Volcon Inc. 10-Q

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 June 30, 2024

☐	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 4,661,782 shares of common stock outstanding at August 5, 2024.

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023 (unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2024 and 2023 (unaudited)	4
	Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 2024 and 2023 (unaudited)	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 (unaudited)	7
	Notes to the Financial Statements (unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
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	43
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
Signatures		45

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VOLCON, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)


	June 30, 2024			December 31, 2023

ASSETS
Current assets:
Cash	$	2,052,175		$	7,983,346
Restricted cash		105,000			210,000
Accounts receivable, net of allowance for doubtful accounts of $53,295 and $70,359 at June 30, 2024 and December 31, 2023, respectively		301,845			203,303
Inventory		9,586,328			8,973,134
Inventory deposits		1,015,847			258,316
Prepaid expenses and other current assets		963,253			1,904,197
Total current assets		14,024,448			19,532,296
Long term assets:
Property and equipment, net		625,166			1,258,607
Other long-term assets		199,281			199,281
Right-of-use assets - operating leases		941,303			1,136,213
Total assets	$	15,790,198		$	22,126,397

LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Accounts payable	$	962,390		$	831,184
Accrued liabilities		1,735,981			3,128,906
Vendor settlements - short-term		1,833,937			–
Current portion of notes payable		6,784			15,278
Convertible notes, net of discount and issuance costs		–			30,149,579
May 2024 Notes		1,416,470			–
Warrant liabilities		70,970			5,971,067
Right-of-use operating lease liabilities, short-term		421,034			399,611
Customer deposits		169,777			417,485
Total current liabilities		6,617,343			40,913,110

Notes payable, net of current portion		32,226			69,138
Vendor settlements - long-term		683,493			–
Right-of-use operating lease liabilities, long-term		559,749			775,170
Total liabilities		7,892,811			41,757,418

COMMITMENTS AND CONTINGENCIES		–			–

Stockholders' equity (deficit):
Preferred stock: $0.00001 par value, 5,000,000 shares authorized, 25,000 shares designated, 6,375 shares outstanding as of June 30, 2024 and no shares issued and outstanding as of December 31, 2023.		–			–
Common stock: $0.00001 par value, 250,000,000 shares authorized, 1,642,685 shares issued and outstanding as of June 30, 2024 and 10,305 shares issued and outstanding as of December 31, 2023		16			–
Additional paid-in capital		155,357,971			101,175,117
Accumulated deficit		(147,460,600	)		(120,806,138	)
Total stockholders’ equity (deficit)		7,897,387			(19,631,021	)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	15,790,198		$	22,126,397

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

VOLCON, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(Unaudited)


	Three Months Ended						Six Months Ended
	June 30, 2024			June 30, 2023			June 30, 2024			June 30, 2023

Revenue	$	940,863		$	519,300		$	1,974,411		$	1,689,758
Cost of goods sold		(3,113,429	)		(334,647	)		(4,735,009	)		(1,564,628	)
Gross margin		(2,172,566	)		184,653			(2,760,598	)		125,130

Operating expenses:
Sales and marketing		543,671			2,380,617			1,304,235			4,169,987
Product development		805,550			1,166,732			1,620,495			2,953,083
General and administrative expenses		2,007,514			1,568,700			4,088,308			3,458,791
Total operating expenses		3,356,735			5,116,049			7,013,038			10,581,861

Loss from operations		(5,529,301	)		(4,931,396	)		(9,773,636	)		(10,456,731	)

Other income		8,589			10,618			21,443			16,503
Loss on extinguishment of Convertible Notes		–			(22,296,988	)		(1,647,608	)		(22,296,988	)
Gain (loss) on change in fair value of financial liabilities		5,111,291			5,792,788			(14,727,696	)		5,792,788
Interest expense		(196,997	)		(1,603,216	)		(526,965	)		(3,383,235	)
Total other income (expense)		4,922,883			(18,096,798	)		(16,880,826	)		(19,870,932	)

Loss before provision for income taxes		(606,418	)		(23,028,194	)		(26,654,462	)		(30,327,663	)
Provision for income taxes		–			–			–			–

Net loss	$	(606,418	)	$	(23,028,194	)	$	(26,654,462	)	$	(30,327,663	)

Net loss per common share – basic	$	(1.51	)	$	(19,110.53	)	$	(110.71	)	$	(26,417.82	)
Net loss per common share – diluted	$	(1.51	)	$	(19,110.53	)	$	(110.71	)	$	(26,417.82	)

