NOTE 1 – ORGANIZATION, NATURE OF OPERATIONS AND GOING CONCERN

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 U.S. Volcon LLC is no longer used for selling vehicles and accessories.

Going Concern

The accompanying 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 August 2022, the Company received net proceeds of approximately $22.3 million for the issuance of convertible notes due February 2024 (“Convertible Notes”) and warrants (see Note 6).

The Company received net proceeds of approximately $3.9 million for the issuance of additional convertible notes in May 2023 due February 2024 (“New Notes”) and warrants. On the issuance date of the New Notes, the Company exchanged the Convertible Notes for Series A and Series B notes (collectively the “Exchange Notes”). The Exchange Notes require the Company to have unrestricted and unencumbered cash on deposit of $10 million if the outstanding principal (and interest, if any) of the Exchange Notes is $15,000,000 or greater as of December 31, 2023 (the September 30, 2023 requirement under the Convertible Notes was removed). The cash on deposit requirement is reduced dollar for dollar to the extent the outstanding principal (and interest, if any) of the Exchange Notes is less than $15 million on this date. The Company also exchanged the warrants issued with the Convertible Notes for new warrants (the “Exchange Warrants”) (see Note 6 for further discussion).

In May 2023, the Company received net proceeds of approximately $4.0 million for the issuance of 26,667 shares of common stock at $168.75 per share.

On September 14, 2023, the holders of the New Notes and Exchange Notes (collectively the “May 2023 Notes”) entered into an agreement to modify the terms to extend the due date to January 31, 2025. In addition, the requirement to have unrestricted and unencumbered cash on deposit of $10 million if the outstanding principal (and interest, if any) of the Exchange Notes is $15 million or greater as of December 31, 2023 was amended to reduce the unrestricted and unencumbered cash on deposit to $5 million if the outstanding principal (and interest, if an) of the Exchange Notes is $15 million or greater as of June 30, 2024. The cash on deposit requirement is reduced dollar for dollar to the extent the outstanding principal (and interest, if any) of the Exchange Notes is less than $15 million on this date. The Company may factor up to $10 million of its accounts receivables provided the factoring lender executed a subordination and intercreditor agreement on terms acceptable to the holders of the May 2023 Notes, which was completed on October 17, 2023. The Company was also required to perfect a security interest in the assets of the Company no later than September 22, 2023, which the Company has completed.

On September 18, 2023, the Company received net proceeds of approximately $571,400 for the issuance of 6,222 shares of common stock at $112.50 per share.

In a series of warrant inducement transactions from September 29, 2023 to October 30, 2023, as more fully discussed below, the Company raised $1,027,478.

On November 17, 2023, received net proceeds of approximately $16.2 million for the issuance of 73,913 Common Units and 878,469 Pre-Funded Units. Each Common Unit consists of one share of common stock, a Series A Warrant to purchase one share of common stock and a Series B Warrant to purchase one share of common stock. Each Pre-Funded Unit consists of one Pre-Funded Warrant to purchase one share of our common stock, a Series A Warrant and a Series B Warrant. The Pre-Funded Warrants are immediately exercisable and may be exercised at any time until all of the Pre-Funded Warrants are exercised in full. Subject to stockholder approval, the Series A and Series B Warrants are subject to adjustments. See further discussion in Note 9.

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 with a $1,000 per share value and an initial conversation price of $1.33 per share for common stock. All covenants from the Convertible Notes were terminated upon this exchange. In March 2024, certain holders of the Series A convertible preferred stock converted $2.3 million shares to 1.7 million shares of common stock.

Management anticipates that our cash on hand as of December 31, 2023 plus 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 year ended December 31, 2023. 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 July 6, 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 October 13, 2023, the Company completed a 1 for 5 reverse stock split and the Company’s common stock price increased to over $1.00. On October 30, 2023, the Company received a notice from Nasdaq that it had regained compliance with Rule 5550(a)(2), as the minimum bid price of its common stock was above $1.00 for 10 consecutive business days. On December 19, 2023, the Company received a notice from Nasdaq that it was again 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 we did not meet the MVLS requirement and we were 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 they informed the Company that it could receive a decision within two weeks from the hearing date, although the timing of the decision is at the discretion of Nasdaq.

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, which 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.