UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, 2022

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

For the transition period from ________ to__________

Commission file number: 001-40867

Volcon, Inc.

(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.)

3121 Eagles Nest Street, Suite 120, Round Rock, TX		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 ☐

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

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

Large Accelerated Filer ☐	Accelerated Filer ☐
Non-Accelerated Filer ☒	Smaller Reporting Company ☒
	Emerging Growth Company ☒

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

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

The registrant had 24,376,260 shares of common stock outstanding at November 8, 2022.

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021(unaudited)	4
	Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	7
	Notes to the Financial Statements (unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		38

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VOLCON, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)


	September 30, 2022			December 31, 2021

ASSETS
Current assets:
Cash	$	19,997,235		$	5,572,199
Restricted cash		551,250			–
Accounts receivable		1,567,568			25,585
Inventory		2,021,955			2,209,015
Inventory deposits		919,551			1,981,397
Prepaid expenses and other current assets		803,473			1,092,860
Total current assets		25,861,032			10,881,057
Long term assets:
Property and equipment, net		609,895			809,734
Intangible assets, net		7,266			18,053
Other long-term assets		294,490			732,810
Right of use assets - operating leases		1,594,519			2,182,612

Total assets	$	28,367,202		$	14,624,265

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	475,141		$	1,454,103
Accrued liabilities		2,499,448			771,631
Accrued purchase commitments		89,744			1,506,976
Current portion of notes payable		15,755,002			17,201
Right of use operating lease liabilities, short-term		380,871			456,207
Customer deposits		58,751			2,277,607
Total current liabilities		19,258,957			6,483,725
Notes payable, net of current portion		54,927			68,785
Right of use operating lease liabilities, long-term		1,237,761			1,767,506
Total liabilities		20,551,645			8,320,017

COMMITMENTS AND CONTINGENCIES		–			–

Stockholders' equity:
Preferred stock: $0.00001 par value, 5,000,000 shares authorized, 2,900,000 shares designated, no shares outstanding		–			–
Common stock: $0.00001 par value, 100,000,000 shares authorized, 24,351,260 shares issued and outstanding as of September 30, 2022, 17,309,187 shares issued and outstanding as of December 31, 2021		198			128
Additional paid-in capital		75,752,873			47,803,643
Accumulated deficit		(67,937,514	)		(41,499,522	)
Total stockholders’ equity		7,815,557			6,304,249

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	28,367,202		$	14,624,265

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, 2022, AND 2021
(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021

Revenue	$	242,710		$	75,067		$	3,795,065		$	75,067
Cost of goods sold		2,012,829			1,176,691			11,549,871			1,176,691
Gross margin		(1,770,119	)		(1,101,624	)		(7,754,806	)		(1,101,624	)

Operating expenses:
Sales and marketing		1,282,014			1,135,205			3,942,827			1,937,745
Product development		2,177,347			3,021,207			6,775,768			7,595,581
General and administrative expenses		2,085,211			586,494			7,409,601			14,634,037
Total operating expenses		5,544,572			4,742,906			18,128,196			24,167,363

Loss from operations		(7,314,691	)		(5,844,530	)		(25,883,002	)		(25,268,987	)

Other income (expense)		33,814			(3,842	)		72,800			(9,332	)
Interest expense		(618,307	)		(42,183	)		(627,789	)		(67,521	)
Total other expense		(584,493	)		(46,025	)		(554,989	)		(76,853	)

Loss before provision for income taxes		(7,899,184	)		(5,890,555	)		(26,437,991	)		(25,345,840	)
Provision for income taxes		–			–			–			–

Net loss	$	(7,899,184	)	$	(5,890,555	)	$	(26,437,991	)	$	(25,345,840	)

Net loss per common share – basic	$	(0.32	)	$	(2.55	)	$	(1.13	)	$	(11.95	)
Net loss per common share – diluted	$	(0.32	)	$	(2.55	)	$	(1.13	)	$	(11.95	)

Weighted average common shares outstanding – basic		24,345,221			2,303,508			23,454,024			2,121,129
Weighted average common shares outstanding – diluted		24,345,221			2,303,508			23,454,024			2,121,129

The accompanying notes are an integral part of these unaudited consolidated financial statements.

