establish, maintain and strengthen our brand, we may lose the opportunity to build and maintain a critical mass of customers. Our ability to develop, maintain and strengthen our brand will depend heavily on the success of our marketing efforts. Failure to develop and maintain a strong brand would materially and adversely affect customer acceptance of our vehicles, could result in suppliers and other third parties being less likely to invest time and resources in developing business relationships with us, and could materially adversely affect our business, results of operations or financial condition.
If we are unable to achieve our targeted manufacturing costs for our vehicles, our financial condition and operating results will suffer.
As a start-up company, we have no historical data that allows us to ensure our targeted manufacturing costs will be achievable. While we expect in the future to better understand our manufacturing costs, there is no guarantee we will be able to achieve sufficient cost savings to reach our gross margin and profitability goals. We may also incur substantial costs or cost overruns in utilizing and increasing the production capability of our vehicle assembly facilities.
If we are unable to achieve production cost targets on our vehicles pursuant to our plans, we may not be able to meet our gross margin and other financial targets. Many of the factors that impact our manufacturing costs are beyond our control, such as potential increases in the costs of our materials and components, such as batteries and chassis. If we are unable to continue to control and reduce our manufacturing costs, our operating results, business and prospects will be harmed.
Increases in costs, disruption of supply, or shortage of materials could harm our business.
We may experience increases in the cost or a sustained interruption in the supply or shortage of materials. Any such increase, supply interruption or shortage could materially and negatively impact our business, prospects, financial condition and operating results. The prices for these materials fluctuate, and their available supply may be unstable, depending on market conditions and global demand for these materials, including as a result of increased production of electric vehicle (EV) products by our competitors, and could adversely affect our business and operating results. For instance, we are exposed to multiple risks relating to battery packs. These risks include:
Our business is dependent on the continued supply of battery cells for the battery packs used in our vehicles. Any disruption in the supply of battery cells could disrupt production of our vehicles. Substantial increases in the prices for our materials or prices charged to us, such as those charged by battery cell suppliers, would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased prices. Any attempts to increase prices in response to increased material costs could result in cancellations of vehicle orders and therefore materially and adversely affect our brand, image, business, prospects and operating results.
An adverse determination in any significant product liability claim against us could materially adversely affect our business, results of operations or financial condition.
The development, production, marketing, sale and usage of our vehicles will expose us to significant risks associated with product liability claims. The powersports vehicles industry in particular is vulnerable to significant product liability claims, and we may face inherent risk of exposure to claims in the event our vehicles do not perform or are claimed to not have performed as expected. If our products are defective, malfunction or are used incorrectly by our customers, it may result in bodily injury, property damage or other injury, including death, which could give rise to product liability claims against us. Any losses that we may suffer from any liability claims and the effect that any product liability litigation may have upon the brand image, reputation and marketability of our products could have a material adverse impact on our business, results of operations or financial condition. No assurance can be given that material product liability claims will not be made in the future against us, or that claims will not arise in the future in excess or outside of our insurance coverage and contractual indemnities with suppliers and manufacturers. We believe we have adequate product liability insurance; however, as we release new products and expand our sales channels, we may not be able to obtain adequate product liability insurance or the cost of doing so may be prohibitive. Adverse determinations of material product liability claims made against us could also harm our reputation and cause us to lose customers and could have a material adverse effect on our business, results of operations or financial condition.
The markets in which we operate are in their infancy and highly competitive, and we may not be successful in competing in these industries as the industry further develops. We currently face competition from new and established competitors and expect to face competition from others in the future, including competition from companies with new technology.
The EV market is in its infancy, and we expect it will become more competitive in the future. There is no assurance that our vehicles will be successful in the respective markets in which they compete. A significant and growing number of established and new companies, as well as other companies, have entered or are reported to have plans to enter the EV market, including the off-road market that we intend to pursue. Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing, sales networks and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Increased competition could result in lower vehicles sales, price reductions, revenue shortfalls, loss of customers and loss of market share, which could harm our business, prospects, financial condition and operating results.
We may need to defend ourselves against intellectual property infringement claims, which may be time-consuming and could cause us to incur substantial costs.
