Empery Digital Inc.

Current report

We are an all-electric, off-road powersports vehicle company selling and developing Volcon electric two-wheeled E-Bikes and motorcycles, four-wheeled utility terrain vehicles, or UTVs, also known as side-by-sides, and golf carts, along with a line of upgrades and accessories. In January 2025, we also entered into a distribution agreement with a golf cart manufacturer, Super Sonic Company Ltd. (“Super Sonic”) located in Vietnam, and a subsidiary of Odes Industry, to supply golf carts to other companies in the U. S. who sell golf carts.

Current report

Distribution and Supplier Agreements

Current report

In January 2025, we signed an exclusive Distribution Agreement with Super Sonic to act as their exclusive distributor of certain of their golf cart products (the “Products”), in the U. S.. Super Sonic agreed to recommend to all customers the sole use of us for all Products. Super Sonic has the right to sell non-Volcon branded Products to other customers and shall pay 5% of the order price to us. Before the end of June 2025, we agreed to provide a procurement plan, and if we fail to meet the minimum purchase requirement described in the procurement plan for two consecutive months, Super Sonic shall have the right to immediately terminate the Distribution Agreement. During the term of the Distribution Agreement, to the extent we sell any Volcon-branded products (the “Volcon Products”) that are similar to the Products, we agreed to provide Super Sonic with a right of first refusal to manufacture the Volcon Products. As more fully discussed in Note 15 of the accompanying financial statements, we may be required to issue our common stock, warrants to purchase our common stock and the right to appoint a director to our board of directors if certain golf cart sales volumes are attained.

Current report

On February 24, 2025, we entered into a Supply Agreement with Venom-EV LLC (“Venom”) to supply Venom with certain golf carts. The Supply Agreement allows Venom to purchase up to $3 million of golf carts with payment terms of 90 days from the date the golf carts are delivered to Venom’s facility. These golf carts will be purchased through a manufacturer specified in the Supply Agreement and we will receive consideration of the cost of the golf carts plus a three percent margin. We received an initial order from Venom for $2.4 million of golf carts. At the end of each calendar quarter, we agreed to issue Venom shares of Company common stock based on the number of golf carts purchased by Venom during the quarter as follows: for each 1,000 Units sold in 2025 to Venom by us, we shall issue Venom a number of shares equal to 1% of our outstanding shares of common stock as of the last day of such quarter that the 1,000 Units were sold for no additional consideration.

Current report

Revenue for the year ended December 31, 2024, was $4,037,191 which represents sales of Brats of $1,561,555, Grunt EVOs of $1,280,739, Stags of $371,552, Volcon Youth of $286,680 (which we stopped selling as of June 30, 2024), MN1s of $31,225, HF1s of $22,500 and accessories and parts of $264,338. Revenue also increased due to the reversal of unclaimed dealer rebates and price adjustment credits in the amount of $350,093 offset by discounts due to various promotions in the amount of $125,859.

Current report

Cost of goods sold for the year ended December 31, 2024 were $18,168,288 including payroll costs of $274,801 for employees performing product fulfillment, logistics management, and service and warranty, partially offset by a stock-based compensation benefit of ($11,827) for the reversal of previously recognized stock-based compensation on stock options that did not vest due to employee terminations. Product costs for Brats and Grunt EVOs sold during the period were $1,523,053 and $1,427,562, (before the finished goods inventory write down discussed below), respectively. Volcon Youth product costs were $186,813 before the additional expense of $81,911 for the write down of all Volcon Youth inventory as the Company could no longer sell Volcon Youth motorcycles or parts after June 30, 2024. MN1 and HF1 product costs were $34,491 and $125,550 respectively.

Current report

Stag product costs were $950,424, which includes an expense of $112,168 for the loss the Company realized due to agreeing to provide additional units to a customer at a sales price less than the manufactured cost of the units. As noted above, the Company also wrote off all Stag parts inventory and prepaid inventory deposits resulting in an expense of $8,712,644. The Company also recognized an expense of $976,420 for a settlement agreement with a vendor who supplies certain suspension components for the Stag, an expense of $2,526,410 for a settlement agreement with the manufacturer of the Stag and $35,000 for a settlement to a vendor of Grunt parts. These expenses were offset by a credit of $700,000 for an amendment to the original settlement agreement with Torrot whereby the Company agreed to settle the future payment obligation by making a one-time lump sum payment and returning all unsold units and parts to Torrot. The Company also wrote down the Grunt EVO finished goods inventory by $674,379 due to the Company lowering the sales price to dealers and distributors.