VOLCON, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(Unaudited)


					Series A				Series B
	Common Stock				Preferred Stock				Preferred Stock				Additional
	Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		paid-in capital			Accumulated 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				–		–		–		–		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

The accompanying notes are an integral part of these unaudited consolidated financial statements.

VOLCON, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022

(Unaudited)

Common stock

Additional

Number

paid-in

Accumulated

of 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

18,089,117

–

18,089,184

Issuance of common stock for cashless exercise of warrants

83,552

–

Issuance of common stock for exercise of stock options and restricted shares

240,107

39,998

–

40,000

Stock-based compensation

54,623

2,642,138

–

2,642,139

Forfeiture of performance shares

(2,876

)

–

Issuance of Note Warrants and underwriter warrants, net of issuance costs of $1,003,513

–

7,177,976

–

7,177,976

Net loss

–

(26,437,991

)

(26,437,991

)

Balance at September 30, 2022

24,351,260

198

75,752,872

(67,937,513

)

7,815,557

The accompanying notes are an integral part of these unaudited consolidated financial statements.

VOLCON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)


	September 30,			September 30,
	2022			2021
Cash flow from operating activities:
Net loss	$	(26,437,991	)	$	(25,345,840	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		2,642,139			14,256,318
Loss on write down of inventory and inventory deposits		1,650,838			–
Loss on lease terminations		395,138			–
Loss on write off of property & equipment		250,369			145,000
Write off of intangible assets		6,427			–
Non-cash interest expense		614,366			58,312
Amortization of right of use assets		342,112			252,951
Depreciation and amortization		574,117			134,557
Changes in operating assets and liabilities:
Accounts receivable		(1,541,983	)		(35,663	)
Inventory		(1,463,778	)		(2,328,686	)
Inventory deposits		1,061,846			(2,940,314	)
Prepaid assets and other current assets		289,387			(238,525	)
Other assets		(29,120	)		(698,627	)
Accounts payable		(978,962	)		1,249,314
Accrued liabilities		293,626			120,322
Right of use liabilities - operating leases		(269,836	)		(194,175	)
Customer deposits		(2,218,856	)		2,278,240
Net cash provided by (used in) operating activities		(24,820,161	)		(13,286,816	)
Cash flow from investing activities:
Purchase of property and equipment		(620,290	)		(694,553	)
Purchase of intangible assets		–			(13,125	)
Net cash used by investing activities		(620,290	)		(707,678	)
Cash flow from financing activities:
Repayment of notes payable		(12,768	)		(8,488	)
Proceeds from WeFunder offering, net of offering costs of $53,500		–			2,205,440
Proceeds from issuance of Series A preferred stock, net of $205,470 of issuance costs		–			2,464,508
Proceeds from issuance of Series B preferred stock, net of $890,026 of issuance costs		–			9,615,331
Proceeds from issuance of common stock from public offering, net of issuance costs of $1,910,816		18,089,184			–
Proceeds from issuance of convertible notes, net of issuance costs of $2,312,895		15,122,345			–
Proceeds from issuance of warrants to convertible note holders, net of issuance costs of $1,003,513		7,177,976			–
Proceeds from issuance of promissory notes, net of issuance costs of $96,000		–			1,104,000
Proceeds from exercise of stock options		40,000			–
Proceeds from issuance of common stock with promissory notes, net of $65,000 of issuance costs		–			735,000
Net cash provided by financing activities		40,416,737			16,115,791

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		14,976,286			2,121,297
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		5,572,199			536,082
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	20,548,485		$	2,657,379

Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,401		$	9,209
Cash paid for income taxes	$	–		$	–

Non-cash transactions:
Recognition of initial right of use asset - operating lease	$	1,128,609		$	1,707,466
Acquisition of property and equipment with note payable	$	–		$	30,942
Conversion of SAFE liability to Series A preferred stock	$	–		$	2,000,000

The accompanying notes are an integral part of these unaudited consolidated financial statements.

VOLCON, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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, under the name Frog ePowersports, Inc. The Company was renamed Volcon, Inc. on October 1, 2020. Volcon is a developer and manufacturer of all-electric off road powersport vehicles.

