ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
AYRO,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| |
Three Months Period Ended March 31, 2021 | |
| |
Series H | | |
Series H-3 | | |
Series H-6 | | |
| | |
| | |
Additional | | |
| | |
| |
| |
Preferred Stock | | |
Preferred Stock | | |
Preferred Stock | | |
Common Stock | | |
Paid-in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
(Deficit) | | |
Total | |
Balance, December 31, 2020 | |
| 8 | | |
$ | – | | |
| 1,234 | | |
$ | – | | |
| 50 | | |
$ | – | | |
| 27,088,584 | | |
$ | 2,709 | | |
$ | 64,509,724 | | |
$ | (25,154,817 | ) | |
$ | 39,357,616 | |
Balance | |
| 8 | | |
$ | – | | |
| 1,234 | | |
$ | – | | |
| 50 | | |
$ | – | | |
| 27,088,584 | | |
$ | 2,709 | | |
$ | 64,509,724 | | |
$ | (25,154,817 | ) | |
$ | 39,357,616 | |
Stock Based Compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 1,699,423 | | |
| | | |
| 1,699,423 | |
Sale of common stock, net of fees | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 8,035,835 | | |
| 804 | | |
| 58,269,025 | | |
| | | |
| 58,269,829 | |
Exercise Warrants | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 13,642 | | |
| 1 | | |
| 99,999 | | |
| | | |
| 100,000 | |
Exercise Options | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 74,987 | | |
| 7 | | |
| 183,418 | | |
| | | |
| 183,425 | |
Net Loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (5,633,833 | ) | |
| (5,633,833 | ) |
March 31, 2021 | |
| 8 | | |
$ | – | | |
| 1,234 | | |
$ | – | | |
| 50 | | |
$ | – | | |
| 35,213,048 | | |
$ | 3,521 | | |
$ | 124,761,589 | | |
$ | (30,788,650 | ) | |
$ | 93,976,460 | |
Balance | |
| 8 | | |
$ | – | | |
| 1,234 | | |
$ | – | | |
| 50 | | |
$ | – | | |
| 35,213,048 | | |
$ | 3,521 | | |
$ | 124,761,589 | | |
$ | (30,788,650 | ) | |
$ | 93,976,460 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS
AYRO,
Inc. (“AYRO” or the “Company”), a Delaware corporation formerly known as DropCar, Inc. (“DropCar”),
a corporation headquartered outside Austin, Texas, is the merger successor of AYRO Operating Company, Inc. (“AYRO
Operating”), which was formed under the laws of the State of Texas on May 17, 2016 as Austin PRT Vehicle, Inc. and subsequently
changed its name to Austin EV, Inc. under an Amended and Restated Certificate of Formation filed with the State of Texas on March 9,
2017. On July 24, 2019, the Company changed its name to AYRO, Inc. and converted its corporate domicile to Delaware. The Company was
founded on the basis of promoting resource sustainability. The Company, and its wholly-owned subsidiaries, are principally engaged in
manufacturing and sales of environmentally-conscious, minimal-footprint electric vehicles. The all-electric vehicles are typically sold
both directly and to dealers in the United States.
Strategic
Review
Following
the hiring of the Company’s new Chief Executive Officer in the third quarter of 2021, the Company initiated a strategic review
of their product development strategy, as they focus on creating value within the electric vehicle, last-mile delivery, and smart payload
and enabling infrastructure markets. While the Company completes their strategic review, they have paused all material research and development
activity and expenditures associated with their planned next-generation three-wheeled high speed vehicle.
In
December of 2021 the Company began research and development on the new 411 fleet vehicle model refresh, the AYRO Z, including updates
on their supply chain evolution, offshoring/onshoring mix, manufacturing strategy, and annual model year refresh program.
NOTE
2. LIQUIDITY AND OTHER UNCERTAINTIES
Liquidity
and Other Uncertainties
The
consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States
(“GAAP”), which contemplates continuation of the Company as a going concern. The Company is subject to a number of risks
similar to those of earlier stage commercial companies, including dependence on key individuals and products, the difficulties inherent
in the development of a commercial market, the potential need to obtain additional capital, competition from larger companies, other
technology companies and other technologies. The Company has a limited operating history and the sales and income potential of its business
and market are unproven. The Company incurred net losses of $4,578,660 for the three months ended March 31, 2022, and negative cash flows
from operations of $5,545,113 for the three months ended March 31, 2022. At March 31, 2022, the Company had cash balances totaling $43,494,716
and marketable securities of $19,977,899. In addition, overall working capital decreased by $3,946,646 during the three months ended
March 31, 2022. Management believes that the existing cash at March 31, 2022 will be sufficient to fund operations for at least the next
twelve months following the issuance of these condensed consolidated financial statements.