Current report

The Company recorded a loss on disposal of assets of $817,736 primarily tooling related to Stag, Grunt EVO and Runt. The Company also recorded $175,000 as an offset to expenses for the partial recovery of a previously written off prepaid inventory deposit. Facilities costs for the year ended December 31, 2024 were $408,217 for our warehouse facility and third party warehousing costs.

Current report

We expect sales expenses to increase as we begin expanding our international distributors and selling commissions to increase sales of Brats, MN1s and HF1s. We expect marketing expenses to increase to promote the MN1 and HF1 products and to launch the two-wheel motorcycle that will replace the Grunt EVO.

Current report

Product development expenses were $2,668,330 for year ended December 31, 2024 and were primarily related to expenses associated with employee payroll costs of $1,515,900, stock-based compensation of $126,337 for share-based awards granted to employees, facilities costs of $242,677, prototype costs of $252,147 and software fees related to product development in the amount of $77,837, travel expenses of $163,669 and depreciation expense of $100,782.

Current report

For the year ended December 31, 2024, general and administrative expenses were $7,665,647 and were primarily related to expenses associated with employee payroll costs of $2,120,064, stock-based compensation of $159,388 for share-based awards granted to employees, professional fees of $1,130,595 (including legal fees of $574,952, tax and accounting fees of $82,116 and audit fees of $242,200), software costs of $549,238, insurance costs of $2,494,892, travel expenses of $161,078, facilities expense of $177,435, annual and special shareholder meeting costs of $201,268, board compensation expense of $125,000 and other public company expense costs of $327,774.

Current report

We expect general and administrative expenses to remain consistent over the next several quarters. Costs such as product liability insurance may increase due to the introduction of new products and increased sales.

Current report

Interest and other income/expenses for the year ended December 31, 2024 was $18,496,282. Non-cash interest expense of $314,838 was recognized for the amortization of debt issuance costs and accretion of principal on the May 2023 Notes through the date these notes were exchanged for Preferred Stock in March 2024. We recorded a loss on the conversion of some of these notes of $333,544 and a loss from the exchange of these notes for Preferred Stock of $1,314,065. We recognized a loss of $1,470,554 when we repaid the outstanding principal of the May 2024 Notes with the proceeds received from our July 2024 equity offering. Non-cash interest expense of $238,965 was recognized for the amortization of debt issuance costs and accretion of principal on the May 2024 Notes until they were repaid. We recorded a loss on the change in the estimated fair value of the Series A and Series B Warrant liabilities of $14,933,739 which was partially offset by a gain of $165,355 from the exercise of some of the Series B Warrants.

Current report

Net cash used in operating activities was $16.0 million for year ended December 31, 2024 and includes all of our operating costs except depreciation and amortization of $0.4 million, write down of Stag, Grunt EVO and Volcon Youth inventory and inventory deposits of $9.3 million, non-cash interest expense for the amortization of debt issuance costs and accretion of principal on the May 2023 Notes and May 2024 Notes of $0.6 million, loss on change in derivative financial liabilities of $14.8 million, losses on conversion and extinguishment of Convertible Notes of $1.6 million, $1.5 million loss on repayment of the May 2024 Notes, $0.8 million from the loss on disposal of fixed assets, and stock based compensation of $0.3 million. Cash used in operating activities includes a decrease in accounts receivable of $0.1 million due to collections, a decrease of $0.8 million in prepaid inventory deposits due to inventory being received, a decrease of $0.9 million in inventory, a decrease of $0.9 million in prepaid assets primarily due to lower insurance costs, a decrease of $0.5 million in accounts payable, and an increase of $1.6 million in accrued liabilities primarily due to the vendor settlements noted above and $0.4 million used to pay our lease liabilities. Asof December 31, 2024, wehave a decrease of $0.2 million in customer deposits, primarily due to orders being fulfilled for two of our Latin American distributors for shipments of Brats and Grunt EVOs paid for previously.