On January 5, 2021, the Company created Volcon ePowersports, LLC, a Colorado wholly-owned subsidiary of the Company, to sell Volcon vehicles and accessories in the United States.

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.

In August 2022, the Company ceased manufacturing the Grunt motorcycle in Round Rock, Texas and has outsourced the manufacturing of the Grunt to a third party in Mexico. 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 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 dates.

Although management believes that the cost reduction initiatives, the estimated future proceeds that are anticipated to be generated from operations and net proceeds received from the convertible notes and warrants will be sufficient to fund the Company’s operations over the next twelve months and meet the requirements to maintain cash on deposit as specified in the convertible note agreements, there can be no assurance that the Company will not require additional funding to continue its operations for the next twelve months. There can also be no assurance that such additional funding if needed, would be available to the Company on acceptable terms, or at all.

Due to these conditions, this raises substantial doubt about the 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.

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; (ii) potential disruption to the Company’s supply chain and distribution 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 economy 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 accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United 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, 2021, which was filed with the Securities and Exchange Commission ("SEC") on March 23, 2022. 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 of September 30, 2022, and for the three and nine months ended September 30, 2022 and 2021. 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, 2021.

Basis of Presentation

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.

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 have been 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 converted at a ratio of 2.5 common shares for each preferred share outstanding upon completion of the Company’s initial public offering completed in October 2021.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of 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 Restricted 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. Restricted cash includes cash equivalents restricted as collateral for the Company’s corporate credit cards and a letter of credit with the Company’s bank. Cash and cash equivalents at September 30, 2022 is $19,997,235 and restricted cash was $551,250. There was no restricted cash as of December 31, 2021.

Revenue Recognition

For sales of the Grunt motorcycle directly to consumers, revenue was recognized when the Company transferred control of the product to the customer and the 14-day acceptance period had expired, or earlier acceptance had been received from the customer. Sales directly to consumers were completed as of June 1, 2022.

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 is 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. The 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 rebates, distributor fees, dealer co-op advertising and volume incentives. Sales promotions and incentives are estimated based on 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.

Product Warranties

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 revenue is 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 the evaluation of historical data. The Company reviews its reserves quarterly to ensure that the accruals are adequate to 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 goods sold in the statement of operations and is recognized as a current liability.

Inventory and Inventory Deposits

Inventories and prepaid 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. As of September 30, 2022, the Company is in the process of transferring its raw materials and work in process inventory for the Grunt to the third party manufacturer. This manufacturer will take title to the inventory and provide the Company with a credit towards future purchases of finished goods once it begins production. The Company has adjusted the value of these inventories to the amount of the credit the third party manufacturer has agreed to give the Company for future manufacturing of the Company’s vehicles.

Property and Equipment

Property 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 recorded using the straight-line method over the estimated useful lives of the assets as follows:


Category		Estimated Useful Lives
Machinery, tooling and equipment		3-7 years
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.

Intangible 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 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 the 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”) 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 component.

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 expenses 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 Expenses

The Company records research and development expenses in the period in which they are incurred as a component of product development expenses.

Income Taxes

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.

Fair Value of Financial 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

The Company has a stock-based incentive award plan for 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.

Recently Issued Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments in ASU 2020-06 simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Under ASU 2020-06, embedded conversion features are no longer separately reported in equity and convertible debt instruments are now accounted for as a single liability measured at amortized cost, as long as no other features require bifurcation and recognition as derivatives. These changes will reduce reported interest expense and increase reported net income for entities with convertible instruments that were bifurcated between liabilities and equity under previously existing guidance. Additionally, temporary differences between the book and tax bases resulting from the bifurcation of the embedded conversion feature under previously existing guidance have been eliminated and deferred tax assets and liabilities arising from such temporary differences will no longer be reported. The new guidance also requires the if-converted method to be used in diluted earnings per share computations for all convertible instruments and revised the if-converted method to preclude the addback of interest expense to the numerator if the principal portions of the convertible instruments are required to be settled in cash. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Until the issuance of the Convertible Notes as discussed in Note 6, ASU 2020-06 did not affect the Company as the Company did not have any instruments outstanding that would be affected by ASU 202-06. The Company adopted ASU No. 2020-06 effective with the issuance of the Convertible Notes. The adoption of ASU 2020-06 does not impact the Company’s liquidity or cash flows.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standard Board 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 – INVENTORY