Others, including our competitors, may hold or obtain patents, copyrights, trademarks or other proprietary rights that could prevent, limit or interfere with our ability to make, use, develop, sell or market our products and services, which could make it more difficult for us to operate our business. From time to time, the holders of such intellectual property rights may assert their rights and may bring suits alleging infringement or misappropriation of such rights. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to cease making, selling or incorporating certain components or intellectual property into the products we offer, to pay substantial damages and/or license royalties, to redesign our products, and/or to establish and maintain alternative branding for our products.
We have applied for trademark rights for the “Volcon” brand name and our logo in the United States and Latin America. We have received notice from two entities who have indicated they will protest the issuance of a trademark for the Volcon name due to the similarity of Volcon to their trademarks, even though our products are different. We are currently in negotiation with these entities to obtain an agreement that our Volcon trademark can co-exist with their trademarks. If we are unsuccessful in obtaining agreement with these entities, we will need to consider the use of a different trademark for our Company and our products.
In the event that we were required to take one or more such actions, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion of resources and management attention.
Potential tariffs or a global trade war could increase our costs and could further increase the cost of our products, which could adversely impact the competitiveness of our products and our financial results.
Our vehicles depend on materials from China, namely batteries, which are among the main components of our vehicles. We cannot predict what actions may be taken with respect to tariffs or trade relations between the United States and China, what products may be subject to such actions, or what actions may be taken by the China in retaliation. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs, trade agreements or related policies have the potential to adversely impact our supply chain and access to equipment, our costs and our product margins. Any such cost increases or decreases in availability could slow our growth and cause our financial results and operational metrics to suffer.
Subsequent to fulfilling orders we have received directly from consumers, we intend to sell our vehicles and accessories through a network of third parties, and there is no assurance that we will be able to successfully build out this network.
Initially, in the U.S. we intended to sell our vehicles directly to the consumer via our website. We will cease selling vehicles directly to consumers and intend to sell our vehicles in the U.S. to powersport vehicle dealers
We are also developing a line of aftermarket accessories for our vehicles that will be manufactured and produced by third parties. We intend to market our accessories on our website but also use our dealer network to display and sell these accessories.
We also intend to sell our vehicles internationally through international distributors. We have signed distributor agreements with distributors in Central and South America. We are relying on these distributors to market, promote, sell and service our vehicles and sell accessories in their designated countries/territories.
We believe our success will be highly dependent on our ability to build out this network in the major markets in which we intend to compete for customers, and to maintain this network in the future. Our model is dependent not only on our ability to create the foregoing network, but also on the commitment and motivation of these third parties to promote our brand and products.
Orders for vehicles are cancelable and the deposit fully refundable until delivered to and accepted by the customer 14 days from delivery, and there can be no assurance that such orders will be converted into sales.
As of September 30, 2021, U.S. customers have made deposits for 277 Grunts and 5 Runts, plus accessories and a deliver fee representing total deposits of $1.9 million. These orders are cancelable by the customer until the vehicle is delivered and after a 14-day acceptance period, therefore the deposits have been recorded as deferred revenue. Based on our current production capacity, we believe we will deliver all of the Grunts by March 2022 and the Runts by the second quarter of 2022.
As of September 30, 2021, we have received orders from Latin America importers for 92 Grunts. Payment for these orders is due prior to shipment and are cancelable until shipped. Based on our current production capacity, we believe we will be able to fulfill all pending orders by March 2022.
The estimated fulfillment of all orders we have received assumes we are successfully able to increase our production capacity in the future, of which there is no assurance. We only recently commenced assembling vehicles and we have encountered delays as we increased production. If we are unable to satisfy pending orders on a timely basis, customers may cancel their orders.
In some cases, there will be significant time between a customer ordering a vehicle and the eventual delivery of the vehicle, which creates a heightened risk that a customer that ordered a vehicle may change his or her mind and not ultimately take delivery of the vehicle, and accessories if purchased in their order, even though the customer paid the full list price to complete their order. As a result, no assurance can be made that orders will not be cancelled. Any cancellations could harm our financial condition, business, prospects and operating results.
We are developing our dealer network in the United States, and we may not be able to obtain a sufficient number of dealers to sell our vehicles to be commercially successful.