Weighted average common shares outstanding – basic		401,802			1,205			240,759			1,148
Weighted average common shares outstanding – diluted		401,802			1,205			240,759			1,148

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 SIX MONTHS ENDED JUNE 30, 2024

(Unaudited)


	Series A Convertible Preferred Stock					Common stock				Additional
	Number of Shares			Amount		Number Shares		Amount		paid -in capital			Accumulated deficit			Total

Balance at January 1, 2024		–		$	–		10,305	$	–	$	101,175,117		$	(120,806,138	)	$	(19,631,021	)

Issuance of common stock for exercise of pre-funded warrants		–			–		739		–		–			–			–

Issuance of common stock for exercise of Series A warrants		–			–		138,593		–		17,352,653			–			17,352,653

Proceeds received for exercise of buydown warrants		–			–		78		–		3,500			–			3,500

Common stock issued for conversion of convertible notes		–			–		39,762		–		7,395,907			–			7,395,907

Conversion of Convertible Notes		24,698			–		–		–		24,716,118			–			24,716,118

Conversion of Preferred Stock for common stock		(18,323	)		–		1,244,081		15		(15	)		–			–

Issuance of common stock for exercise of Series B Warrants		–			–		117,605		1		–			–			1

Reclassification of warrant liability to equity		–			–		–		–		3,405,662			–			3,405,662

Proceeds received for Issuance of warrants with May 2024 Notes, net of issuance costs of $111,194		–			–		–		–		1,023,200			–			1,023,200

Stock-based compensation		–			–		–		–		285,829			–			285,829

Common stock issued for reverse stock split due to rounding		–			–		91,522		–		–			–			–

Net loss		–			–		–		–		–			(26,654,462	)		(26,654,462	)

Balance at June 30, 2024		6,375		$	–		1,642,685	$	16	$	155,357,971		$	(147,460,600	)	$	7,897,387

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 SIX MONTHS ENDED JUNE 30, 2023
(Unaudited)


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

Balance at January 1, 2023		1,086	$	–	$	76,369,940	$	(75,734,927	)	$	635,013

Issuance of common stock for exercise of stock options and vesting of restricted stock units		2		–		25,000		–			25,000

Issuance of common stock for public offering, net of issuance costs of $501,300		267		–		3,998,700		–			3,998,700

Stock-based compensation		6		–		1,682,827		–			1,682,827

Net loss		–		–		–		(30,327,663	)		(30,327,663	)

Balance at June 30, 2023		1,361	$	–	$	82,076,467	$	(106,062,590	)	$	(23,986,123	)

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

VOLCON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2024 AND 2023
(Unaudited)


	June 30,			June 30,
	2024			2023
Cash flow from operating activities:
Net loss	$	(26,654,462	)	$	(30,327,663	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on extinguishment of convertible notes		1,314,065			22,296,988
Loss (gain) on change in fair value of financial liabilities		14,893,051			(5,792,788	)
Gain on exercise of Series B Warrants		(165,355	)		–
Loss on conversion of notes to common stock		333,544			–
Stock-based compensation		285,829			1,682,827
Loss on write down of inventory and inventory deposits		57,262			165,324
Loss (gain) on sale/write off of property & equipment		618,738			(6,423	)
Bad debt (recovery) expense		(16,378	)		51,198
Non-cash interest expense		498,657			3,385,204
Amortization of right-of-use assets		194,910			181,677
Depreciation and amortization		197,237			106,625
Changes in operating assets and liabilities:
Accounts receivable		(82,162	)		580,155
Inventory		(347,144	)		786,821
Inventory deposits		(1,080,843	)		(1,847,714	)
Prepaid assets and other current assets		940,944			(954,117	)
Accounts payable		131,205			(381,252	)
Accrued liabilities and vendor settlements		1,124,505			(626,788	)
Right-of-use liabilities - operating leases		(193,998	)		(174,365	)
Customer deposits		(247,708	)		295,739
Net cash used in operating activities		(8,198,103	)		(10,578,552	)
Cash flow from investing activities:
Purchase of property and equipment		(255,754	)		(393,291	)
Proceeds from sale of property and equipment		15,157			–
Proceeds from insurance settlement		58,058			–
Proceeds from sale of vehicles		–			89,000
Net cash used in investing activities		(182,539	)		(304,291	)
Cash flow from financing activities:
Repayment of notes payable		(45,402	)		(72,859	)
Proceeds from issuance of May 2024 Notes and warrants, net of issuance costs of $245,150		2,255,851			–
Proceeds from exercise of Series B Warrants		130,522			–
Proceeds from exercise of buy down warrants		3,500			–
Proceeds from issuance of common stock from public offering, net of issuance costs of $501,300		–			3,998,700
Proceeds from issuance of convertible notes and warrants, net of issuance costs of $586,968		–			3,913,032
Proceeds from exercise of stock options		–			25,000
Net cash provided by financing activities		2,344,471			7,863,873

