# Empery Digital Inc.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Empery Digital Inc.](/companies/empd.md) (CIK 1829794)
- Form: 10-Q
- Filed: 2022-11-10
- Accepted by EDGAR: Nov 10, 2022, 08:50 ET
- Period: 2022-09-30
- Accession: 0001683168-22-007482
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1829794/000168316822007482/volcon_i10q-093022.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1829794/000168316822007482/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $242.7k | us-gaap:Revenues |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $3.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $2.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $11.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | −$1.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | −$7.8m | us-gaap:GrossProfit |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | −$7.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | −$25.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $618.3k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $627.8k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | −$7.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | −$26.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | −$0.32 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | −$1.13 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | −$0.32 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | −$1.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 24,345,221 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 23,454,024 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | −$24.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $620.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-09-30 | $20.0m | us-gaap:Cash |
| Current assets | at 2022-09-30 | $25.9m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $28.4m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $19.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $20.6m | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $85.6k | us-gaap:LongTermDebt |
| Shareholders' equity | at 2022-09-30 | $7.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,259 characters.

*The following discussion and analysis is intended as a review of significant factors affecting the Company’s financial condition and results of operations for the periods indicated. This discussion and analysis should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K, which contains audited financial statements of the Company as of and for the year ended December 31, 2021, previously filed with the Securities and Exchange Commission. Results for the three and nine months ended September 30, 2022 are not necessarily indicative of results for the year ending December 31, 2022 or any future period.*

### Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.

In addition, from time to time, we or our representatives may make forward-looking statements orally or in writing. We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us. Such forward-looking statements relate to future events or our future performance, including: our financial performance and projections; our growth in revenue and earnings; and our business prospects and opportunities. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “hopes” or the negative of these or similar terms. In evaluating these forward-looking statements, you should consider various factors, including: our ability to change the direction of the Company; our ability to keep pace with new technology and changing market needs; our capital needs, and the competitive environment of our business. These and other factors may cause our actual results to differ materially from any forward-looking statement. Forward-looking statements are only predictions. The forward-looking events discussed in this document and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us. We are not obligated to publicly update or revise any forward-looking statement, whether as a result of uncertainties and assumptions, the forward-looking events discussed in this document and other statements made from time to time by us or our representatives might not occur.

While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Other sections of this Form 10-Q describe additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations, and we do not intend to do so.

Forward-looking statements include, but are not limited to, statements about:

- our ability to generate revenues from sales, generate cash from operations, or obtain additional funding to market our vehicles and develop new products;
- our ability to successfully implement and effectively manage our outsourced manufacturing, design and development model and achieve any anticipated benefits;
- the ability of third-party manufacturers to produce our vehicles in accordance with our design and quality specifications, with sufficient scale to satisfy customers and within a reasonable cost;
- anticipated timing for the manufacture, design, production, shipping and launch of our vehicles;
- the inability of our suppliers to deliver the necessary components for our vehicles at prices and volumes acceptable to our third-party manufacturers;
- our ability to establish a network of dealers and international distributors to sell and service our vehicles.
- whether our vehicles will perform as expected;
- our facing product warranty claims or product recalls;
- our facing adverse determinations in significant product liability claims;
- customer adoption of electric vehicles;
- the development of alternative technology that adversely affects our business;
- the impact of COVID-19 on our business;
- increased government regulation of our industry;
- tariffs and currency exchange rates; and
- the conflict with Russia and the Ukraine and the potential adverse effect it may have on the availability of batteries for our vehicles.

### Overview

We are an all-electric, off-road powersports vehicle company developing electric two and four-wheel motorcycles and utility terrain vehicles, or UTVs, also known as side-by-sides, along with a complete line of upgrades and accessories. In October 2020, we began building and testing prototypes for our future offerings with two off-road motorcycles – the Grunt and the Runt. Our motorcycles feature unique frame designs protected by design patents. Additional utility and design patents have been filed for other aspects of Volcon’s vehicles.

We initially began to sell and distribute the Grunt and related accessories in the United States on a direct-to-consumer sales platform. We terminated our direct-to-consumer sales platform in November 2021. Prior to the termination of our direct-to-consumer sales platform, U.S. customers made deposits for 360 Grunts (net of cancellations) and five Runts, plus accessories and a delivery fee representing total deposits of $2.2 million. These orders were cancellable by the customer until the vehicle was delivered and after a 14-day acceptance period, therefore the deposits were recorded as deferred revenue. As of June 30, 2022, we had completed shipping of all Grunts sold through our direct-to-consumer sales platform. Due to delays in developing the Runt, we refunded the deposits made for all Runts.

