You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with the financial statements and the
related notes appearing elsewhere in this Form 10-Q. This discussion contains
forward-looking statements reflecting our current expectations that involve
risks and uncertainties. Actual results and the timing of events could differ
materially from those discussed in our forward-looking statements as a result of
many factors, including those set forth under "Risk Factors" and elsewhere in
this Form 10-Q.
Overview
We are an all-electric, off-road powersports vehicle company developing and
building electric two and four-wheel motorcycles and utility terrain vehicles
(UTVs), also known as side-by-sides. In October 2020, we launched our offerings
with two off-road motorcycles - the Grunt and the Runt. We are currently taking
orders on our website for these initial offerings and began delivering the
Grunts in the third quarter of 2021. We expect to begin delivering Runts in the
second quarter of 2022. Also in 2022, we expect to introduce a prototype of the
Volcon Stag which we expect to be available for sale in the first half of 2023.
The Stag will be followed with the introduction the Beast, of a higher
performance, longer range UTV which will be available for sale in the first half
of 2024.
We are assembling the Grunt in a leased production facilities in Round Rock,
Texas. We will be leasing a dedicated, built-to-suit manufacturing facility on
53 acres in Liberty Hill, Texas, 25 miles northwest of downtown Austin from an
entity controlled by our founders. We expect to begin production at this
facility in the first quarter of 2023.
We initially intended to sell and distribute our vehicles and accessories in the
U.S. on a direct-to-consumer sales platform. We are currently negotiating
dealership agreements with retail partners to display and sell our vehicles and
accessories. These retail partners will also provide warranty and repair
services to our customers.
As of September 30, 2021, U.S. customers have made deposits for 277 Grunts, plus
accessories and a deliver fee representing total deposits of $1.9 million. These
orders are cancelable by the customer until the vehicle is delivered and after a
14-day acceptance period, therefore the deposits have been recorded as deferred
revenue. Based on our current production capacity, we believe we will deliver
all of the Grunts by March 2022.
We plan to sell our vehicles and accessories globally in a three-phase rollout
of export sales- Latin America importers in 2021, Canada, Europe, and Africa in
2022 and Southeast Asia plus Australia in 2023. Export sales are executed with
individual importers in each country that buy vehicles by the container. Each
importer will sell vehicles to local dealers or directly to customers. Local
dealers will provide warranty and repair services for vehicles purchased in
their country.
As of September 30, 2021, we have received orders from Latin America importers
for 92 Grunts. Payment for these orders is due prior to shipment and are
cancelable until shipped. Based on our current production capacity, we believe
we will be able to fulfill all pending orders by March 2022.
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Results of Operations
We were formed on February 21, 2020. Operations for the period from February 21,
2020 (inception) to September 30, 2020, and the three months ended September 30,
2020 are not materially different; therefore, the financial information for 2020
below is from the inception through September 30, 2020.
February 21,
2020
(inception) Three months Nine months
to ended ended
September 30, September 30, September 30,
2020 2021 2021
Revenue $ - $ 75,067 $ 75,067
Cost of goods sold - 1,176,691 1,176,691
Gross margin - (1,101,624 ) (1,101,624 )
Operating expenses:
Sales and marketing 26,946 1,123,206 1,937,745
Product development 331,621 3,021,207 7,595,581
General and administrative 18,090 586,492 14,634,037
Total operating expenses 376,657 4,730,906 24,167,363
Loss from operations (376,657 ) (5,832,529 ) (25,268,987 )
Interest and other expense - (46,025 ) (76,853 )
Net loss $ (376,657 ) $ (5,878,554 ) $ (25,345,840 )Due to recurring losses there is no provision for income taxes for any period
presented.
Revenue
Revenue for the three and nine months ended September 30, 2021, was $75,067 and
represents the sale of 11 Grunts.
Cost of goods sold
Cost of goods sold for the three and nine months ended September 30, 2021, was
$1,176,691. Costs include labor costs of $476,027 for employees and contractors
performing parts purchasing, assembly and quality control testing of Grunts and
stock-based compensation of $188,860 for share based awards for employees. Part
costs for Grunts sold during the periods were $152,830. Facilities costs were
$48,321 for our manufacturing facility and inventory warehouse.
In the next 6-9 months we could experience manufacturing delays due to shipping
constraints in our supply chain. We expect cost of goods sold to increase as we
sell higher quantities of Grunts, but we expect the cost per Grunt to decrease
as we gain efficiencies in the manufacturing process and the cost of parts is
reduced as we purchase in higher volumes and source additional suppliers.