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(6,036,171	)		(3,018,970	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD		8,193,346			11,537,842
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	2,157,175		$	8,518,872

SUPPLEMENTAL CASH FLOW INFORMATION

	2024		2023
Supplemental disclosure of cash flow information:
Cash paid for interest	$	26,267	$	4,648
Cash paid for income taxes	$	–	$	–

Non-cash transactions
Conversion of Convertible Notes for common stock	$	7,414,025	$	–
Exchange of Convertible Notes for Preferred Stock	$	24,716,118	$	–
Reclassification of warrant liability to equity for cashless exercise of Series A Warrants	$	17,352,653	$	–
Reclassification of warrant liability to equity for modification of Series B Warrants	$	3,405,662	$	–
Exchange of finished goods inventory with vendor for raw materials inventory	$	323,312	$	–
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 February and March 2024, certain holders of the May 2023 Convertible Notes issued in May 2023 converted approximately $7.4 million of principal to common stock. In March 2024, the holders exchanged the remaining May 2023 Convertible Notes of $24.7 million for Series A Convertible Preferred Stock (“Preferred Stock”) with a $1,000 per share value and an initial conversation price of $133.00 per share for common stock (see Note 10). All covenants from the Convertible Notes were terminated upon this exchange.

As discussed further in Note 7 below, on May 22, 2024, the Company issued senior notes with an aggregate principal amount of $2,942,170 due May 22, 2025 (the “May 2024 Notes”) for net proceeds of $2,255,851. The holders of the May 2024 Notes also received fully vested warrants (the “May 2024 Note Warrants”) to purchase 101,463 shares of the Company’s common stock at an exercise price of $29.00 per share. The May 2024 Note Warrants are exercisable beginning November 23, 2024 and expire November 23, 2029.

Management anticipates that our cash on hand as of June 30, 2024 plus the cash expected to be generated from operations will not be sufficient to fund planned operations beyond one year from the date of the issuance of the financial statements as of and for the three and six months ended June 30, 2024. 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 December 19, 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 December 26, 2023, the Company was notified by Nasdaq that it is not in compliance with Nasdaq’s Listing Rule 5810(c)(3)(A)(iii) as the closing bid price of our common stock had been below $0.10 for ten consecutive trading days from December 11, 2023 through December 22, 2023 and was subject to delisting on January 2, 2024. On January 4, 2024, the Company received notice from Nasdaq that it did not meet the MVLS requirement and it was subject to delisting. The Company submitted a hearing request to Nasdaq’s Hearings Department for both of these matters, which stayed the suspension of the Company’s common stock. The Company participated in a hearing with Nasdaq’s Hearings Department on March 26, 2024 and on April 2, 2024, they informed the Company that the Company has until June 24, 2024 to regain compliance with the above listing rules.

On June 11, 2024, the Company received a notice from the Nasdaq that the Company no longer met the minimum 500,000 publicly held shares requirement for Nasdaq and, as such, it no longer complied with Listing Rule 5550(a)(4). Furthermore, the notice indicated that this matter would serve as an additional basis for delisting the Company’s securities from Nasdaq, that the Panel would consider this matter in their decision regarding the Company’s continued listing on Nasdaq, and that the Company should present its views with respect to this additional deficiency to the Panel in writing no later than June 18, 2024. On June 18, 2024, the Company submitted a letter to Nasdaq notifying them that the Company was in compliance with Listing Rule 5550(a)(4) due to the issuance of additional shares of common stock from the conversion of Preferred Stock to common stock by certain Preferred Stockholders.

On July 17, 2024, Nasdaq informed the Company that it had regained compliance with the above listing rules but will continue to be monitored for ongoing compliance.

