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, 2023

☐	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 6,819,278 shares of common stock outstanding at October 30, 2023.

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)	4
	Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2023 and 2022 (unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)	7
	Notes to the Financial Statements (unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	46
Signatures		48

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VOLCON, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)


	September 30, 2023			December 31, 2022

ASSETS
Current assets:
Cash	$	2,425,820		$	10,986,592
Restricted cash		551,250			551,250
Accounts receivable, net of allowance for doubtful accounts of $118,689 and $62,451 at September 30, 2023 and December 31, 2022, respectively		206,447			864,957
Inventory		7,051,537			5,645,883
Inventory deposits		406,743			427,662
Prepaid expenses and other current assets		2,807,355			1,850,666
Total current assets		13,449,152			20,327,010
Long term assets:
Property and equipment, net		1,264,166			601,766
Intangible assets, net		1,453			5,813
Other long-term assets		199,281			285,037
Right-of-use assets - operating leases		1,231,092			1,505,987
TOTAL ASSETS	$	16,145,144		$	22,725,613

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3,470,898		$	1,036,628
Accrued liabilities		1,809,092			2,045,239
Exercised Warrants - Shares to be issued		537,250			–
Accrued Purchase commitments		–			28,600
Current portion of notes payable		14,910			18,670
Convertible notes, net of issuance costs		29,709,960			17,353,748
Right-of-use operating lease liabilities, short-term		423,849			391,117
Customer deposits		201,005			23,471
Total current liabilities		36,166,964			20,897,472
Notes payable, net of current portion		73,099			50,116
Right-of-use operating lease liabilities, long-term		845,117			1,143,011
Total liabilities		37,085,180			22,090,599

COMMITMENTS AND CONTINGENCIES		–			–

Stockholders' (deficit) equity:
Preferred stock: $0.00001 par value, 5,000,000 shares authorized, no shares outstanding		–			–
Common stock: $0.00001 par value, 250,000,000 shares authorized, 6,403,166 shares issued and outstanding at September 30, 2023 and 100,000,000 shares authorized, 4,885,252 shares issued and outstanding as of December 31, 2022		63			48
Additional paid-in capital		96,450,387			76,369,892
Accumulated deficit		(117,390,486	)		(75,734,927	)
Total stockholders’ (deficit) equity		(20,940,036	)		635,013

TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY	$	16,145,144		$	22,725,613

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, 2023, AND 2022
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022

Revenue	$	487,430		$	242,710		$	2,177,188		$	3,795,065
Cost of goods sold		(3,542,468	)		(2,012,829	)		(5,107,096	)		(11,549,871	)
Gross margin		(3,055,038	)		(1,770,119	)		(2,929,908	)		(7,754,806	)

Operating expenses:
Sales and marketing		1,870,532			1,282,014			6,040,519			3,942,827
Product development		2,983,197			2,177,347			5,936,280			6,775,768
General and administrative expenses		1,544,344			2,085,211			5,003,135			7,409,601
Total operating expenses		6,398,073			5,544,572			16,979,934			18,128,196

Loss from operations		(9,453,111	)		(7,314,691	)		(19,909,842	)		(25,883,002	)

Other income (expense)		(54,702	)		33,814			(38,199	)		72,800
Loss on extinguishment of Convertible Notes		–			–			(22,296,988	)		–
Gain (loss) on change in fair value of financial liabilities		(684,994	)		–			5,107,794			–
Interest expense		(1,135,089	)		(618,307	)		(4,518,324	)		(627,789	)
Total other expense		(1,874,785	)		(584,493	)		(21,745,717	)		(554,989	)

Loss before provision for income taxes		(11,327,896	)		(7,899,184	)		(41,655,559	)		(26,437,991	)
Provision for income taxes		–			–			–			–

Net loss	$	(11,327,896	)	$	(7,899,184	)	$	(41,655,559	)	$	(26,437,991	)