Sales and marketing
Sales and marketing expenses relate to costs to increase exposure and awareness
for our products and developing our network of U.S. dealers and international
distributors. Sales and marketing expenses for the period ended September 30,
2020, were not significant as we did not have significant operations during this
period as there were no sales and marketing employees. Sales and marketing
expense were $1,123,206 and $1,937,745 for the three and nine months ended
September 30, 2021, respectively.
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For the three months ended September 30, 2021, sales and marketing expenses were
primarily related to expenses associated with promoting our products and brand
of $459,996, professional fees of $192,468, composed primarily of legal fees of
$152,498 to develop our dealer agreements and evaluate compliance with dealer
laws across the United States, employee payroll costs of $179,279, and
stock-based compensation of $160,622 for share based awards granted to
employees. For the nine months ended September 30, 2021, sales and marketing
expenses were primarily related to expenses associated with promoting our
products and brand of $788,840, professional fees of $272,042, primarily
composed of legal fees of $153,784 to develop our dealer network and evaluate
compliance with dealer laws across the United States, employee payroll costs of
$420,994, and stock-based compensation of $237,028 for share based awards
granted to employees and consultants.
We expect sales and marketing expense to increase as we expand our U.S. dealer
and international distributor networks and promote our products.
General and Administrative Expense
General and administrative expenses relate to costs for our finance, accounting
and administrative functions to support the development, manufacturing and sales
of our products. General and administrative expenses for the period ended
September 30, 2020, were not significant as we did not have significant
operations during this period as there were no employees. General and
administrative expense were $586,492 and $14,634,037 for the three and nine
months ended September 30, 2021, respectively.
For the three months ended September 30, 2021, general and administrative
expenses were primarily related to employee payroll costs of $179,321,
stock-based compensation of $145,804 for share based awards granted to employees
and consultants, and professional fees of $165,742, including professional fees
related to employee recruitment of $108,177. For the nine months ended September
30, 2021, general and administrative expenses were primarily related to employee
payroll costs of $431,304, stock-based compensation of $13,370,864 (consisting
of $13.0 million due to warrants issued to our founders in March 2021 and
$338,875 due to share based awards granted to employees and consultants), and
professional fees of $661,570, including legal fees of $175,115, accounting fees
of $232,354 and recruiting fees of $189,177.
We expect general and administrative expenses, other than stock-based
compensation related to the founder warrants, to increase as we increase
staffing to support sales, manufacturing, product development and to comply with
public company reporting and compliance requirements.
Product Development Expense
Product development expenses relate to development of our products and process
to manufacture these products. Product development expense was not significant
for the period from February 21, 2020 (inception) through September 30, 2020, as
we did not have any employees as of September 30, 2020. Product development
expenses for the three and nine months ended September 30, 2021, were $3,021,207
and $7,595,581, respectively.
Product development expenses for the three months ended September 30, 2021, are
primarily employee payroll costs of $893,266, stock-based compensation of
$543,299 for share based awards granted to employees and consultants,
professional fees of $366,530 for product design, prototype parts and tooling
costs of $1,664,529 and facilities costs of $104,885. Product development
expenses in for the nine months ended September 30, 2021, are primarily employee
payroll costs of $1,341,112, stock-based compensation of $459,566 for share
based awards granted to employees and consultants, professional fees of
$955,391, including $790,676 for product design and $151,925 for employee
recruitment, prototype parts and tooling costs $4,068,523 and facilities cost of
$265,398.
We expect product development costs to increase in the future as our product
development activities expand for new vehicle models.
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Interest and Other Expenses
Interest and other expense for the three and nine months ended September 30,
2021, primarily relates to interest on our notes payable used to purchase two
vehicles and accretion on the promissory notes issued in September 2021.
Net Loss
Net loss for the three months ended September 30, 2020, and the period from
February 21, 2020 (inception) through September 30, 2020, was $304,559 and
$376,657, respectively, compared to $5,878,554 and $25,345,840 for the three and
nine months ended September 30, 2021, respectively.
Liquidity and Capital Resources
On September 30, 2021, we had cash of $2.7 million and we had working capital of
$3.0 million. Since inception in February 2020, we have funded our operations
from proceeds from debt and equity sales.