Inventory consists of the following:

Schedule of inventory
	September 30, 2022		December 31, 2021
Raw materials	$	1,709,012	$	1,822,306
Work in process		118,186		45,444
Finished goods		194,757		341,265
Total inventory	$	2,021,955	$	2,209,015

The Company has recognized a loss of $1,650,838 on inventory and inventory deposits for Grunt parts for the nine months ended September 30, 2022 to reduce inventories for Grunts to their net realizable value. There were no losses recognized in the nine months ended September 30, 2021. The Company has purchase commitments for future payments due for inventory where initial deposits were paid as of September 30, 2022. The total additional payments due subsequent to September 30, 2022 are $878,511.

NOTE 4 – LONG – LIVED ASSETS

Property and Equipment

Property and equipment consist of the following:

Schedule of property and equipment
	September 30, 2022			December 31, 2021
Machinery, tooling and equipment	$	208,162		$	554,378
Vehicles		156,648			148,460
Internal use manufactured vehicles		274,385			73,500
Fixtures & furniture		50,768			75,935
Leasehold improvements		44,663			60,248
Computers		231,791			88,610
		966,417			1,001,130
Less: Accumulated depreciation		(356,522	)		(191,397	)
Total property and equipment	$	609,895		$	809,734

Depreciation expense for the three and nine months ended September 30, 2022 was $265,907 and $569,757, respectively. Depreciation expense for the three and nine months ended September 30, 2021 was $57,448 and $124,726, respectively.

Intangible Assets

Intangible assets consist of the following:


	September 30, 2022			December 31, 2021
Domain names	$	17,438		$	17,438
Software		–			13,125
		17,438			30,563
Less: Accumulated amortization		(10,172	)		(12,510	)
Total intangible assets	$	7,266		$	18,053

Amortization expense for the three and nine months ended September 30, 2022 was $1,453 and $4,360, respectively. Amortization expense for the three and nine months ended September 30, 2021 was $3,741 and $9,831, respectively.

NOTE 5 – NOTES PAYABLE

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 will 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 will make monthly payments of $753 over 48 months.

The following table provides the maturities of these notes payable as of September 30, 2022:


Remainder of 2022	$	5,921
2023		23,685
2024		23,685
2025		17,664
2026		14,654
Total future payments		85,609
Less: Interest		(12,390	)
Total notes payable		73,219
Less current portion		(18,292	)
Long-term notes payable	$	54,927

NOTE 6 - CONVERTIBLE NOTES

On August 24, 2022, the Company issued senior convertible notes with an aggregate principal amount of $27,173,913 due February 24, 2024 (“the Convertible Notes”). The Convertible Notes have a conversion price of $2.25 per share of common stock (12,077,295 total shares if fully converted) and were issued with an original issue discount of 8.0% and do not bear interest unless an event of default has occurred, upon which interest accrues at 10% per annum. The holders of the Convertible Notes can convert any portion of the principal at any time during the term of the notes. The holders of the Convertible Notes also received fully vested warrants (the “Note Warrants”) to purchase 9,057,971 shares of the Company’s common 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 has reserved shares of common stock for the total number of shares the Convertible Notes can be converted into and the total shares issuable for the exercise of the Note Warrants. The Company received net cash proceeds, after issuance costs (excluding the value of the warrants issued to the placement agent as discussed below) of $22,300,321.

The Convertible Note and Note Warrant holders (collectively the “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 number 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 Company’s outstanding shares of Common Stock 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 to 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

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 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.

The Company incurred debt issuance costs of $3,316,409, which includes $616,730 for the fair value of the warrants issued to the placement agent of the Convertible Notes as further described in Note 8. The Company allocated the net proceeds received from the issuance 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 $27,173,913 using the effective interest method and an interest rate of 39.6%. As of September 30, 2022, 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 September 30, 2022:

Summary of convertible notes
Principal amount	$	27,173,913
Unamortized discount and issuance costs		(11,437,202	)
Net carrying amount		15,736,711
Fair value (Level 2)	$	24,637,026

Interest expense recorded for the three and nine months ended September 30, 2022 was $614,366.