Current report

Net cash used in investing activities was $0.2 million for the year ended December 31, 2024, primarily consisting of $0.3 million of purchases of equipment and tooling offset by $0.1 million received from an insurance settlement for a vehicle that was totaled in the period.

Current report

Cash provided by financing activities for the year ended December 31, 2024, was $10.4 million and was primarily related to the net proceeds from the issuance of common stock and pre funded warrants in July 2024 for net proceeds of $10.8 million and net proceeds from the issuance May 2024 Senior Notes and May 2024 Note Warrants of $2.3 million offset by the repayment of the May 2024 Senior Notes of $2.9 million. We also received net proceeds of $0.2 million for the issuance of common stock from our At The Market equity offering (“ATM”) established in October 2024 and proceeds of $0.1 million for the exercise of Series B warrants.

Current report

As of December 31, 2024, we had shareholders’ equity of $40,761. As described above, subsequent to December 31, 2024, we received additional net proceeds from the issuance of common stock from our ATM of $8.8 million, and we received net proceeds of $10.7 million from the issuance of common stock units or pre-funded warrant units. As of the date of this report, we estimate we have shareholders’ equity of over $17.0 million.

Current report

None

Previous report

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 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.

Previous report

We initially began to sell and distribute the Grunt and related accessories in the United States (‘U.S.”) on a direct-to-consumer sales platform. We terminated our Grunt direct-to-consumer sales platform in November 2021. Prior to the termination of our direct-to-consumer sales platform, U.S. consumers 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 cancelable by the consumer 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.

Previous report

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. As of March 15, 2024, we have 103 active dealers. Dealers can order any of our available products provided they are current on their accounts receivable and are within their established credit limit. We are offering dealers payment terms 30 to 90 days to make larger purchases of our vehicles. We have entered into an accounts receivable factoring arrangement to allow the Company the ability to generate cash for working capital. We have agreements with third party financing companies 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 the third party.

Previous report

We sell our vehicles internationally through importers. Each importer buys vehicles by the container and sells vehicles and accessories to local dealers or directly to consumers. Local dealers or the importer will provide warranty and repair services for vehicles purchased in their country. In October 2023, the Company made a decision to postpone expanding our dealer network in Canada for the foreseeable future and we have terminated the employment of our Canadian regional sales managers. As of March 15, 2024, we have signed agreements with six importers in Latin America, one importer for the Caribbean Region, collectively referred to herein as the LATAM importers, one importer in New Zealand, and one importer in Australia to sell our vehicles and accessories in their assigned countries/markets. In 2024, we expect to expand our global sales of our vehicles and accessories beyond our current distributor base.

Previous report

In June 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. In October 2022, we signed an expanded agreement with Torrot, which superseded the June 2022 agreement, to also be the exclusive distributor of Torrot and Volcon co-branded youth electric motorcycles in the U.S. as well as Latin America. Finally, in December 2022, we signed an expanded agreement with Torrot to be the exclusive distributor of Volcon co-branded youth electric motorcycles in Canada. In June 2023, we wrote down all remaining Torrot branded inventory in the amount of $84,000. In December 2023 we notified Torrot that we were terminating our agreements due to continued lower than expected sales at significantly discounted pricing. In 2023, we wrote down the Volcon co-branded Torrot youth motorcycles by $2,674,352 to reduce their cost to the estimated net realizable value due to lower than expected sales. We have agreed to give Torrot a total of 1,000 Volcon branded Torrot motorcycles originally purchased for $1.8 million, an upfront payment of $370,000 and an additional $1.7 million to be paid out at $100,000 over 17 months beginning in April 2024 in exchange for unfulfilled 2023 and 2024 unit purchases. As of December 31, 2023, we have Volcon Youth inventory of approximately $239,935, after reducing these to the estimated net realizable value, of Volcon branded Torrot motorcycles and accessories which we intend to liquidate and we have agreed to give Torrot sales rights in the U.S., Canada and LATAM after June 30, 2024.