Cash used in operating activities
Operating activities for the period from February 21, 2020 (inception) to
September 30, 2020, mainly included research and development costs, and
professional fees for consultants and attorneys for the formation of the Company
and early product development efforts. Some of these costs were paid for by the
founders on behalf of the Company. Net cash used in operating activities was
$13.3 million for the nine months ended September 30, 2021, and includes all of
our operating costs except stock-based compensation, and depreciation and
amortization. Cash used in operating activities includes increases in inventory
and prepaid inventory totaling $5.3 million as we made payments and deposits to
purchase raw materials to begin production of the Grunt in September 2021 for
delivery to customers, cash provided by customer deposits of $2.3 million and an
increase in accounts payable of $1.2 million.
Cash used in investing activities
Net cash used in investing activities was $0.7 million for the nine months ended
September 30, 2021, and mainly included purchases of equipment and tooling
related to our product development and certain intangible assets. Cash uses from
investing activities for the period ended September 30, 2020, was not
significant.
Cash provided by financing activities
Cash provided from financing activities for the period ended September 30, 2020,
was $1.6 million and was related to proceeds received from the SAFE offering
that was partially completed at September 30, 2020. Net cash provided by
financing activities was $16.1 million for the nine months ended September 30,
2021.
In January 2021, we completed a WeFunder SAFE offering which was convertible
into preferred stock upon future financing events. We received gross proceeds of
$2,258,940 and paid expenses of $53,500.
In February 2021, we completed an offering of our Series A preferred stock. We
received gross proceeds of $2,669,978 and issued 415,287 shares of Series A
preferred stock. We paid commissions and expenses of $205,470 and issued 79,750
shares of common stock and warrants to purchase 79,750 shares of common stock
with an exercise price of $2.57 to placement agents in connection with the
offering. This equity financing resulted in the SAFE investments of $2.0 million
as of December 31, 2020, converting into 424,269 shares of Series A preferred
stock and the WeFunder SAFE investments converting into 351,832 shares of Series
A preferred stock.
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From April 2021 to September 2021, we sold 1,105,827 shares of Series B
preferred stock at $9.50 per share resulting in gross proceeds of $10.5 million.
We paid commissions and expenses of $890,026 and issued 123,295 shares of common
stock and warrants to purchase 197,272 shares of common stock with an exercise
price of $3.80 to placement agents in connection with the offering.
On September 10, 2021, the Company entered into an agreement with a lender for a
6% promissory note of $2 million. The promissory note has a maturity date of one
year from inception or immediately upon the completion of this offering. For
providing the above promissory note, the Company agreed to issue 266,664 shares
of our common stock and agreed to pay $35,000 of the placement agent's and
investor's legal costs and paid a 6% commission to the placement agent, who is
the underwriter of this offering. Such payment is cash compensation for
providing services for a private placement in accordance with FINRA Rule 5110
Supplementary Material .01(b)(2).
Our continuation as a going concern is dependent upon our ability to obtain
continued financial support from our stockholders, necessary equity financing to
continue operations and the attainment of profitable operations. As of September
30, 2021, we had incurred an accumulated deficit of $26.7 million since
inception and have generated less than $0.1 million in revenue. Additionally,
management anticipates that our cash on hand as of September 30, 2021, is
insufficient to fund planned operations beyond one year from the date of the
issuance of the financial statements as of and for the three and nine months
ended September 30, 2021. These factors raise substantial doubt regarding our
ability to continue as a going concern.
On October 8, 2021, and October 29, 2021, the Company completed its initial
public offering and sold 3,025,000 and 226,875 shares of its common stock at
$5.50 per share. The Company received net proceeds of $16.6 million after
underwriter commissions and expenses of $1,7 million. The Company expects to
incur additional expenses of approximately $150,000 related to this offering.
The underwriter was also issued 151,250 warrants to purchase the Company's
common stock at $6.88 per share.
The proceeds from initial public offering, along with proceeds from sales of the
Grunt and related accessories which began in September 2021, and Runts and
related accessories which are expected to begin in the second quarter of 2022,
may not provide sufficient capital to fund operations beyond one year from the
date of the issuance of the financial statements as of and for the three and
nine months ended September 30, 2021, due to the ongoing development of our
vehicles. We may be required to raise additional proceeds to fund our operations
and there is no guarantee that we will be able to raise funding with favorable
terms, if at all.