Beginning in November 2021, we began negotiating dealership agreements with powersports dealers to display and sell our vehicles and accessories. Customers can now, or will soon be able to, buy our vehicles and accessories directly from a local dealership. Some of these dealers will also provide warranty and repair services to customers. Through September 30, 2022, we have entered into 144 dealership agreements. Upon sale of a Grunt the dealer may order an additional Grunt. We expect that once we have increased manufacturing capacity, dealers will be able to order in higher quantities to support their customer demand. We also expect to be able to offer the dealers a financing option, or “floor plan” to make higher purchases of our vehicles but we do not currently have this financing option available. We have an agreement with a third-party financing company to provide financing to qualified customers of each dealer. There is no recourse to the Company or the dealer if the dealer’s customer defaults on the financing agreement with this third-party.

As of September 30, 2022, we have signed agreements with five importers in Latin America and one importer for the Caribbean Region, collectively referred to herein as the LATAM importers to sell our vehicles and accessories in their assigned countries/markets. In May 2022 we signed an exclusive distribution agreement with Torrot Electric Europa S.A., referred to herein as Torrot, to distribute their electric motorcycles for youth riders in Latin America. We will use our LATAM importers to sell Torrot’s products in Latin America. On October 1, 2022, we signed an expanded agreement with Torrot to also be the exclusive distributor of Torrot and Volcon co-branded youth electric motorcycles in the United States as well as Latin America.

We expect to expand our global sales of our vehicles and accessories beyond our current LATAM importer base. We expect to sign more LATAM importers in 2023 and expect to begin selling in Canada, Europe and Australia in 2023. We expect export sales to be executed with individual importers in each country that buy vehicles by the container. Each importer will sell vehicles and accessories to local dealers or directly to customers. Local dealers will provide warranty and repair services for vehicles purchased in their country.

In July 2022, we expanded our offerings with the introduction of the first of our Volcon Stag UTV models, the Stag LE, which we anticipate will be available for delivery in the first half of 2023, followed by additional models of the Stag expected in 2024 and 2025 and the introduction of a higher performance, longer range UTV (to be named) which we expect to begin delivering in 2025. The Stag will be manufactured by a third-party and incorporate electrification units, which include batteries, drive units and control modules provided by General Motors. As of September 30, 2022 we have taken non-binding pre-production orders. Pre-orders of the Stag are non-binding and cancellable prior to delivery.

Through August 2022 we assembled the Grunt in a leased production facility in Round Rock, Texas. In August 2022 we announced that we will outsource the manufacturing of the Grunt to a third-party manufacturer, which we anticipate will reduce costs and improve profitability on the Grunt and expect to receive Grunts from this manufacturer in November 2022. We also outsourced the manufacturing of the 2023 Grunt EVO to the same third-party manufacturer. The 2023 Grunt EVO will replace the Grunt and has a belt drive rather than a chain drive as well as an updated rear suspension.

In September 2022, we reduced our headcount in our product development and administration departments as we outsourced the design and development of certain components of our vehicle development. We also hired our chief marketing officer and expect to hire additional sales and marketing employees and increase marketing activities to further support our brand and products.

We began taking pre-orders for an E-Bike, the Brat, in September 2022 and expect shipments to customers to begin in the fourth quarter of 2022. The Brat is being manufactured by a third-party. We are also working to finalize arrangements for the Runt to be manufactured by a third-party and we expect to begin selling the Runt in the second quarter of 2023.

The estimated fulfillment of all orders we have received assumes that our third-party manufacturers can successfully meet our order quantities and deadlines. If they are unable to satisfy orders on a timely basis, our customers may cancel their orders.