Previous report

In July 2022, we expanded our offerings with the introduction of the first of our Volcon UTV models, the Stag, which we initially anticipated would be available for delivery to customers in the fourth quarter of 2023, followed by additional models of the Stag expected in 2024 and 2025. Due to a delay in certain parts from third party vendors, we expect delivery to customers to begin in the first quarter of 2024. The Stag is being manufactured by a third party and incorporates electrification units, which include batteries, drive units and control modules provided by General Motors. Beginning in June 2022, we took non-binding pre-production orders which are cancelable prior to delivery. In the third quarter of 2023 we canceled all of the original pre-production orders due to the introduction of multiple models and new pricing. We began taking new pre-production orders for the newly introduced models in the third quarter of 2023. We also expect to introduce a higher performance, longer range UTV (to be named) but development of this vehicle has not yet begun and no timeline for its development and release has been determined.

Previous report

In August 2022 we ceased manufacturing of the Grunt and we outsourced the manufacturing of the remaining Grunts and the 2024 Grunt EVO to the same third party manufacturer as the Stag. The 2024 Grunt EVO has replaced the Grunt and has a belt drive rather than a chain drive as well as an updated rear suspension. We began selling the Grunt EVO in the third quarter of 2023.

Previous report

We began taking pre-orders for an E-Bike, the Brat, in September 2022 and shipments to customers began in the fourth quarter of 2022. The Brat is being manufactured by a third party. In January 2023, we began selling the Brat directly to consumers through our website. Consumers who order the Brat from our website can have the Brat shipped to their specified destination.

Previous report

In November 2022, we finalized an agreement with the same third party that manufactures the Stag and Grunt EVO to manufacture the Runt LT. We received prototypes of the Runt LT in the first quarter of 2023. We are evaluating the market for the Runt LT and will determine whether to proceed with production in the first half of 2024.

Previous report

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.

Previous report

In September and October 2023, we reduced our headcount in several departments to reduce costs and we continue to evaluate other cost reduction opportunities.

Previous report

Results of Operations

Previous report

Revenue for the year ended December 31, 2022, was $4,546,686, which represents sales of Grunts of $3,576,796 and accessories and parts of $250,780. The sales of Grunts are offset by promotional rebates and discounts provided to dealers and distributors during 2022 resulting in $930,422 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 of $489,769 and $129,383 represents the sale of Brats and Torrot kids motorcycles, respectively.

Previous report

Cost of goods sold for the year ended December 31, 2022 were $13,412,820 including labor costs of$1,740,645 for employees and contractors performing assembly, logistics, quality control testing, and service and warranty of Grunts through August 2022, when assembly of the Grunt was discontinued, and stock-based compensation of$344,374 for share-based awards for these employees. Subsequent to August 2022, labor costs of $453,471 relate to employee and contractor costs for logistics, quality control testing and service and warranty, including stock-based compensation of$234,178 for share-based awards for these employees. Total cost of materials for Grunts during the year were$5,460,943 which include parts costs for Grunts sold of $3,814,424, adjustments for excess and obsolete inventory of $460,744 and adjustmentsto record inventory at its net realizable value of $1,692,217. We paid $128,137 for fees owed to cancel purchase orders for Grunt parts to reduce quantities ordered to expected sales demand. Cost of goods sold for Brats and Torrot Youth motorcycles, excluding shipping, was$235,160 and $206,596, respectively, this includes a $82,627 write-down for Torrot Youth inventory to sell remaining quantities on hand in anticipation of the Volcon Youth branded motorcycles which arrived in the first quarter of 2023.

Previous report

Facilities costs for the year ended December 31, 2022 were $585,114 for our manufacturing facility and inventory warehousing costs. Shipping costs and duties/tariffs for inventory purchases and shipments to customers were $2,627,658 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 offset by $242,772 for shipping fees paid by customers. Accrued warranty costs were $575,608. Depreciation expense of $285,564 was recorded in the year 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.

Previous report

We also expect sales expenses to increase as we begin expanding our international distributors and selling commissions for increased sales of Grunt EVOs and the Stag offset by overall lower expenses as we seek to reduce costs.

Previous report

For the year ended December 31, 2022, product development expenses totaled $8,456,157 and primarily related to expenses associated with employee payroll costs of $3,646,927, stock-based compensation of $704,152 for share-based awards granted to employees and consultants, $1,010,895 for consulting fees for product design, other professional fees of $133,680, primarily for employee recruiting, prototype parts and tooling costs of $2,201,706, facilities cost of $262,762 and software fees, small equipment, tools and shop supplies of $183,761.