Net loss per common share – basic	$	(1.84	)	$	(1.62	)	$	(7.57	)	$	(5.64	)
Net loss per common share – diluted	$	(1.84	)	$	(1.62	)	$	(7.57	)	$	(5.64	)

Weighted average common shares outstanding – basic		6,162,589			4,869,044			5,502,512			4,690,805
Weighted average common shares outstanding – diluted		6,162,589			4,869,044			5,502,512			4,690,805

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

VOLCON, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023
(Unaudited)


	Common stock				Additional
	Number				paid-in		Accumulated
	of Shares		Amount		capital		deficit			Total

Balance at January 1, 2023		4,885,252	$	48	$	76,369,892	$	(75,734,927	)	$	635,013

Issuance of common stock for exercise of stock options and vesting of restricted stock		10,000		–		25,000		–			25,000

Issuance of common stock for public offerings, net of issuance costs of $629,900		1,480,000		15		4,570,085		–			4,570,100

Stock-based compensation		27,772		–		2,223,356		–			2,223,356

Reclassification of derivative liabilities to equity		–		–		13,262,055		–			13,262,055

Shares issued for rounding due to reverse stock split		142		–		–		–			–

Net loss		–		–		–		(41,655,559	)		(41,655,559	)

Balance at September 30, 2023		6,403,166	$	63	$	96,450,387	$	(117,390,486	)	$	(20,940,036	)

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

VOLCON, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022

(Unaudited)

	Common stock					Additional
	Number of					paid-in		Accumulated
	Shares			Amount		capital		Deficit			Total

Balance at January 1, 2022	3,461,837		$	35	$	47,803,736	$	(41,499,522	)	$	6,304,249

Issuance of common stock for public offering, net of issuance costs of $1,910,816	1,333,334			13		18,089,171		–			18,089,184

Issuance of common stock for cashless exercise of warrants	16,711			–		–		–			–

Issuance of common stock for exercise of stock options and restricted stock	48,022			–		40,000		–			40,000

Stock-based compensation	10,925			–		2,642,139		–			2,642,139

Forfeiture of performance shares	(576	)		–		–		–			–

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	4,870,253		$	48	$	75,753,022	$	(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, 2023 AND 2022
(Unaudited)


	September 30,			September 30,
	2023			2022
Cash flow from operating activities:
Net loss	$	(41,655,559	)	$	(26,437,991	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on extinguishment of convertible notes		22,296,988			–
Gain on change in fair value of financial liabilities		(5,107,794	)		–
Stock-based compensation		2,223,356			2,642,139
Loss on write down of inventory and inventory deposits		1,786,365			1,650,838
Loss on lease terminations		85,756			395,138
(Gain) loss on sale/write off of property & equipment		(6,423	)		250,369
Bad debt expense		66,990			–
Write off of intangible assets		–			6,427
Non-cash interest expense		4,516,041			614,366
Amortization of right-of-use assets		274,895			342,112
Depreciation and amortization		173,803			574,117
Changes in operating assets and liabilities:
Accounts receivable		591,520			(1,541,983	)
Inventory		(3,192,019	)		(1,463,778	)
Inventory deposits		20,919			1,061,846
Prepaid assets and other current assets		(956,689	)		289,387
Other assets		–			(29,120	)
Accounts payable		2,434,270			(978,962	)
Accrued liabilities		(264,747	)		293,626
Right-of-use liabilities - operating leases		(265,161	)		(269,836	)
Customer deposits		177,534			(2,218,856	)
Net cash provided by (used in) operating activities		(16,799,955	)		(24,820,161	)
Cash flow from investing activities:
Purchase of property and equipment		(818,399	)		(620,290	)
Proceeds from sale of vehicles		89,000			–
Net cash used by investing activities		(729,399	)		(620,290	)
Cash flow from financing activities:
Repayment of notes payable		(76,801	)		(12,768	)
Proceeds from issuance of common stock from public offerings, net if issuance costs of $629,900		4,570,100			–
Proceeds from issuance of convertible notes and warrants, net of issuance costs of $586,968		3,913,033			–
Proceeds from exercise of warrants		537,250
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 exercise of stock options		25,000			40,000
Net cash provided by financing activities		8,968,582			40,416,737