NOTE 7 – RELATED PARTY TRANSACTIONS

In September 2022, the Company issued purchase orders for prototype parts of $21,860 and made prepayments as of September 30, 2022 on these purchase orders of $10,930, to a vendor that Pink Possum holds an equity interest of 25%. This vendor is expected to provide additional prototype and product parts for the Stag Armageddon, an upgraded version of the Stag LE. The Stag Armageddon is expected to be released in 2024. Pink Possum loaned this vendor $80,000 in exchange for the 25% equity interest but if the loan is repaid by December 31, 2022, then Pink Possum will return the equity interest.

The Company subleased warehouse and office space on a month to month basis from a company owned by a consultant who was also the Company’s former Chief Operating Officer and his spouse. Monthly rent was $11,120 and the Company could cancel the lease with a 90-day cancellation notice. In May 2021, the consultant became a salaried employee of the Company, however, in December 2021, the employee resigned from the Company. As of December 31, 2021, the Company continued to rent the warehouse and office space under the same terms.

In January 2022, the Company executed a lease assignment with the ultimate landlord of this facility. The lease was set to expire on December 31, 2023 and the monthly lease payment was approximately $9,800. The Company paid the former Chief Operating Officer $15,317 to reimburse him for the security deposit on the lease of $9,453 plus $5,864 for leasehold improvements and equipment he installed in the facility. Total expense recognized to this related party for this lease for the three and nine months ended September 30, 2022 was zero and $11,120, respectively, and $33,360 and $100,080 for the three and nine months ended September 30, 2021, respectively. See further discussion of the termination of this lease effective September 2022 in Note 12 below.

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 had 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 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 totaled 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 would have begun at the time a certificate of occupancy was received by the landlord.

The Company evaluated the cost of this facility in relation to other lower cost options, including having a third-party manufacture the Stag, and determined that it would be in the best interest of 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 for the nine month period ended September 30, 2022.

Total amortization expense for the right of use asset recorded for the initial lease for the nine months ended September 30, 2022 was $61,709 and for the three and nine months ended September 30, 2021 was $37,025 and $111,076, respectively.

In June 2021, the Company entered into an agreement with a company controlled by the Company’s Chairman and founding stockholder to lease office space for $2,000 per month for a period of one year. Total expense recorded for this lease for the three and nine months ended September 30, 2022 was $4,000 and $16,000, respectively. In May 2022, the Company informed the landlord that it will terminate this lease, and the landlord has confirmed that the lease terminated effective September 1, 2022.

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. James, 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 4,750,000 and 6,250,000 shares, respectively, of common stock at an exercise price of $0.98. During the quarter ended March 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 5,507,575 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.

Also see “Note 8 -- Stockholders’ Equity” for a further discussion of the warrants issued to Pink Possum and Highbridge.

NOTE 8 – STOCKHOLDERS’ EQUITY

The Company is authorized to issue up to 100,000,000 shares of common stock with a par value of $0.00001. In addition, the Company is authorized to issue 5,000,000 shares of preferred stock with a par value of $0.00001. The specific rights of the preferred stock, when so designated, shall be determined by the board of directors.

Common Stock

In October 2021, the Company completed its initial public offering and sold 3,251,875 shares of common stock for net proceeds of approximately $15.9 million. Total issuance costs were $2,949,882 including the issuance of fully vested warrants to purchase 162,594 shares of the Company’s common stock with a five year exercise term at an exercise price of $6.88 per share to the underwriter of the initial public offering which were valued at $981,871. Upon completion of the initial public offering all shares of preferred stock were converted to common stock. The total shares of common stock issued upon conversion of preferred stock were 5,743,175.

On February 1, 2022, the Company sold 6,666,667 shares of its common stock in a public offering at $3.00 per share. The Company received net proceeds of $18,089,117 after underwriter commissions and expenses of $1,910,816. The underwriter was also issued a warrant to purchase 333,334 shares of the Company’s common stock at an exercise price of $3.75 per share that expires five years from the date of issuance.