Employment Matters

On January 13, 2024, the Company’s Chief Executive Officer (“CEO”), Jordan Davis, resigned his employment with the Company effective February 2, 2024. The Company entered into a 30-day consulting agreement with Mr. Davis and paid him $12,500.

On January 30, 2024, John Kim, an independent board member of the Company signed an employment agreement with the Company to become the CEO effective February 3, 2024. Mr. Kim’s salary is $800,000 and he has an annual bonus of $250,000. Mr. Kim will also receive 5% of the gross proceeds or other consideration if the Company completes a sale of substantially all of its assets or otherwise enters into a change of control transaction. Mr. Kim is also entitled to an equity award equal to 10% of the Company’s fully diluted equity, subject to stockholder approval of an increase in the shares available under the 2021 Plan or a new equity plan.

On January 30, 2024, Greg Endo, the Company’s Chief Financial Officer, signed a new employment agreement with the Company. Mr. Endo’s salary will be increased to $300,000 and he will have an annual bonus of up to 50% of his salary as determined by the compensation committee of the board of directors. Mr. Endo has agreed to a reduction in the salary to $238,500 through the end of 2024. Mr. Endo will also receive 5% of the gross proceeds or other consideration if the Company completes a sale of substantially all of its assets or otherwise enters into a change of control transaction. Mr. Endo is also entitled to an equity award equal to 4% of the Company’s fully diluted equity, subject to stockholder approval of an increase in the shares available under the 2021 Plan or a new equity plan.

On February 23, 2024, Katherine Hale resigned her position as Chief Marketing Officer. Ms. Hale was provided a severance amount of $112,500 which was paid out over three monthly installments beginning in March 2024.

Impact of Russia and Ukraine Conflict

On February 24, 2022, Russia invaded Ukraine. The conflict between Russia and Ukraine could impact the availability of nickel, an element used in the production of lithium ion cells used in batteries that power our vehicles. The shortage of these cells could have an impact on our ability to produce vehicles to meet our customers’ demands. In addition, sanctions against Russia could impact the price of elements, including nickel, that are used in the production of batteries which would result in higher costs to produce our vehicles. These sanctions have also impacted the U.S. and global economies and could result in an economic recession which could cause a broader disruption to the Company’s supply chain and distribution network and customer demand for our products.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Information

The 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, 2023, which was filed with the Securities and Exchange Commission ("SEC") on March 28, 2024. 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 June 30, 2024, and for the three and six months ended June 30, 2024 and 2023. 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, 2023.

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.

As discussed in Note 10, the Company completed a reverse 1 for 100 stock split on June 6, 2024, a reverse 1 for 45 stock split on February 2, 2024 and 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 these reverse stock splits.

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 June 30, 2024 or December 31, 2023. Restricted cash includes cash restricted as collateral for the Company’s corporate credit cards.

Revenue Recognition

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. 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.

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 manufacture and ship the Company’s vehicles, 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.

The Company transferred substantially all of its raw materials and work-in-process inventory for the Grunt to the third party manufacturer in the second quarter of 2023. Title to the inventory transferred to the third party manufacturer and it provides the Company with a credit towards future purchases 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.

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 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

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, which approximated the carrying value of the Company’s debt as of June 30, 2024 and December 31, 2023. 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 8.

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 and warrant liabilities is classified as Level 3 within the Company’s fair value hierarchy. Refer to Note 8, 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 two of its vehicles, the Stag and Grunt EVO, and this third party is also performing product design and development services on the Stag.

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. The Company also sources some of the other components from third party suppliers and the third party manufacturer sources other components from third party suppliers or fabricates them from materials sourced from third parties.

On January 8, 2024, the Company notified the manufacturer of the Volcon Youth motorcycles that it was terminating the co-branding and distribution agreement with them due to lower than anticipated sales of these units. In March 2024, the Company agreed to allow the manufacturer to keep all fully paid for units manufactured and held by the manufacturer, cease selling the Volcon Youth Motorcycles as of June 30, 2024, and pay cash of $2,070,000 which includes a payment of $370,000 in March 2024 and $100,000 monthly for seventeen months starting April 2024. The settlement was recorded in the financial statements for the year ended December 31, 2023. The balance of the liability as of June 30, 2024, is $1,400,000. As discussed below, the Company has written down this inventory to its estimated net realizable value.