Previous report

For the year ended December 31, 2022, general and administrative expenses were $9,046,778 and were primarily related to expenses associated with employee payroll costs of $2,497,956, stock-based compensation of $1,211,788, professional fees of$2,197,734, including legal fees of $1,714,350 and recruiting fees of $173,122, insurance costs of $1,539,798, public company costs of $416,629 excluding legal fees of $496,364 included above, and software fees of $361,014.

Previous report

We expect general and administrative expenses to remain relatively consistent with the fourth quarter of 2023 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.

Previous report

Interest and other expenses, net for the year ended December 31, 2022 were $2,171,780. Non-cash interest expense of $2,231,403 was recognized for the amortization of debt issuance costs and accretion of principal on the Convertible Notes issued in August 2022.

Previous report

Net cash used in operating activities was $33.7 million for the year ended December 31, 2022 and includes all of our operating costs except non-cash expenses including stock-based compensation of $3.3 million, write-down of inventory and prepaid inventoryof $1.7 million, depreciation and amortization of $0.8 million, non-cash interest expense for the amortization of debt issuance costs and accretion of principal on Convertible Notes of $2.2 million, amortization of right of use assets and lease costs of $0.4 million and losses on write-off of assets and leases of $0.6 million. Cash used in operating activities includes increases in accounts receivable of $0.8 million for sales made to dealers, an increase in inventory of $5.1 million offset by a reduction in inventory deposits of $1.6 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 $2.3 million of customer deposits as we fulfilled all direct to consumer orders, a decrease of $0.4 million due to timing of payments on accounts payable, a decrease of $0.2 million in accrued liabilities and an increase in prepaid expenses and other assets of $0.8 million.

Previous report

Net cash used in investing activities was $0.8 million for the year ended December 31, 2022, primarily consisting of $0.3 million of purchases of equipment and tooling related to our Brat, Grunt, and Runt 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 headcount growth prior to headcount reductions that occurred in the third quarter of 2022.

Previous report

Cash provided from financing activities for the year ended December 31, 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 29,630 shares at $675.00 per share for net cash proceeds of $18.1 million and the issuance of senior Convertible Notes and Note Warrants in August 2022 for net cash proceeds of $22.3 million.

Previous report

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies:

Previous report

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including conversion features of our convertible debt and warrants issued in connection with our convertible debt, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The classification of derivative financial instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.

Previous report

We accounted for the conversion features of our New Notes and Exchange Notes and related Note Warrants and Exchange Warrants issued in connection with the New Notes and Exchange Notes, all issued May 2023, as derivative financial liabilities in accordance with ASC 815. Accordingly, we recognized these derivative financial liabilities at fair value initially and adjusted them to fair value at each reporting period. These liabilities were subject to re-measurement at each balance sheet date until exercised or until the conversion feature share price and the warrant exercise price become fixed, and any change in fair value was recognized in the statement of operations. The fair value of these financial instruments were initially measured at fair value using a Monte Carlo simulation model and subsequently, the fair value was also estimated using a Monte Carlo simulation model until they were no longer deemed derivative liabilities as of August 3, 2023. In addition, we made a probability assessment as to whether our stockholders would approve the adjustment of the conversion prices and exercise prices of the derivative financial liabilities.

Previous report

We account for the Series A Warrants and Series B Warrants issued in connection with the November 2023 Common Units and Prefunded Warrant Units as financial liabilities in accordance with ASC 815. Accordingly, we recognize these financial liabilities at fair value initially and adjust them to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised or until warrant exercise price and number of warrants become fixed, and any change in fair value is recognized in the statement of operations. The fair value of these financial instruments were initially measured at fair value using a Monte Carlo simulation model and subsequently, the fair value was also estimated using a Monte Carlo simulation model as of December 31, 2023. In addition, we made a probability assessment as to whether our stockholders would approve the adjustment of the exercise prices of the financial liabilities. The determination of the fair value of the warrant liability may be subject to change as more current information becomes available and accordingly the actual results could differ significantly. The Series A Warrants and Series B Warrants are classified as current liabilities as the timing of their exercise is at the discretion of the warrant holders and the warrants were fully vested as of the date they were issued.

Previous report — wording carried elsewhere

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Previous report — wording carried elsewhere

Derivative Financial Liabilities and Warrant Liabilities