JOBS Act Accounting Election
The recently enacted JOBS Act provides that an "emerging growth company" can
take advantage of the extended transition period provided in Section 7(a)(2)(B)
of the Securities Act of 1933, as amended, for complying with new or revised
accounting standards. In other words, an "emerging growth company" can delay the
adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have irrevocably elected not to avail ourselves
of this extended transition period and, as a result, we will adopt new or
revised accounting standards on the relevant dates on which adoption of such
standards is required for other public companies.
We have implemented all new accounting pronouncements that are in effect and may
impact our financial statements and we do not believe that there are any other
new accounting pronouncements that have been issued that might have a material
impact on our financial position or results of operations.
Critical Accounting Policies
Use of Estimates in Financial Statement Presentation
The preparation of the financial statements in conformity with generally
accepted accounting principles in the United States of America ("U.S. GAAP")
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the dates of the financial statements and the reported amounts
of expenses during the reporting periods.
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Making estimates requires management to exercise judgment. It is at least
reasonably possible that the estimate of the effect of a condition, situation or
set of circumstances that existed at the date of the financial statements, which
management considered in formulating its estimate, could change in the near term
due to one or more future confirming events. Accordingly, actual results could
differ significantly from those estimates.
Revenue recognition
Revenue is recognized when we transfer control of the product to the customer
and a 14-day acceptance period has expired or the customer has acknowledged
acceptance prior to the end of the 14-day acceptance period. Revenue is measured
as the amount of consideration we expect to receive in exchange for transferring
control of our vehicles, parts and accessories. Consideration that is received
in advance of the transfer of goods is deferred until delivery has occurred.
Sales and other taxes we collect concurrent with revenue-producing activities
are excluded from revenue. If a right of return exists, we adjust revenue for
the estimated effect of returns. Until we develop sales history, we will
estimate expected returns based on industry data for sales returns as a percent
of sales, type of product, and a projection of this experience into the future.
Our sales do not have a financing component.
Sales promotions and incentives. We provide for estimated sales promotion and
incentive expenses, which are recognized as a component of sales in measuring
the amount of consideration we expect to receive in exchange for transferring
goods or providing services. Examples of sales promotion and incentive programs
include distributer fees and volume incentives. Sales promotion and incentive
expenses are estimated based on current programs for each product line. We
record these amounts as a liability in the balance sheet until they are
ultimately paid. Adjustments to sales promotions and incentives accruals are
made as actual usage becomes known in order to properly estimate the amounts
necessary to generate consumer demand based on market conditions as of the
balance sheet date.
Shipping and handling charges and costs. We record shipping and handling charged
to the customer and related shipping costs as a component of cost of sales when
control has transferred to the customer.
Product warranties
We provide a one-year warranty on our vehicles, and a two-year warranty on the
battery pack. We accrue warranty reserves at the time a vehicle is delivered to
the customer. Warranty reserves include our best estimate of the projected cost
to repair or to replace any items under warranty, based on actual warranty
experience as it becomes available and other known factors that may impact our
evaluation of historical data. We review our reserves quarterly to ensure that
our accruals are adequate in meeting expected future warranty obligations, and
we will adjust our estimates as needed. Factors that could have an impact on the
warranty reserve include the following: changes in manufacturing quality, shifts
in product mix, changes in warranty coverage periods, product recalls and
changes in sales volume. Warranty expense is recorded as a component of cost of
revenues in the statement of operations. The portion of the warranty provision
which is expected to be incurred within 12 months from the balance sheet date
will be classified as current, while the remaining amount will be classified as
long-term liabilities.
Income taxes
Deferred taxes are determined utilizing the "asset and liability" method,
whereby deferred tax asset and liability account balances are determined based
on differences between financial reporting and the tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. We provide a valuation
allowance, when it is more likely than not that deferred tax assets will not be
realized in the foreseeable future.
The impact of an uncertain income tax position on the income tax return is
recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant tax authority. An uncertain income tax position will
not be recognized if it has less than a 50% likelihood of being sustained.
Interest and penalties on income taxes will be classified as a component of the
provisions for income taxes.
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Stock-based compensation
We measure the total amount of employee stock-based compensation expense for a
grant based on the grant date fair value of each award and recognizes the
stock-based compensation expense on a straight-line basis over the requisite
service period of an award. Stock-based compensation is based on unvested
outstanding awards. We have elected to recognize forfeitures when realized.
Off-balance Sheet Arrangements
As of September 30, 2021, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
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