In June 2024, the Company was notified by the manufacturer of a suspension component for the Stag that due to the Company’s initial production forecast provided by the third party manufacturer of the Stag, the vendor had acquired raw materials to fulfill several months’ worth, of this component needed for the forecast. Although the Company had provided updated forecasts to the third party manufacturer of the Stag, the revised forecasts were not provided timely to this vendor. The Company entered into an agreement to pay for the excess raw materials by making weekly payments in the amount of $15,704 over an eighteen-month period once the Company can validate the inventory quantities and amounts paid by the vendor, which is expected to be completed by August 2024. The Company recorded a liability of $633,936 and $483,493 in vendor settlements current and long-term, respectively, as of June 30, 2024 and an expense of $1,117,429 in costs of goods sold for the three and six months ended June 30, 2024.

Recently Issued Accounting Pronouncements

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
	June 30, 2024		December 31, 2023
Raw materials	$	7,557,689	$	6,770,892
Finished goods		2,028,639		2,202,242
Total inventory	$	9,586,328	$	8,973,134

As of June 30, 2024, the Company has purchase commitments for future payments due for inventory of $352,004.

NOTE 4 – LONG – LIVED ASSETS

Property and Equipment

Property and equipment consist of the following:

Schedule of property and equipment
	June 30, 2024			December 31, 2023
Machinery, tooling and equipment	$	282,232		$	1,015,568
Vehicles		193,670			213,528
Internal use manufactured vehicles		195,559			22,906
Fixtures & furniture		90,768			90,768
Leasehold improvements		44,663			44,663
Computers		220,588			221,571
		1,027,480			1,609,004
Less: Accumulated depreciation		(402,314	)		(350,397	)
Total property and equipment	$	625,166		$	1,258,607

Depreciation expense for the three and six months ended June 30, 2024 was $99,517 and $197,237, respectively. Depreciation expense for the three and six months ended June 30, 2023 was $53,330 and $103,718, respectively.

NOTE 5 – NOTES PAYABLE

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 February 2028 and $908 per month until February 2029. The vehicles are collateral for these arrangements. In February 2024, one of the vehicles was involved in an accident and was totaled. The note payable associated with this vehicle was paid off with the proceeds received from the insurance carrier.

The following table provides the maturities of notes payable as of June 30, 2024:


Remainder of 2024	$	5,451
2025		10,898
2026		10,898
2027		10,898
2028		10,898
2029		1,816
Total future payments		50,859
Less: Interest		(11,849	)
Total notes payable		39,010
Less current portion		(6,784	)
Long-term notes payable	$	32,226

NOTE 6 - CONVERTIBLE NOTES

On August 24, 2022, the Company issued senior convertible notes (“Convertible Notes”) with an aggregate principal amount of $27,173,913 due February 24, 2024. The holders of the Convertible Notes also received fully vested warrants (the “Note Warrants”) to purchase 403 shares of the Company’s common stock at an initial exercise price of $64,125.00 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 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 10. These debt issuance costs were amortized as additional interest expense through May 24, 2023 when the Convertible Notes were exchanged as discussed below.

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 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 to accrete the allocated value of the Convertible Notes using the effective interest method and an interest rate of 39.6%. Interest expense, including amortization of issuance costs, recorded for the Convertible Notes for the three and six months ended June 30, 2023 was $1,136,997 and $2,913,632, respectively, prior to the recognition of the unamortized discount and issuance costs upon issuance of the addition senior convertible notes noted below.

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 $57,150.00 per share of common stock, which was adjusted to $16,875.00 upon stockholder approval received on August 3, 2023. The conversion price was also subject to further adjustment if the Company completed an equity or convertible note offering with a price below $16,875.00, or completed 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 $16,875.00 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 was also subject to further adjustment if the Company completed an equity or convertible note offering with a price below $16,875.00. The New Notes were issued with an original issue discount of 8.8% and did not bear interest unless an event of default had occurred, upon which interest accrued at 10% per annum.

The holders of the New Notes also received fully vested warrants (the “New Warrants”) to purchase 242 shares of the Company’s common stock at an initial exercise price of $24,525.00 per share. The New Warrants expire August 24, 2027.

The Company incurred debt issuance costs of $586,968 upon issuance of the New Notes and New Warrants. The Company amortized these issuance costs as additional interest expense over the remaining term of the New Notes.

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 was $

SEC Form 10-Q filed by Volcon Inc.