### Results of Operations

The following financial information is for the three months and nine months ended September 30, 2022 and 2021.

|  | Three Months Ended September 30, 2022 | September 30, 2021 | Nine Months Ended September 30, 2022 | September 30, 2021 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $242,710 | $75,067 | $3,795,065 | $75,067 |
| Cost of goods sold | 2,012,828 | 1,176,691 | 11,549,871 | 1,176,691 |
| Gross margin | (1,770,119) | (1,101,624) | (7,754,806) | (1,101,624) |
| Operating expenses: |  |  |  |  |
| Sales and marketing | 1,282,014 | 1,135,205 | 3,942,827 | 1,937,745 |
| Product development | 2,177,347 | 3,021,207 | 6,775,768 | 7,595,581 |
| General and administrative expenses | 2,085,211 | 586,494 | 7,409,601 | 14,634,037 |
| Total operating expenses | 5,544,572 | 4,742,906 | 18,128,196 | 24,167,363 |
| Loss from operations | (7,314,691) | (5,844,530) | (25,883,002) | (25,268,987) |
| Other income (expense) | 33,814 | (3,842) | 72,800 | (9,332) |
| Interest expense | (618,307) | (42,183) | (627,789) | (67,521) |
| Total other expense | (584,493) | (46,025) | (554,989) | (76,853) |
| Loss before provision for income taxes | (7,899,184) | (5,890,555) | (26,437,991) | (25,345,840) |
| Provision for income taxes | – | – | – | – |
| Net loss | $(7,899,184) | $(5,890,555) | $(26,437,991) | (25,345,840) |

#### Revenue

Revenue for the three and nine months ended September 30, 2022, was $242,710 and $3,795,065 which represents sales of Grunts of $953,429 and $4,493,951; and accessories and parts of $81,125 and $196,845, respectively. The sales of Grunts are offset by promotional rebates provided to dealers and distributors in the third quarter of 2022 on inventory held by them as of August 1, 2022 resulting in $812,600 being recorded to reduce revenue. The rebate is provided as a year-end incentive to dealers and distributors to sell their remaining 2022 Model Year Grunt inventory. Revenue for the three and nine months ended September 30, 2021, was $75,067 and represents the sale of 11 Grunts.

We expect revenue for the three months ended December 31, 2022 to be consistent with the revenue for the three months ended September 30, 2022 due to availability of Grunt and Brat inventory.

#### Cost of Goods Sold

Cost of goods sold for the three months ended September 30, 2022 were 2,012,828 including labor costs of $504,830 for employees and contractors performing assembly and quality control testing of Grunts and stock-based compensation of $113,795 for share-based awards for employees. Part costs for Grunts sold during the period was $48,627. We paid $223,758 for fees owed to cancel purchase orders to reduce quantities ordered to expected sales demand. Facilities costs were $131,344 for our manufacturing facility and inventory warehousing costs. Shipping costs and duties/tariffs for inventory purchases and shipments to customers were $701,825, which includes an accrual of $350,000 for costs expected to be incurred to ship our raw materials and work-in-process inventory to our third-party manufacturer. Depreciation expense of $123,008 was recorded in the period and a loss on the write-off of property and equipment of $170,657 was recognized for the disposal of manufacturing assets due to the outsourcing of Grunt assembly.

Cost of goods sold for the nine months ended September 30, 2022 were 11,549,871 including labor costs of $1,868,801 for employees and contractors performing assembly and quality control testing of Grunts and stock-based compensation of $392,244 for share-based awards for employees. Part costs for Grunts during the period were $5,402,140 which included parts costs for Grunts sold of 3,080,033, inventory adjustments for excess and obsolete inventory of $364,322 and adjustments of $1,643,505 to record inventory at its net realizable value. Facilities costs were $458,650 for our manufacturing facility and inventory warehousing costs. Shipping costs and duties/tariffs for inventory purchases and shipments to customers were $2,041,022 which includes an accrual of $350,000 for costs expected to be incurred to ship our raw materials and work-in-process inventory to our third-party manufacturer. Accrued warranty costs were $556,314. Depreciation expense of $270,526 was recorded in the period and a loss on the write-off of property and equipment of $170,657 was recognized for the disposal of manufacturing assets due to the outsourcing of Grunt assembly.

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.

For the fourth quarter of 2022 we expect our overall cost of goods sold related to Grunts to decrease as we expect to sell fewer Grunts as we transition the manufacturing of the Grunt to our third-party manufacturer and we begin transitioning to the Grunt EVO. Our third-party manufacturers could experience manufacturing delays due to shipping constraints in their supply chain or shipping delays to get our products to us or our customers. We expect the lower cost of goods sold from the Grunt in the fourth quarter of 2022 will be partially offset by higher cost of goods sold for the Brat, which we expect to begin selling in the fourth quarter of 2022.