The underwriting agreement provided the underwriter with the option to sell an additional 1,000,000 shares (the “Overallotment”) which could be sold for up to 45 days subsequent to the completion of the offering at $3.00 per share. The underwriter did not exercise the option for the Overallotment.

The Company’s officers and directors agreed not to sell any shares for 90 days following this offering. The Company has agreed not to issue any shares for a period of twelve months following the offering, other than for the purposes of shares issued related to the 2021 Plan (as defined below) or for an acquisition or merger, without the consent of the underwriter.

As discussed in Note 6 above, the Company issued the Convertible Notes and Note Warrants, along with the warrants to the placement agent in August 2022. The Company received consent from the underwriter to issue such securities. In addition, the Company was required to reserve 21,135,267 shares of common stock for future issuance of shares for the conversion of the Convertible Notes and exercise of the Note Warrants and 603,864 shares for the exercise of the placement agent warrants.

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 424,269 shares of Series A preferred stock.

In January 2021, the Company completed a WeFunder SAFE offering which was convertible into shares of the Company’s preferred stock upon specified 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 351,832 shares of Series A preferred stock.

Preferred Stock

In 2021, the Company designated 1,400,000 shares of preferred stock as Series A preferred stock. The Series A preferred stock had a par value of $0.00001, had no voting rights, no dividends and each share would automatically convert into 2.5 shares of common stock of the Company at the time of the Company’s initial public offering. In February 2021, the Company completed an offering of 415,287 shares of Series A preferred stock and received gross proceeds of $2,669,974. The Company paid expenses of $205,470 related to the offering including issuing to one financial broker dealer 79,750 shares of common stock and 79,775 fully vested warrants with a 5 year exercise term to purchase common stock with an exercise price of $2.57 valued at $49,743.

In 2021, the Company designated 1,500,000 shares of preferred stock as Series B preferred stock, with a par value of $0.00001 per share and a stated value of $9.50 per share. The Series B preferred stock would receive dividends equivalent to any such dividends paid on common stock in the future, had no voting rights, and each share would automatically convert into 2.5 shares of common stock upon completion of the Company’s initial public offering. As of March 31, 2021, the Company completed the sale of 457,688 shares of Series B preferred stock and received gross proceeds of $4,347,495 and paid expenses of $70,802. In May 2021, the Company completed the remaining sale of 648,139 shares of Series B preferred stock and received gross proceeds of $6,157,842 for these shares and paid expenses of $819,224. The Company issued 123,296 shares of common stock and 197,277 fully vested warrants to purchase common stock with a 5 year exercise term and an exercise price of $3.80 valued at $182,281 to two financial brokers who assisted the Company with this offering.

As noted above, 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 in October 2021.

Warrants

During the year ended December 31, 2021, the Company issued fully vested warrants to purchase 150,000 shares of the Company’s common stock to consultants with exercise prices ranging from $0.245 - $1.00 which expire 10 years from the date of issuance. The Company valued the warrants using an estimated fair value of the shares of common stock between $0.76 – $1.18, volatility of 105% based on peer companies, risk free interest rate of 0.85%, no dividends and an estimated life of 5 years. During the year ended December 31, 2021, certain warrant holders, including those from the Series A and Series B preferred stock offerings, exercised warrants representing 317,018 shares of common stock, primarily on a cashless basis, and the Company issued 236,220 shares of common stock as settlement for these warrants. Total proceeds received from warrant exercises occurring in the year ended December 31, 2021 was $6,250.

Entities controlled by the Company’s two founders, who were both directors and one of which was the Chairman of the Board at the time these agreements were entered into, 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 Highbridge and Pink Possum for a total of 11,000,000 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 Highbridge and Pink Possum, 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, Highbridge and Pink Possum 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. In December 2021, Highbridge exercised its warrants on a cashless basis and the Company issued 5,507,575 shares of common stock. As of July 26, 2022, this founder is no longer on the board of directors but does hold board observer rights.