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	$	(8,560,772	)	$	14,976,286
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		11,537,842			5,572,199
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	2,977,070		$	20,548,485

SUPPLEMENTAL CASH FLOW INFORMATION


	2023		2022
Supplemental disclosure of cash flow information:
Cash paid for interest	$	6,474	$	4,401
Cash paid for income taxes	$	–	$	–

Non-cash transactions
Recognition of initial right-of-use asset - operating lease	$	–	$	1,128,609
Acquisition of property and equipment with note payable	$	96,024	$	–

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 designs and sells all-electric off-road powersport vehicles.

On January 5, 2021, the Company created Volcon ePowersports, LLC (“Volcon LLC ''), a Colorado wholly-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.

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 Company received net proceeds of approximately $3.9 million for the issuance of additional convertible notes in May 2023 due February 2024 (“New Notes”) and warrants. On the issuance date of the New Notes, the Company exchanged the Convertible Notes for Series A and Series B notes (collectively the “Exchange Notes). The Exchange Notes require the Company to have unrestricted and unencumbered cash on deposit of $10 million if the outstanding principal (and interest, if any) of the Exchange Notes is $15,000,000 or greater as of December 31, 2023 (the September 30, 2023 requirement under the Convertible Notes was removed). The cash on deposit requirement is reduced dollar for dollar to the extent the outstanding principal (and interest, if any) of the Exchange Notes is less than $15 million on this date. The Company also exchanged the warrants issued with the Convertible Notes for new warrants (the “Exchange Warrants”) (see Note 6 for further discussion).

On September 14, 2023, the holders of the New Notes and Exchange Notes (collectively the “May 2023 Notes”) entered into an agreement to modify the terms to extend the due date to January 31, 2025. In addition, the requirement to have unrestricted and unencumbered cash on deposit of $10 million if the outstanding principal (and interest, if any) of the Exchange Notes is $15 million or greater as of December 31, 2023 was amended to reduce the unrestricted and unencumbered cash on deposit to $5 million if the outstanding principal (and interest, if an) of the Exchange Notes is $15 million or greater as of June 30, 2024. The cash on deposit requirement is reduced dollar for dollar to the extent the outstanding principal (and interest, if any) of the Exchange Notes is less than $15 million on this date. In addition, the Company must sell 250 units of its Stag UTV by December 31, 2023. The Company may factor up to $10 million of its accounts receivables provided the factoring lender executed a subordination and intercreditor agreement on terms acceptable to the holders of the May 2023 Notes, which was completed on October 17, 2023. The Company was also required to perfect a security interest in the assets of the Company no later than September 22, 2023, which the Company has completed.

In May 2023, the Company received net proceeds of approximately $4.0 million for the issuance of 1,200,000 shares of common stock at $3.75 per share.

On September 18, 2023, the Company received net proceeds of approximately $571,400 for the issuance of 280,000 shares of common stock at $2.50 per share.

In a series of warrant inducement transactions from September 29, 2023 to October 30, 2023, as more fully discussed below, the Company raised $1,027,495.

Management anticipates that our cash on hand as of September 30, 2023 plus, the cash received from the warrant inducements, and cash expected to be generated from operations will not be sufficient to fund planned operations and maintain required cash balances for the Exchange 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, 2023. There can be no assurance that additional funding, if needed, 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. The consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.

Nasdaq Compliance

On July 5, 2023, the Company received a notice from Nasdaq that it was not in compliance with Nasdaq’s Listing Rule 5550(b)(2), which requires that it maintain a market value of listed securities (“MVLS”) of $35 million. MVLS is calculated by multiplying the Company’s shares outstanding by the closing price of its common stock. On July 6, 2023, the Company received a notice from Nasdaq that it was not in compliance with Nasdaq’s Listing Rule 5550(a)(2), as the minimum bid price of its common stock had been below $1.00 per share for 30 consecutive business days. On October 30, 2023, the Company received a notice from Nasdaq that it has now regained compliance with Rule 5550(a)(2), as the minimum bid price of its common stock was above $1.00 for 10 consecutive business days.