Beginning in the first quarter of 2023 we expect the cost of goods sold to increase as we expect to begin selling the Grunt EVO and sell higher quantities of Brats than we anticipate in the fourth quarter of 2022. Our cost per Grunt EVO is fixed in our contract with the third-party manufacturer. We have identified suppliers who can deliver Grunt EVO parts at a lower cost than we have historically paid for the same or similar Grunt part, as many are interchangeable, and we have provided these vendors to our third-party manufacturer for their consideration in sourcing parts. Additional cost savings may be realized if the third-party manufacturer can source or manufacture parts at a lower cost.

#### Sales and Marketing Expense

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.

For the three months ended September 30, 2022 sales and marketing expenses were $1,282,014 and include $432,640 for promoting our products and brand, $479,848 for employee payroll costs, stock-based compensation expense of $123,678 for share-based awards granted to employees and consultants, and travel costs of $76,555 primarily related to costs incurred for travel to build our dealer and distributor network.

For the nine months ended September 30, 2022 sales and marketing expenses were $3,942,827 and include $1,094,886 for promoting our products, employee payroll costs of $1,379,911, stock-based compensation of $550,563 for share-based awards granted to employees and consultants, $317,746 for facilities costs, including costs of $148,323 for closing our Denver store, primarily to operate our now closed dealership in Denver, Colorado and travel costs of $182,845 primarily related to costs incurred for travel to build our dealer network.

Sales and marketing expenses for the three months ended September 30, 2021 were $1,135,205 and 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 $1,937,745 and 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 expenses to increase as we expand our U.S. dealer and international distributor networks and promote our brand and 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.

For the three months ended September 30, 2022, general and administrative expenses were $2,085,211 and were primarily related to expenses associated with employee payroll costs of $659,262, stock-based compensation of $123,608, professional fees of $431,763, including legal fees of $331,483 and recruiting fees of $29,073, insurance costs of $419,581 and public company costs excluding legal fees of $190,083.

For the nine months ended September 30, 2022, general and administrative expenses were $7,409,601 and were primarily related to expenses associated with employee payroll costs of $2,085,487, stock-based compensation of $1,018,582, professional fees of $1,874,017, including legal fees of $1,450,289 and recruiting fees of $173,122, insurance costs of $1,165,738, and public company costs excluding legal fees of $349,073.

For the three months ended September 30, 2021, general and administrative expenses were $586,494 and 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 $14,634,037 and 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 to remain relatively consistent with the third quarter of 2022 over the next several quarters as we have decreased staffing in some administrative areas but expect costs such as insurance and public company reporting and compliance requirements to offset the employee cost reductions.

#### Product Development Expense

Product development expenses relate to development and testing of our products and process to manufacture these products.

For the three months ended September 30, 2022, product development expenses totaled $2,177,347 and primarily relate to expenses associated with employee payroll costs of $1,199,179, stock-based compensation of $81,191 for share-based awards granted to employees and consultants, professional fees of $64,444 for product design, research and development costs of $115,034, prototype parts and tooling costs of $500,532, and facilities cost of $74,540.

For the nine months ended September 30, 2022, product development expenses totaled $6,775,768 and primarily related to expenses associated with employee payroll costs of $3,077,064, stock-based compensation of $646,350 for share-based awards granted to employees and consultants, professional fees of $293,706 including $173,001 for product design and $95,130 for employee recruiting, research and development costs of $624,984, prototype parts and tooling costs of $1,569,902, and facilities cost of $204,781.

Product development expenses for the three months ended September 30, 2021 were $3,021,207 and 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 were $7,595,581, and 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 related to employee costs to decrease in the future since we have outsourced certain design and development of our new vehicle models. The decrease will be offset by increases due to outsourced design and development costs and costs related to prototype costs for the Stag, Grunt EVO and Runt. Prototype costs, especially for the Stag, will be significant as we begin receiving Stag units that will be used to validate engineering and manufacturing design and costs incurred to perform testing to ensure the vehicles meet regulatory compliance requirements where we expect to sell these vehicles.

#### Interest and Other Expenses

Interest and other expenses for the three and nine months ended September 30, 2022 were $618,307 and $627,789. Non-cash interest expense of $614,366 was recognized for the amortization of debt issuance costs and accretion of principal on the Convertible Notes issued in August 2022. Interest expenses for the three and nine months ended September 30, 2021 were not significant for either period.

