Business context and reporting period
Entity mismatch: The supplied filing is Volcon, Inc.’s Form 10-Q, not an Empery Digital Inc. filing. This summary therefore describes Volcon. The unaudited reporting period ended June 30, 2023; the filing was signed August 11, 2023.
Volcon designs and sells all-electric off-road powersports vehicles, UTVs, e-bikes, parts and accessories. It has outsourced vehicle manufacturing and some design and development work to third parties.
Financial performance and position
| Metric | Three months ended June 30, 2023 | Six months ended June 30, 2023 |
|---|---|---|
| Revenue | $519,300 | $1,689,758 |
| Gross profit | $184,653 (35.6% margin) | $125,130 (7.4% margin) |
| Operating expenses | $5,116,049 | $10,581,861 |
| Operating loss | $(4,931,396) | $(10,456,731) |
| Net loss | $(23,028,194) | $(30,327,663) |
| Basic and diluted loss per share | $(0.85) | $(1.17) |
At June 30, 2023, cash was $7.97 million and restricted cash was $0.55 million. Current assets were $18.53 million versus current liabilities of $44.00 million, a working-capital deficit of approximately $25.5 million. Total assets were $21.04 million, total liabilities $45.03 million, and stockholders’ deficit $23.99 million.
Current liabilities included $28.58 million of convertible notes, $2.93 million of conversion liabilities and $9.64 million of warrant liabilities. The May 2023 notes are due February 2024. The balance sheet also included $91,951 of notes payable and $1.36 million of operating lease liabilities.
For the first half, operating cash use was $10.58 million, investing cash use was $0.30 million, and financing cash provided was $7.86 million. Cash, cash equivalents and restricted cash declined by $3.02 million to $8.52 million.
Material changes versus prior comparable period
- Second-quarter revenue fell 78% from $2.37 million; first-half revenue fell 52% from $3.55 million. The 2023 mix shifted toward Brat e-bikes and youth motorcycles, while 2022 revenue was predominantly Grunt sales.
- Gross margin improved from a loss of $3.64 million in Q2 2022 and $5.98 million in H1 2022 to positive gross profit in 2023. The filing attributes the change in part to prior-year inventory charges, lower production costs, expired Grunt warranty accruals and other adjustments; 2023 gross profit should be read alongside these items.
- Operating losses narrowed year over year, but net losses increased, primarily reflecting a $22.30 million loss on extinguishment of the prior convertible notes, partly offset by a $5.79 million non-cash gain from remeasurement of derivative liabilities and affected by higher interest expense.
- Cash used in operations improved from $18.22 million in H1 2022 to $10.58 million in H1 2023. Cash declined from $10.99 million at December 31, 2022, while current liabilities rose substantially, mainly due to the new note and derivative liability accounting.
Outlook, commentary and principal risks
- Going concern: Management says available cash plus expected operating cash generation will not be sufficient to fund planned operations and meet required cash balances beyond one year from issuance of the financial statements. The filing states that substantial doubt exists about the company’s ability to continue as a going concern; additional funding may not be available on acceptable terms or at all.
- Cash covenant and financing: The May 2023 notes require at least $10 million of unrestricted cash on December 31, 2023 if outstanding principal and interest are at least $15 million, with the threshold reduced dollar for dollar below that debt level. The notes include restrictive covenants and potential default and redemption provisions. The company reported covenant compliance at June 30.
- Product plans: Management expected Grunt EVO sales to begin in Q3 2023 and Runt LT and Stag deliveries in Q4 2023; these are expectations, not reported results. It anticipated higher revenue and cost of goods sold as launches began. Stag component costs and sourcing were not fully settled, and actual unit costs could exceed expectations. Management also expected sales and marketing and some administrative and product-development costs to rise.
- Operating risks: Production and development rely on third parties, including a manufacturer serving multiple vehicle programs, and one supplier provides critical Stag battery and drivetrain components. Delays, quality issues, supplier pricing, battery availability, customer demand, dealer financing and expansion of the dealer/distributor network could affect execution and margins.
- Nasdaq listing: After quarter-end, Nasdaq notified Volcon that it was below both the $35 million market-value requirement and the $1.00 minimum bid-price requirement. The stated deadline to regain compliance was January 2, 2024; delisting was possible if compliance was not restored. These notices were received July 5 and 6, 2023.
- Dilution and derivatives: May 2023 notes and warrants could convert or be exercised into up to 65.3 million shares, according to the risk-factor discussion, creating potential substantial dilution. Their conversion and exercise prices were adjusted to $0.75 after shareholder approval on August 3, 2023; the filing also describes a $0.22 floor subject to the transaction terms. Fair-value changes in these instruments can materially affect reported earnings.
- Controls and unusual items: Management concluded disclosure controls and procedures were ineffective at June 30, citing prior late filings and unremediated control deficiencies. The filing reports no material change in internal control over financial reporting during the first half. The $22.30 million extinguishment loss and $5.79 million fair-value gain are significant non-cash or transaction-related earnings items.
Most important facts for investors to verify
- Confirm the filing belongs to the intended issuer: this document identifies Volcon, Inc. (ticker VLCN), not Empery Digital Inc.
- Assess funding needs, available financing and the December 31, 2023 cash covenant against the company’s cash burn and going-concern warning.
- Check the outstanding note balances, conversion terms, potential dilution and any subsequent conversions, warrant exercises or financing transactions.
- Verify whether the Grunt EVO, Runt LT and Stag launches occurred as planned, and review realized sales, margins, production costs and supplier performance.
- Check whether Nasdaq listing deficiencies were cured by the deadline and whether disclosure-control remediation was completed.
- Review the underlying note disclosures for the unusual gross-margin adjustments, derivative valuations, debt-extinguishment accounting and any subsequent events.