As discussed in Note 6, the Company issued the Note Warrants, which are fully vested, to purchase 9,057,971 shares of the Company’s common stock at an exercise price of $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 to purchase 603,864 shares of the Company’s common stock at an exercise price of $3.5625. The warrants are not exercisable until February 24, 2023 and expire on February 24, 2028. The Company valued all of these warrants using the closing price of the Company’s common stock on August 24, 2022 of $2.44, volatility of 79.81% based on peer companies, risk free interest rate of 3.03%, no dividends and an estimated life of 2.5 years.

During three and nine months ended September 30, 2022, the Company recognized expense of $0 and $7,302, respectively, and during the three and nine months ended September 30, 2021, the Company recognized expense of $151,720 and $13,274,861, respectively, related to common stock warrants. No additional expense will be recognized in the future for any warrants outstanding as of September 30, 2022.

The following is the activity related to common stock warrants during the nine months ended September 30, 2022:

Schedule of warrant activity
	Common Stock Warrants
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Life in years		Intrinsic Value

Outstanding at January 1, 2022		5,174,209		$	1.16
Granted		9,995,169		$	2.92
Cancelled		–		$	–
Expired		–		$	–
Exercised		(83,760	)	$	0.004
Outstanding at September 30, 2022		15,085,618		$	2.33		6.05	$	4,895,647
Exercisable at September 30, 2022		15,085,618		$	2.33		6.05	$	4,895,647

NOTE 9 – STOCK-BASED COMPENSATION

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 initially reserved a total of 3,000,000 shares of the Company’s common stock for issuance under the 2021 Plan. On July 26, 2022, the Company’s stockholders approved an increase of 4,000,000 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, 2022, were 2,987,808 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.

Restricted Stock Units

The following is the restricted stock unit activity for the nine months ended September 30, 2022:


Outstanding January 1, 2022	$	350,000
Granted		35,000
Vested		(185,000	)
Canceled		(50,000	)
Outstanding September 30, 2022	$	150,000

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 25,000 RSUs to the holders of these RSUs that vesting was extended and these additional RSUs would also vest as of May 15, 2022. The Company recorded additional expenses of $1,126,250 during the nine months ended September 30, 2022, related to these modifications. The remaining 25,000 shares that were vested as of December 31, 2021 were issued in January 2022. In January 2022, the Company granted 10,000 RSUs that vested over 3 months (vesting began in December 2021), to a consultant.

The Company recognized expenses for RSUs of $35,325 and $1,232,135 (including the amounts noted above), for the three and nine months ended September 30, 2022, respectively, and $(18,568) and $179,795 for the three and nine months ended September 30, 2021, respectively. The Company expects to recognize additional compensation expenses of $157,090 related to RSUs assuming all awards outstanding at September 30, 2022 will vest.

Performance Shares

In January 2021, the board of directors authorized 250,000 common shares to be reserved under the 2021 Plan for issuance to employees upon achieving multiple Company performance milestones. The allocation of the number of shares to be awarded was to be determined upon achievement of all the milestones. In July 2021, the Compensation Committee of the board of directors approved a grant of 162,507 shares since some of the performance milestones were met. The Company recognized share-based compensation expenses of $594,775 related to the grant of these shares.

The remaining 87,493 shares not awarded in July 2021 were available for issuance to employees as of December 31, 2021 based upon achieving multiple Company performance milestones for the second half of 2021. On March 1, 2022, the Compensation Committee of the board of directors approved a grant of 44,623 shares for the achievement of some of the Company’s performance milestones, and the Company recognized share-based compensation expenses of $82,050 related to the grant of these shares in the quarter ended March 31, 2022. Certain individuals whose employment terminated subsequent to December 31, 2021 forfeited their share grants totaling 2,876 shares and such shares are available for future issuance under the 2021 Plan.

Stock Options

The following summarizes activity relating to common stock options to employees and consultants for services during the nine months ended September 30, 2022:

Schedule of stock option activity
	Common Stock Options
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Life in years	Intrinsic Value
Outstanding at January 1, 2022		1,964,045		$	3.33
Granted		2,221,454		$	3.44
Forfeited		(722,561	)	$	4.22
Exercised		(55,107	)	$	1.00
Outstanding at September 30, 2022		3,407,831		$	3.21		$
Exercisable at September 30, 2022		586,417

SEC Form 10-Q filed by Volcon Inc.