We initially intended to sell and distribute our vehicles and accessories in the U.S. on a direct-to-consumer sales platform. We are currently negotiating dealership agreements with retail partners to display and sell our vehicles and accessories which will require us to discontinue selling and distributing our vehicles under the direct-to-consumer model.
We will be required to comply with manufacture/dealer laws in each state in which we sell our vehicles through dealers. Dealer laws vary by state and although our dealer agreements are intended to comply with these laws, we may be required to amend our agreements if these laws are changed or are challenged by dealers or other OEMs.
Many dealers will require us to identify financing sources for dealers to purchase vehicle inventory and to identify financing sources for the dealers’ customers to finance their purchase. We will incur costs under these financing arrangements to incentivize dealers to buy our vehicles including free dealer financing for certain periods or based on purchase volumes, interest rate buy downs on the dealers’ customer financing to incentivize their customers’ purchase our vehicles. Since we are a young company with limited sales history and recurring losses, we may not be able to obtain these financing sources which may result in dealers not wanting to sell our vehicles.
We may be unable to improve our existing products and develop and market new products that respond to customer needs and preferences and achieve market acceptance.
We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can successfully enhance existing products, develop new innovative products and distinguish our products from our competitors’ products through innovation and design. Product development requires significant financial, technological, and other resources. There can be no assurance that we will be able to incur a level of investment in research and development that will be sufficient to successfully make us competitive in product innovation and design. In addition, even if we are able to successfully enhance existing products and develop new products, there is no guarantee that the markets for our existing products and new products will progress as anticipated. If any of the markets in which our existing products compete do not develop as expected, our business, results of operations or financial condition could be materially adversely affected.
We have no experience servicing our vehicles, we intend to primarily utilize third parties to service our vehicles, and if we are unable to address the service requirements of our customers, our business could be materially and adversely affected.
We have no experience servicing or repairing our vehicles and we are developing our service manual and service procedures to repair our vehicles. We are in the process of developing a network of service providers who will also be our dealers as many states require that only dealers can provide warranty service on vehicles.
Servicing electric vehicles is different than servicing vehicles with internal combustion engines and requires specialized skills, including high voltage training and servicing techniques. If we are unable to successfully address the service requirements of our customers, our business and prospects will be materially and adversely affected. If we are unable to successfully address the servicing requirements of our customers or establish a market perception that we maintain high-quality support, our reputation could be harmed, we may be subject to claims from our customers, and our business, results of operations or financial condition may be materially and adversely affected.
Significant product repair and/or replacement due to product warranty claims or product recalls could have a material adverse impact on our business, results of operations or financial condition.
We will provide a one-year warranty against defects for our vehicles, and a two-year warranty on the batteries in our vehicles. Our warranty will generally require us to repair or replace defective products during such warranty periods at no cost to the consumer. We will record provisions based on an estimate of product warranty claims, but there is the possibility that actual claims may exceed these provisions and therefore negatively impact our results of operations of financial condition.
In addition, we may in the future be required to make product recalls or could be held liable in the event that some of our products do not meet safety standards or statutory requirements on product safety, even if the defects related to any such recall or liability are not covered by our limited warranty. The repair and replacement costs that we could incur in connection with a recall could have a material adverse effect on our business, results of operations or financial condition. Product recalls could also harm our reputation and cause us to lose customers, particularly if recalls cause consumers to question the safety or reliability of our products, which could have a material adverse effect on its business, results of operations or financial condition.
Our success is dependent upon the success of the off-road vehicle industry and upon consumers’ willingness to adopt electric vehicles.
Our success is dependent upon the success of the off-road vehicle industry as a whole, and in particular upon consumers’ willingness to adopt electric vehicles as an alternative to combustion vehicles. If the market for electric off-road vehicles does not develop at the rate or in the manner or to the extent that we expect, our business, results of operations or financial condition may be adversely materially affected. The market for electric vehicles is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standard, frequent new vehicle announcements and changing consumer demands and behaviors. Factors that may influence the adoption of electric vehicles include:
The influence of any of the factors described above may cause our customers not to purchase our vehicles and may otherwise materially adversely affect our business, results of operations or financial condition.