We expect interest expense to increase in the future as we recognize interest on the Convertible Notes issued in August 2022. These notes were issued at an original issuance discount (“OID”) of 8% and due to the warrants also issued in connection with these notes, the allocation of proceeds between the convertible notes and warrants resulted in the notes being recorded at a significantly greater discount than the stated 8% OID. This discount, along with the OID will be accreted to interest expense over the term of the Convertible Notes and does not result in any cash payments to be made unless the Company has an event of default as discussed in Note 6 to the financial statements.

#### Net Loss

Net loss for the three and nine months ended September 30, 2022, was $7,899,184 and $26,437,991, respectively, compared to $5,890,555 and $25,345,840 for the three and nine months ended September 30, 2021, respectively.

### Liquidity and Capital Resources

On September 30, 2022, we had cash and restricted cash of $20.5 million, including $0.5 million of restricted cash, and we had working capital of $6.6 million. Since inception we have funded our operations from proceeds from debt and equity sales.

#### Cash used in operating activities

Net cash used in operating activities was $24.8 million for the nine months ended September 30, 2022 and includes all of our operating costs except stock-based compensation, write-down of inventory and prepaid inventory, depreciation and amortization, non-cash interest expense for the amortization of debt issuance costs and accretion of principal on Convertible Notes, and losses on write-off of assets and leases. Cash used in operating activities includes increases in accounts receivable of $1.5 million for sales made to dealers, an increase in inventory of $1.4 million offset by a reduction in inventory deposits of $1.1 million as we made fewer deposits based on outsourcing of the assembly of the Grunt in August 2022 as the third-party manufacturer will purchase raw materials prospectively, a decrease of $2.2 million of customer deposits as we fulfilled all direct to consumer orders, a decrease of $1.0 million due to timing of payments on accounts payables, an increase of $0.3 million in accrued liabilities and an increase in prepaid expenses of $0.3 million.

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 $0.6 million for the nine months ended September 30, 2022, consisting of $0.2 million of purchases of equipment and tooling related to our Grunt manufacturing and product development, $0.2 million for the cost of Grunts capitalized as demonstration units, and $0.2 million related to computers and equipment due to the growth in headcount during the period. Net cash used in investing activities was $0.7 million for the nine months ended September 30, 2021 and mainly included purchases of equipment related to our Grunt manufacturing, tooling related to our product development and certain intangible assets.

#### Cash provided by financing activities

Cash provided from financing activities for the period ended September 30, 2022, was $40.4 million and was related to proceeds received from both the public offering of our common stock in February 2022 where we sold 6,666,667 shares at $3.00 per share and the issuance of senior convertible notes and warrants in August 2022 for net cash proceeds of $22.3 million.

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 $2.3 million and paid expenses of $53,500.

In February 2021, we completed an offering of our Series A preferred stock. We received gross proceeds of $2.7 million and issued 415,287 shares of Series A preferred stock. We paid commissions and expenses of $0.2 million 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.

From April 2021 to May 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 attain profitable operations and if necessary, obtain continued financial support from the issuance of debt or equity. As of September 30, 2022, we had incurred an accumulated deficit of $68.0 million since inception. Additionally, one of the covenants for our Convertible Notes requires us to have $10 million of cash on hand if principal (and interest, if any) of $15 million or more of the Convertible Notes is outstanding as of September 30, 2023 and December 31, 2023 (subject to adjustment if the principal (and interest, if any) is below $15 million). Although management anticipates that our cash on hand as of September 30, 2022 plus the cash expected to be generated from operations is sufficient to fund planned operations and maintain required cash balances for the Convertible Notes beyond one year from the date of the issuance of the financial statements as of and for the three and nine months ended September 30, 2022 there can be no assurance that we will not require additional funding to support our operations. There can also be no assurance that such 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.

### 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

No critical accounting policies or estimates existed as of September 30, 2022.

## Market risk

As filed, 153 characters.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

## Controls and procedures

As filed, 2,121 characters.

### Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were not effective as of September 30, 2022 to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding disclosures. Notwithstanding this conclusion, we believe that our unaudited consolidated financial statements contained in this Quarterly Report fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects. Management is working to identify corrective actions for the weakness and will periodically re-evaluate the need to add personnel and implement improved review procedures.

### Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

## Risk factors

As filed, 179 characters.

There have been no material changes to the risk factors included in the Form 8-K filed with the SEC on September 13, 2022, which is accessible on the SEC’s website at www.sec.gov.

Filed Nov 10, 2022.
Source: SEC EDGAR, the filing index for accession 0001683168-22-007482. Last ingested by Listed: Nov 2, 2026, 08:36 ET. No prices; not investment advice.