Volcon(VLCN) - 2021 Q4 - Annual Report

Part I Business Volcon, Inc. is an early-stage, all-electric, off-road powersports vehicle company, shipping its Grunt motorcycle since Q3 2021 and transitioning to a dealership sales model while planning global expansion and new products like the Stag UTV and Brat E-Bike - The company develops and builds electric two and four-wheel motorcycles and UTVs, with initial products being the Grunt and Runt motorcycles; development of the Runt is currently under evaluation due to cost concerns[20][22] - Volcon terminated its direct-to-consumer sales platform in November 2021 and is transitioning to a dealership model in the U.S., having 33 dealership agreements as of December 31, 2021[21][24] - The company plans to expand its product line with the Stag UTV, expected for delivery in the second half of 2023, and the Brat E-Bike in Q4 2022[23][44][45] - Global expansion is planned in three phases: Latin America (started 2021), Canada and Europe (expected 2022), and Australia (expected 2023), utilizing country-specific importers[25][56] - The company faces significant competition from established powersports companies like Polaris, which has entered the electric UTV market, and specialized electric motorcycle manufacturers like Zero Motorcycles[60][61] Risk Factors The company faces substantial risks, including auditor's doubt about its going concern ability, material weaknesses in internal controls, dependence on single-source suppliers, high component costs, potential product liability, intense competition, trademark disputes, and reliance on building a new dealer network - The company's independent auditor has raised substantial doubt about its ability to continue as a going concern, stating that existing cash is only sufficient to fund operations until September 2022 without additional financing[73] - Material weaknesses in internal control over financial reporting have been identified, including inadequate segregation of duties and insufficient formal written policies[74] - The company is dependent on single-source suppliers for many components, exposing it to risks of production delays and potential loss of access to important technology if key suppliers face difficulties[78][79] - The cost of parts for the Grunt currently exceeds its net realizable value, leading to a non-cash inventory write-down of $5,450,007 in Q4 2021[80] - The company has received notices from two entities protesting its application for the "Volcon" trademark, which could require a rebranding effort if an agreement is not reached[59][94] - The conflict between Russia and Ukraine could impact the availability and price of nickel, a key component in the lithium-ion batteries used in the company's vehicles[83][90] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[132] Properties Volcon's corporate headquarters and current production facilities are in Round Rock, Texas, occupying approximately 21,300 square feet, with additional leased retail space in Denver, Colorado, and a future 40,000 square foot manufacturing facility planned in Liberty Hill, Texas - The company leases approximately 21,300 sq. ft. in Round Rock, TX for its headquarters and 6,200 sq. ft. of retail space in Denver, CO[132] - A lease has been signed for a future 40,000 sq. ft. built-to-suit manufacturing facility in Liberty Hill, Texas, from an entity owned by two of the company's founders; construction had not commenced as of December 31, 2021[132] Legal Proceedings As of the filing date, the company is not a party to any legal proceedings - The company is not currently party to any legal proceedings[135] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[136] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Volcon's common stock trades on NASDAQ under "VLCN", with 24,055,672 shares outstanding held by 1,381 shareholders as of March 21, 2022; the company has never paid cash dividends and has a 2021 Stock Plan authorizing 3,000,000 shares for equity compensation - The company's common stock is listed on the NASDAQ Stock Market LLC under the trading symbol "VLCN"[137] - As of March 21, 2022, there were 1,381 shareholders of record and 24,055,672 outstanding shares of common stock[138][9] - The company has never declared or paid cash dividends and intends to retain any future earnings to finance business growth[139] Equity Compensation Plan Information as of December 31, 2021 | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity Compensation Plans Approved by Security Holders | 2,401,538 | $2.77 | 478,200 | | Equity Compensation Plans Not Approved by Security Holders | 5,174,209 | $1.16 | – | | Total | 7,575,747 | $1.67 | 478,200 | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations For fiscal year 2021, Volcon generated its first revenues of $448,819 but incurred a substantial net loss of $40.1 million, driven by high costs of goods sold including a $5.45 million inventory write-down, and a surge in operating expenses, notably $14.6 million in stock-based compensation, leading to critical liquidity with $5.6 million cash at year-end and substantial doubt about its going concern ability despite recent funding Results of Operations In 2021, Volcon recorded its first revenue of $448,819 from 75 Grunt vehicles, but a gross loss of $10.1 million due to $5.45 million inventory write-down and high initial costs, with operating expenses soaring to $29.1 million, driven by $15.8 million in G&A (including $13.5 million in stock-based compensation) and $10.5 million in product development, culminating in a $40.1 million net loss Consolidated Results of Operations (2021 vs. 2020) | | 2021 | 2020 | | :--- | :--- | :--- | | Revenue | $448,819 | $0 | | Cost of goods sold | $10,507,454 | $0 | | Gross margin | ($10,058,635) | $0 | | Sales and marketing | $2,872,620 | $125,752 | | Product development | $10,465,186 | $407,760 | | General and administrative | $15,783,409 | $833,277 | | Total operating expenses | $29,121,214 | $1,366,789 | | Loss from operations | ($39,179,850) | ($1,366,789) | | Net loss | ($40,125,109) | ($1,374,413) | - Cost of goods sold for 2021 included a significant write-down of inventory of $5,450,007 to record inventory at its net realizable value[160] - General and administrative expenses for 2021 were primarily driven by stock-based compensation of $13,504,435, of which $13,031,989 was due to warrants issued to the company's founders in March 2021[166] - Product development expenses in 2021 increased to $10.5 million, mainly due to prototype parts and tooling costs ($5.7 million) and increased payroll costs ($2.0 million) as development activities expanded[169] Liquidity and Capital Resources As of December 31, 2021, Volcon had cash of $5.6 million and working capital of $4.4 million, with operations funded entirely through debt and equity sales, including $30.0 million from financing activities in 2021; despite a subsequent $18.1 million offering in February 2022, management concludes there is substantial doubt about the company's ability to continue as a going concern without further capital - The company had cash of $5.6 million and an accumulated deficit of $41.5 million as of December 31, 2021[173][183] - Net cash used in operating activities was $24.1 million for the year ended December 31, 2021[175] - In 2021, the company raised $30.0 million from financing activities, including its initial public offering which provided net proceeds of $16.6 million in October 2021[178][182] - Management states that cash on hand as of December 31, 2021, plus proceeds from the February 2022 offering, is insufficient to fund planned operations for a full year, raising substantial doubt about its ability to continue as a going concern[183] Quantitative and Qualitative Disclosures About Market Risk The company is a smaller reporting company and is therefore not required to provide the information for this item - As a smaller reporting company, Volcon is not required to provide disclosures about market risk[187] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2021, and the period from inception to December 31, 2020, including the independent auditor's report expressing substantial doubt about the company's ability to continue as a going concern, detailing significant net loss, changes in stockholders' equity, and reliance on financing activities Report of Independent Registered Public Accounting Firm The auditor, MaloneBailey, LLP, issued an unqualified opinion on the financial statements, confirming fair presentation in accordance with U.S. GAAP, but critically included a "Going Concern Matter" paragraph highlighting recurring losses and capital deficiency that raise substantial doubt about the company's ability to continue as a going concern - The auditor's report includes a paragraph stating that the company's recurring losses from operations and need for additional funding raise substantial doubt about its ability to continue as a going concern[192] Consolidated Financial Statements The consolidated financial statements show a significant increase in assets, liabilities, and stockholders' equity in 2021, primarily due to financing activities and the commencement of operations, with the balance sheet as of December 31, 2021, showing total assets of $14.6 million and total liabilities of $8.3 million, a net loss of $40.1 million for 2021, and cash flow highlighting $24.2 million used in operations funded by $30.0 million from financing activities Consolidated Balance Sheet Data (as of December 31) | | 2021 | 2020 | | :--- | :--- | :--- | | Total Current Assets | $10,881,057 | $638,871 | | Total Assets | $14,624,265 | $1,854,013 | | Total Current Liabilities | $6,483,725 | $2,322,125 | | Total Liabilities | $8,320,017 | $2,995,868 | | Total Stockholders' Equity (Deficit) | $6,304,249 | ($1,141,855) | Consolidated Statement of Operations Data | | For the Year Ended Dec 31, 2021 | For the Period Feb 21, 2020 to Dec 31, 2020 | | :--- | :--- | :--- | | Revenue | $448,819 | $0 | | Gross Margin | ($10,058,635) | $0 | | Loss from Operations | ($39,179,850) | ($1,366,789) | | Net Loss | ($40,125,109) | ($1,374,413) | | Net Loss per Share | ($8.79) | ($5.69) | Consolidated Statement of Cash Flows Data (Year Ended Dec 31, 2021) | Cash Flow Activity | 2021 | | :--- | :--- | | Net cash used in operating activities | ($24,160,526) | | Net cash used by investing activities | ($838,030) | | Net cash provided by financing activities | $30,034,673 | | Net Change in Cash | $5,036,117 | Notes to the Consolidated Financial Statements The notes provide critical context to the financial statements, including the going concern uncertainty, a $5.45 million inventory loss, details on related-party leases, a $13.0 million expense for exchanging founder anti-dilution warrants for 11 million fixed warrants, and a subsequent event where the company raised $18.1 million net proceeds from a public offering in February 2022 - Note 1 (Going Concern): The financial statements were prepared assuming the company will continue as a going concern, but recurring losses and negative cash flows raise substantial doubt about this ability[211] - Note 3 (Inventory): The company recognized a loss of $5,450,007 on inventory and inventory deposits to reduce the value of Grunt parts to their net realizable value[240] - Note 7 (Stockholders' Equity): In March 2021, the company exchanged anti-dilution warrants held by founders for 11,000,000 fixed-price warrants, recognizing an expense of $13,031,989[263] - Note 12 (Subsequent Events): On February 1, 2022, the company sold 6,666,667 shares of common stock in a public offering, receiving net proceeds of $18,055,000[286] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[289] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, and as a newly public company, a management report on internal control over financial reporting is not yet required, with no material changes reported in the fourth quarter of 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[289] - The annual report does not include a management assessment of internal control over financial reporting, as permitted for newly public companies[290] Other Information The company reports no other information for this item - None[291] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[291] Part III Directors, Executive Officers and Corporate Governance Information required for this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days of the fiscal year-end - Information is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Stockholders[292] Executive Compensation Information required for this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Stockholders[293] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required for this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Stockholders[294] Certain Relationships and Related Transactions and Director Independence Information required for this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Stockholders[295] Principal Accountant Fees and Services Information required for this item is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive proxy statement for the 2022 Annual Meeting of Stockholders[296] Part IV Exhibit and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report, with consolidated financial statements included in Item 8 and all other financial statement schedules omitted as they are not applicable or the required information is already included elsewhere - The consolidated financial statements are included in Part II, Item 8 of the report[298] - All financial statement schedules have been omitted as they are not applicable or the information is included elsewhere[299] Form 10-K Summary The company has elected not to provide a summary for its Form 10-K - The company has elected not to provide summary information[301]