The Company has until January 2, 2024, to regain compliance with the MVLS requirement. To regain compliance with the MVLS requirement, the Company’s MVLS must close at $35 million or more for a minimum of ten consecutive business days during this grace period. While the Company may be able to qualify for additional time to attempt to regain compliance, there can be no assurance that it will qualify for additional time to regain compliance, or that it will regain compliance with or without such additional time. If the Company does not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company’s shares of common stock will be subject to delisting.

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.

Impact of the United Auto Workers Union Strike

On September 15, 2023, the United Auto Workers Union went on strike. This strike could cause a disruption to the Company’s supply chain, specifically General Motors’ ability to supply batteries and drive train components used in the Stag UTV. Shortages of these components could have an impact on our ability to produce vehicles to meet our customers’ demands.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Information

The accompanying interim 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, 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 of September 30, 2023, and for the three and nine months ended September 30, 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 Presentation

As discussed in Note 14, the Company completed a reverse 1 for 5 stock split on October 13, 2023, all share and per share amounts have been adjusted to reflect the impact of this reverse stock split.

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.

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. There were no cash equivalents as of September 30, 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.

Revenue Recognition

For sales of the Grunt motorcycle directly to consumers, revenue was recognized when the Company transferred control of the product to the consumer and the 14-day acceptance period had expired, or earlier acceptance had been received from the consumer. Sales directly to consumers were completed as of June 1, 2022. Beginning in February 2023 the Company began selling the Brat E-Bike and Volcon Youth motorcycles 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 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 presently 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 goods sold 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 the Company’s 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. In May 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 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 expenses 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 basis 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

ASC Topic 820 Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.

ASC Topic 820 defines fair value as 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. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:

	·	Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
	·	Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
	·	Level 3 — Inputs that are unobservable for the asset or liability.

The following section describes the valuation methodologies that the Company used to measure different financial instruments at fair value.

Debt

The fair value of the Company’s debt approximated the carrying value of the Company’s debt as of September 30, 2023 and December 31, 2022. Factors that the Company considered when estimating the fair value of its debt included market conditions, and term of the debt. The level of the debt would be considered as Level 2.

The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.

The Company accounts for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”), and all derivative instruments are reflected as either assets or liabilities at fair value on the consolidated balance sheets. The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between able and willing market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC Topic 820, based on the hierarchical framework associated with the three levels or price transparency utilized in measuring financial instruments at fair value as discussed above.

Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e., at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.

Initial Measurement

The Company records its financial instruments classified as a liability, temporary equity or permanent equity at issuance at the fair value, or cash received.

Subsequent Measurement - Financial instruments classified as liabilities

The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other expense/income. The Monte Carlo simulation is used to determine the fair value of derivatives for instruments with embedded conversion features and for free standing warrants as discussed further in Note 7.

Additional Disclosures Regarding Fair Value Measurements

The carrying value of cash, accounts receivable, inventory, other assets, and accounts payable and accrued expenses approximate their fair value due to the short-term maturity of those items.

Warrant Liabilities and Convertible Liabilities

The fair value of the derivative liabilities is classified as Level 3 within the Company’s fair value hierarchy. Please refer to Note 7, Derivative Instruments, for further discussion of the measurement of fair value of the derivatives and their underlying assumptions.

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.

Concentration Risk

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 Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective January 1, 2023. The Company determined that the update applied to trade receivables, but that there was no material impact to the consolidated financial statements from the adoption of ASU 2016-13.