We currently operate in an area that is not heavily regulated, and future changes in government oversight may subject us to increased regulations, which may increase our expenses.
The off-road vehicle market is not heavily regulated, as compared to on-road vehicles, and, as such, we are not currently subject to significant government regulations. As this market develops and grows, it may come under increased regulatory scrutiny, which may result in increased regulations. This increase in regulations may result in increased costs and expenses, which may materially and adversely affect our business, results of operations or financial condition.
We will lease a new facility from an entity controlled by our founders, and this arrangement was not conducted on an arm’s length basis.
We will be leasing a dedicated, built-to-suit manufacturing facility on 53 acres in Liberty Hill, Texas from an entity controlled by our founders. Although we believe the lease terms are at or below current market rates, due to the relationship between our company and our founders, the negotiation of the lease agreement was not conducted on an arm’s length basis. As such, it is possible that the terms were less favorable to us than in a transaction negotiated in an arm’s length transaction.
Our directors and executive officers will continue to exercise significant control over us, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.
The existing holdings of our directors and executive officers, assuming full exercise of the warrants held by such individuals, will be, in the aggregate, approximately 54% of our outstanding common stock. As a result, these stockholders will be able to influence our management and affairs and control the outcome of matters submitted to our stockholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets.
These stockholders acquired their shares of common stock for substantially less than the price of the shares of common stock being acquired in this offering, and these stockholders may have interests, with respect to their common stock, that are different from those of investors in this offering and the concentration of voting power among one or more of these stockholders may have an adverse effect on the price of our common stock.
In addition, this concentration of ownership might adversely affect the market price of our common stock by: (1) delaying, deferring or preventing a change of control of our company; (2) impeding a merger, consolidation, takeover or other business combination involving our company; or (3) discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
We are party to certain agreements with our founders that may create a conflict of interest for our board of directors in evaluating a potential change of control transaction.
We have entered into consulting agreements with Pink Possum, LLC (“Pink Possum”), an entity controlled by Mr. Okonsky, and Highbridge Consultants, LLC (“Highbridge”), an entity controlled by Mr. James, pursuant to which Messrs. Okonsky and James provide us with services. Pursuant to the consulting agreements, upon the occurrence of a Fundamental Transaction, which generally includes a business combination, merger, or sale of all or substantially all of our assets (or similar events), for an aggregate gross sales price of $100.0 million or more, each entity will receive a cash payment equal to 1% of such gross sales price. Since Messrs. Okonsky and James are entitled to these payments, they may have a conflict of interest in determining whether a particular Fundamental Transaction is in the best interests of our shareholders. Furthermore, these payments upon the consummation of a Fundamental Transaction may make our company less attractive to a potential acquirer or may reduce the valuation we receive in connection with a Fundamental Transaction.
Your ownership may be diluted if additional capital stock is issued to raise capital, to finance acquisitions or in connection with strategic transactions.
We intend to seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing equity or convertible debt securities in addition to the shares issued in this offering, which would reduce the percentage ownership of our existing stockholders. Our board of directors has the authority, without action or vote of the stockholders, to issue all or any part of our authorized but unissued shares of common or preferred stock. Our certificate of incorporation authorizes us to issue up to 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. Future issuances of common or preferred stock would reduce your influence over matters on which stockholders vote and would be dilutive to earnings per share. In addition, any newly issued preferred stock could have rights, preferences and privileges senior to those of the common stock. Those rights, preferences and privileges could include, among other things, the establishment of dividends that must be paid prior to declaring or paying dividends or other distributions to holders of our common stock or providing for preferential liquidation rights. These rights, preferences and privileges could negatively affect the rights of holders of our common stock, and the right to convert such preferred stock into shares of our common stock at a rate or price that would have a dilutive effect on the outstanding shares of our common stock.
General Risk Factors
If our stock price fluctuates, you could lose a significant part of your investment.
The market price of our common stock is subject to wide fluctuations in response to, among other things, the risk factors described in this filing and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us. Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock. In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
If securities or industry analysts do not publish research or reports about us, or if they adversely change their recommendations regarding our common stock, then our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our industry and our market. If no analyst elects to cover us and publish research or reports about us, the market for our common stock could be severely limited and our stock price could be adversely affected. As a small-cap company, we are more likely than our larger competitors to lack coverage from securities analysts. In addition, even if we receive analyst coverage, if one or more analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. If one or more analysts who elect to cover us issue negative reports or adversely change their recommendations regarding our common stock, our stock price could decline.