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, 2023		December 31, 2022
Raw materials	$	3,561,150	$	3,060,160
Work-in-process		–		439,839
Finished goods		3,490,387		2,145,884
Total inventory	$	7,051,537	$	5,645,883

The Company has purchase commitments for future payments due for inventory where initial deposits were paid as of September 30, 2023. The total additional payments due subsequent to September 30, 2023 are $252,548. In June 2023, the Company wrote down all remaining Torrot branded inventory in the amount of $84,000. In September 2023, the Company wrote down the Volcon co-branded Torrot youth motorcycles in the amount of $1,622,262 to reduce their cost to the estimated net realizable value.

NOTE 4 – LONG – LIVED ASSETS

Property and Equipment

Property and equipment consist of the following:

Schedule of property and equipment
	September 30, 2023			December 31, 2022
Machinery, tooling and equipment	$	1,011,351		$	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
		1,869,593			1,107,272
Less: Accumulated depreciation		(605,427	)		(505,506	)
Total property and equipment	$	1,264,166		$	601,766

Depreciation expense for the three and nine months ended September 30, 2023 was $65,725 and $169,443, respectively. Depreciation expense for the three and nine months ended September 30, 2022 was $265,907 and $569,757, respectively.

NOTE 5 – 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 was 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 was 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 March 2023, the Company entered into two financing arrangements to purchase two vehicles. The total principal of these arrangements is $96,024 with interest rates of 11.44% and 8.63% and monthly payments totaling $1,923 are due through January 2028 and $908 per month until February 2029.

The following table provides the maturities of notes payable as of September 30, 2023:


Remainder of 2023	$	5,768
2024		23,073
2025		23,073
2026		23,073
2027		23,073
2028		12,927
2029		1,816
Total future payments		112,803
Less: Interest		(24,794	)
Total notes payable		88,009
Less current portion		(14,910	)
Long-term notes payable	$	73,099

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 had an initial conversion price of $11.25 per share of common stock (2,415,459 total shares if fully converted) and were issued with an original issue discount of 8.0% and did not bear interest unless an event of default occurred, upon which interest would have accrued at 10% per annum. The holders of the Convertible Notes could have converted 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 1,811,595 shares of the Company’s common stock at an initial exercise price of $14.25 per share. The conversion and warrant exercise prices were subject to adjustment if the Company declared a stock dividend, stock split or recapitalization. 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.

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 recorded non-cash interest expense through May 24, 2023 (see below for discussion of issuance of additional convertible notes) to accrete the allocated value of the Convertible Notes using the effective interest method and an interest rate of 39.6%. The Company incurred debt issuance costs of $3,316,409 upon issuance of the Convertible Notes, 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 9. These debt issuance costs were amortized as additional interest expense through May 24, 2023. Total interest expense for the Convertible Notes for the three and nine months ended September 30, 2023 was zero0 and $2,913,632, respectively, prior to the recognition of the unamortized discount and issuance costs upon issuance of the additional senior convertible notes noted below. Substantially all of the assets of the Company are collateral for the Convertible Notes.

On May 24, 2023, the Company issued additional senior convertible notes (“New Notes'') with an aggregate principal amount of $4,934,783 due February 24, 2024 to the same investors of the Convertible Notes. The New Notes had an initial conversion price of $12.70 per share of common stock, which was subject to adjustment to $3.75 upon stockholder approval (1,315,942 total shares if fully converted at $3.75 per share, stockholder approval was received on August 3, 2023). The conversion price is also subject to further adjustment if the Company completes an equity or convertible note offering with a price below $3.75, or completes a stock split, reverse stock split or recapitalization where the lowest day’s volume weighted average price (“VWAP”) of the Company’s stock price is below $3.75 in the five days following the stock split, with a floor price of $0.22 (subject to stockholder approval, which was obtained on August 3, 2023). The conversion price is also subject to further adjustment if the Company completes an equity or convertible note offering with a price below $3.75. The New Notes were issued with an original issue discount of 8.8% and do not bear interest unless an event of default has occurred, upon which interest accrues at 10% per annum.

The holders of the New Notes also received fully vested warrants (the “New Warrants”) to purchase 1,086,957 shares of the Company’s common stock at an initial exercise price of $5.45 per share.

Concurrent with the issuance of the New Notes, the Company exchanged the Convertible Notes into two new notes, Series A Notes and Series B Notes both due February 24, 2024 (collectively the “Exchange Notes” and collectively with the New Notes the “May 2023 Notes”). The aggregate principal amount of Series A Notes is $3,690,422 and these are convertible into the Company’s common stock at an initial conversion price of $3.75 per share (984,113 total shares if fully converted). The aggregate principal amount of the Series B Notes is $23,483,491 and were initially convertible into the Company’s common stock at an initial conversion price of $5.45 per share (4,308,898 total shares if fully converted) but were subject to adjustment to $3.75 upon stockholder approval (6,262,265 total shares if fully converted at $3.75 per share), which approval was received on August 3, 2023.

In September 2023, the holders of the May 2023 Notes agreed to modify the due date of these notes to January 31, 2025. In October 2023, the conversion price of the Notes and exercise price of the Warrants were reduced to $1.369 per share. See discussion of further modifications below.

The Company completed a public offering and sold 280,000 shares of common stock at $2.50 per share. The holders of the May 2023 Notes waived their right to reduce the conversion price to the equity issuance price and agreed to reduce the conversion price to $2.75 per share (11,675,892 total shares if fully converted at $2.75 per share).

The May 2023 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 Series A and Series B Notes at any time if the weighted average price of the Company’s common stock for ten consecutive trading days equals or exceeds $5.85 or $8.45, respectively, subject to the share limitations described above. In addition to default interest of 10% accruing on the May 2023 Notes, the holders may require the Company to redeem a portion or all of the outstanding May 2023 Notes.

Events of default for the May 2023 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 28, 2023)
	·	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 May 2023 Notes and May 2023 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 May 2023 Notes and Exchange 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 May 2023 Notes
	·	Electronic transfer of shares of the Company’s common stock is not available

As of September 30, 2023, the Company is in compliance with all covenants. The May 2023 Notes originally required the Company to have unrestricted and unencumbered cash on deposit of $10 million if the outstanding principal (and interest, if any) of the May 2023 Notes is $15 million or greater as of 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 May 2023 Notes is less than $15 million on December 31, 2023.

In September 2023, the note holders modified this requirement to change the date from December 31, 2023 to June 30, 2024 and reduced the cash on deposit requirement to $5 million. All other provisions for this cash on deposit requirement remain unchanged. The holders also included a new requirement that the Company sell at least 250 units of its Stag utility terrain vehicle by December 31, 2023 or the Company would be in default on the Notes.

The Company also exchanged the 1,811,595 Note Warrants with an exercise price of $14.25 per share issued with the Convertible Notes in August 2022 for 3,411,596 warrants which had an initial exercise price of $5.45 per share (the “Exchange Warrants”), and which exercise price was adjusted to $3.75 per share upon stockholder approval, which approval was received on August 3, 2023. The Exchange Warrants expire August 24, 2027.

The conversion prices of the Exchange Notes, and the exercise prices of the New Warrants and Exchange Warrants (collectively the “May 2023 Warrants”) are subject to further adjustment in the event that the Company issues additional common stock, stock options, warrants or convertible notes with prices below $3.75 per share, or completes a stock split, reverse stock split or recapitalization where the lowest day’s VWAP of the Company’s stock price is below $3.75 in the five days following the stock split with a floor of $0.22 per share. As discussed above, in September 2023 the Company completed a public offering of 280,000 shares of its common stock at $2.50 per share. The exercise price of the May 2023 Warrants were reduced to $2.50 per share as a result of the public offering.

Also in September 2023, the Company and the holders of the Exchange Warrants entered into a warrant inducement agreement whereby the Exchange Warrant holders agreed to exercise 307,001 Exchange Warrants at a reduced exercise price of $1.75 per share. The Company issued the holders 307,001 warrants (“Reload Warrants”) with an exercise price of $2.50 per share. The Reload Warrants are immediately exercisable for unregistered shares of the Company’s common stock and have the same terms as the May 2023 Warrants and expire August 24, 2027. The Company recognized equity issuance costs of $216,855 for the issuance of the Reload Warrants.