As an “emerging growth company” under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.
As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of:
For so long as we remain an emerging growth company, we will not be required to:
We intend to take advantage of all of these reduced reporting requirements and exemptions, other than the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act.
Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or CEO pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
We cannot predict if investors will find our securities less attractive due to our reliance on these exemptions. If investors were to find our common stock less attractive as a result of our election, we may have difficulty raising all of the proceeds we seek in this offering.
On October 8, 2021, we closed our initial public offering of 3,025,000 shares of common stock at a price to the public of $5.50 per share. The gross proceeds from our initial public offering, before deducting underwriting discounts and commissions, were $16.6 million. We granted the underwriters in the offering a 45-day option to purchase up to an additional 226,875 shares of common stock. The underwriters exercised this option and sold 226,875 shares of common stock at a price of $5.50 per share and we received gross proceeds of $1.1 million. The offer and sale of all of the shares in the offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-259468), which was declared effective by the SEC on October 5, 2021. Aegis Capital Corp. acted as underwriter for the offering.ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on October 8, 2021 pursuant to Rule 424(b). No direct or indirect payments were made by us to any of our directors or officers or their associates, to persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries. Pending the uses described, we intend to invest the net proceeds in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
INDEX TO EXHIBITS
Exhibit Number | Description | |
| 3.1 | Amended and Restated Certificate of Incorporation of Volcon, Inc.(incorporated by reference to exhibit 3.1 of the Form 8-K filed October 8, 2021) | |
| 3.2 | Amended and Restated Bylaws of Volcon, Inc.(incorporated by reference to exhibit 3.2 of the Form S-1 file number 333-259468) | |
| 4.1 | Form of common stock(incorporated by reference to exhibit 4.1 of the Form S-1 file number 333-259468) | |
| 4.2 | Form of Warrant issued to Pink Possum, LLC and Highbridge Consulting, LLC(incorporated by reference to exhibit 4.2 of the Form S-1 file number 333-259468) | |
| 4.3 | Form of Underwriter Warrant(incorporated by reference to exhibit 4.3 of the Form S-1 file number 333-259468) | |
| 4.4 | Form of Underwriter Warrant(incorporated by reference to exhibit 4.3 of the Form S-1 file number 333-262343) | |
| 4.5 | Form of Senior Convertible Note(incorporated by reference to exhibit 10.3 of the Form 8-K filed August 24, 2022) | |
| 4.6 | Form of Common Stock Purchase Warrant(incorporated by reference to exhibit 10.4 of the Form 8-K filed August 24, 2022) | |
| 4.7 | Placement Agent Warrant(incorporated by reference to exhibit 10.6 of the Form 8-K filed August 24, 2022) | |
| 10.1 | Securities Purchase Agreement by and among Volcon, inc. and the Buyers, dated August 22, 2022(incorporated by reference to exhibit 10.1 of the Form 8-K filed August 24, 2022) | |
| 10.2 | Registration Rights Agreement by and among Volcon, inc. and the Buyers, dated August 22, 2022(incorporated by reference to exhibit 10.2 of the Form 8-K filed August 24, 2022) | |
| 10.3 | Placement Agent Agreement(incorporated by reference to exhibit 10.5 of the Form 8-K filed August 24, 2022) | |
| 31.1* | Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of | |
| 31.2* | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of | |
| 32.1*(1) | Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of | |
| 32.2*(1) | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of | |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted in |
______________
| * | Filed herewith. |
| † | Indicates management contract or compensatory plan, contract or arrangement. |
| (1) | The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VOLCON, INC. | ||||
| SIGNATURE | TITLE | DATE | ||
| ||||
| /s/ Jordan Davis | Chief Executive Officer and Director | |||
| Jordan Davis | (principal executive officer) | |||
| /s/ Greg Endo | Chief Financial Officer | |||
| Greg Endo | (principal financial and accounting officer) |