As discussed in Note 14, the Company completed a 1 for 5 reverse stock split on October 13, 2023 and the lowest day’s VWAP in the five days following the reverse split was $1.369 per share and the conversion price of New Notes and Exchange Notes, and the exercise price of the New Warrants and Exchange Warrants were reduced to $1.369 per share effective October 20, 2023.

Holders of the May 2023 Notes, the May 2023 Warrants and Reload Warrants (collectively the “Holders”) do not have voting rights to the extent they have not converted their notes or exercised their warrants.

The May 2023 Warrants and Reload Warrants contain certain conversion limitations, providing that a holder thereof may not exercise such warrants 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 May 2023 Warrants and Reload Warrants provide the holders the right to exercise these 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 has evaluated the issuance of the New Notes and Exchange Notes and related warrants and has determined that the Convertible Notes were extinguished based on the conclusion that the terms of the New Notes and Exchange Notes are substantially different from the Convertible Notes in accordance with ASC 470, Debt. In addition, the Company has recognized a loss on the extinguishment of the Convertible Notes based on the carrying value of the Convertible Notes at the transaction date, plus gross proceeds received from the issuance of New Notes and New Warrants, less the fair value of the i) New Notes and conversion option, ii) New Warrants, iii) Exchange Notes and conversion options, and iv) Exchange Warrants. The resulting loss on extinguishment was $22,296,988, which includes the unamortized issuance costs of $1,330,296 of the Convertible Notes as of the date of the issuance of the New Notes. The fair value of the May 2023 Notes were estimated based on the future cash flows discounted at an interest rate of 14.9%. The May 2023 Notes were recorded at their initial fair values as follows:


	Fair Value		Principal Amount
New Notes	$	4,410,058	$	4,934,783
Series A Exchange Notes		3,298,012		3,690,422
Series B Exchange Notes		20,986,449		23,483,891
Total May 2023 Notes	$	28,694,519	$	32,109,096

The Company recognized interest expense of $958,640 and $1,364,993 in the three and nine months ended September 30, 2023 for the accretion of the discount on the May 2023 Notes during the periods.

The Company estimated the fair value of the conversion features of the New Notes, Exchange Notes, New Warrants and Exchange Warrants as of May 24, 2023 as discussed in Note 7 below.

The Company incurred debt issuance costs of $586,968 upon issuance of the New Notes and New Warrants. The Company will amortize these issuance costs as additional interest expense over the remaining term of the New Notes. The Company recognized interest expense of $172,194 and $237,416 for the amortization of these issuance costs for the three and nine months ended September 30, 2023.

As of September 30, 2023, there were no conversions of the May 2023 Notes.

NOTE 7 - DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 6, the Company recognized a loss on the extinguishment of the Convertible Notes based on the fair values of the New Notes including the conversion feature, New Warrants, Exchange Notes and conversion feature and Exchange Warrants. The Company determined that there was a derivative liability associated with the conversion features in the New Notes and Exchange Notes due to the variable conversion price subject to stockholder approval in the conversion feature. Therefore, the Company has separated conversion features from the New Notes and Exchange Notes and has recorded them at fair value and will continue to adjust them to fair value until the conversion price is fixed. The Company has also determined that the New Warrants and Exchange Warrants are derivative liabilities due to the potential adjustment in the exercise prices. The Company has accounted for the New Warrants and Exchange Warrants as liabilities at fair value and will continue to adjust them to fair value until the exercise prices are fixed.

The fair value of the conversion features and warrant liabilities were calculated using a Monte Carlo simulation and the following assumptions and methodologies:

Schedule of assumptions
	May 24, 2023		August 3, 2023
Conversion Feature Liabilities
Company stock price on valuation date	$	0.70	$	0.551
Volatility (closing prices of guideline comparable public companies)		86.3%		84.1%
Conversion price per share	$	0.75	$	0.75
Note term (years)		0.76		0.56
Risk free interest rate		5.1%		5.4%
Warrant Liabilities
Company stock price on valuation date	$	0.70	$	0.551
Volatility (closing prices of guideline comparable public companies)		119.2%		115.0%
Conversion price per share	$	0.75	$	0.75
Warrant term (years)		4.25		4.06
Risk free interest rate		3.8%		4.3%

In addition to the above factors, the Company also used a probability assessment for the initial and June 30, 2023 valuation to evaluate whether stockholder approval would be received to lower the conversion and exercise prices. The Company utilized a 50/50 assessment that stockholders would or would not approve the lower conversion and exercise price. Management notes that at the time of the assessment, the stockholder vote had not yet started therefore there was no data to determine whether one scenario was more likely than another. Since the stockholders approve the lower conversion and exercise price on August 3, 2023, no probability assessment was used.

Based on the above factors, the estimated fair value of the Company’s financial derivative liabilities carried at fair value at May 24, 2023 and August 2, 2023 as follows:


	May 24, 2023		August 3, 2023
Conversion Feature - New Notes	$	663,096	$	557,168
Conversion Feature - Series A Exchange Notes		970,805		416,672
Conversion Feature - Series B Exchange Notes		4,324,792		2,651,436
New Warrants		3,123,682		2,445,244
Exchange Warrants		9,287,474		7,191,535
Total	$	18,369,849	$	13,262,055

On August 3, 2023, shareholders approved the adjustment of the conversion price of the New Notes and Exchange Notes and the exercise price of the New Warrants and Exchange Warrants. The conversion and exercise prices can adjust to a floor of $0.22 per share based on certain events defined in the agreements related to these instruments. The Company has concluded that as of August 3, 2023, the conversion feature of the May 2023 Notes and the May 2023 Warrants are no longer derivative liabilities. The Company recognized a (loss) gain of $(690,290) and 2,333,417 for the change in the fair values of the conversion features of the May 2023 Notes for the three and nine months ended September 30, 2023, respectively.

The Company has calculated the fair value of May 2023 Warrants at August 3, 2023, and recognized a gain of $5,296 and $2,774,377 in the three and nine months ended September 30, 2023. The total gain recognized for the nine months ended September 30, 2023 for the May 2023 Notes conversion features and May 2023 Warrants is $5,107,794.

NOTE 8 – RELATED PARTY TRANSACTIONS

During 2022, the Company issued purchase orders and made prepayments for prototype parts of $21,860 to a vendor that Pink Possum, LLC (“Pink Possum”), an entity controlled by Mr. Okonsky, one of the Company’s founders, Chairman of the Board and Chief Technology Officer, holds an equity interest of 25% as of September 30, 2023. This vendor is expected to provide additional prototype and product parts for a prototype of an upgraded version of the Stag expected to be released in the future.

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 manufacturer 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 it 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. The unrefunded portion of the prepaid rent and security deposit related to some survey, architecture and construction design costs that were incurred by the landlord prior to the Company terminating the lease. In September and October 2023, the landlord notified the Company that there were additional costs that exceeded the amount of the refund and the landlord released the Company from paying any amounts in excess of the original expected refund. The landlord also released the Company from any remaining obligations under the lease and amendments. The Company has recognized a loss on the termination of this lease of $247,525 in the year ended December 31, 2022 and $85,756 in the three and nine months ended September 2023.

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. There was no amortization expense recorded in 2023.

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 and nine months ended September 30, 2022 was $4,000 and $16,000, respectively.

On August 28, 2020, the Company entered into three-year consulting agreements with Pink Possum, 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 950,000 and 1,250,000 shares, respectively, of common stock at an exercise price of $4.90. 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 1,101,515 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 9 – STOCKHOLDERS’ EQUITY

SEC Form 10-Q filed by Volcon Inc.