Since
early 2020, when the World Health Organization declared the spread of the transmissible and pathogenic coronavirus a global pandemic,
there have been business slowdowns and decreased demand for AYRO products. The outbreak of such a communicable disease has resulted in
a widespread health crisis which has adversely affected general commercial activity and the economies and financial markets of many countries,
including the United States. As the outbreak of the disease has continued through 2020, 2021 and into 2022, the measures taken by the
governments of countries affected has adversely affected the Company’s business, financial condition, and results of operations.
The
Company relies on foreign suppliers, including Cenntro Automotive Group (“Cenntro”), its largest supplier, for a number of
raw materials, instruments and technologies that the Company purchases. The Company’s success is dependent on the ability to import
or transport such products from Cenntro and other overseas vendors in a timely and cost-effective manner. The Company relies heavily
on third parties, including ocean carriers and truckers, in that process. The global shipping industry is experiencing ocean shipping
disruptions, trucking shortages, increased ocean shipping rates and increased trucking and fuel costs, and the Company cannot predict
when these disruptions will end.
There
is currently a shortage of shipping capacity from China and other parts of Asia, and as a result, receipt of imported products may be
disrupted or delayed. The shipping industry is also experiencing issues with port congestion and pandemic-related port closures and ship
diversions. Labor disputes among freight carriers and at ports of entry are common, and the Company expects labor unrest and its effects
on shipping products to be a challenge for it. A port worker strike, work slow-down or other transportation disruption in the port of
Long Beach, California could significantly disrupt the Company’s business. The Company is currently experiencing such disruption
at the port due to multiple factors brought about by the COVID-19 pandemic, such as supply and demand imbalance, a shortage of warehouse
workers, truck drivers, transport equipment (tractors and trailers) and other causes, which have resulted in heightened congestion, bottlenecks
and gridlock, leading to abnormally high transportation delays. This has materially and adversely affected the Company’s business
and could continue to materially and adversely affect our business and financial results. If significant disruptions along these lines
continue, this could lead to further significant disruptions in the Company’s business, delays in shipments, and revenue and profitability
shortfalls, which could adversely affect the business, prospects, financial condition and operating results.
The
global shipping industry is also experiencing unprecedented increases in shipping rates from the trans-Pacific ocean carriers due to
various factors, including limited availability of shipping capacity. For example, the cost of shipping products by ocean freight has
recently increased to at least three times historical levels and will have a corresponding impact on profitability. The Company may find
it necessary to rely on an increasingly expensive spot market and other alternative sources to make up any shortfall in shipping needs.
Additionally, if increases in fuel prices occur, transportation costs would likely further increase. Similarly, supply chain disruptions
such as those described in the preceding paragraphs may lead to an increase in transportation costs. Such cost increases have adversely
affected the Company’s business and could have additional adverse effects on the business, prospects, financial condition and operating
results.
The
Company may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials, including lithium-ion
battery cells, semiconductors, and integrated circuits. Any such increase or supply interruption could materially negatively impact the
business, prospects, financial condition and operating results. Currently, the Company is experiencing supply chain shortages, including
with respect to lithium-ion battery cells, integrated circuits, vehicle control chips, and displays. Certain production-ready components
may be delayed in shipment to company facilities which has and may continue to cause delays in validation and testing for these components,
which would in turn create a delay in the availability of saleable vehicles.
The
Company uses various raw materials, including aluminum, steel, carbon fiber, non-ferrous metals (such as copper), and cobalt. The prices
for these raw materials fluctuate depending on market conditions, and global demand and could adversely affect business and operating
results. For instance, the Company is exposed to multiple risks relating to price fluctuations for lithium-ion cells. These risks include:
|
● |
the
inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers
of lithium-ion cells required to support the growth of the electric vehicle industry as demand for such cells increases;
|
|
● |
disruption
in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and
|
|
● |
an
increase in the cost of raw materials, such as cobalt, used in lithium-ion cells. |
Any
disruption in the supply of lithium-ion battery cells, semiconductors, or integrated circuits could temporarily disrupt production of
the Company’s vehicles until a different supplier is fully qualified. Moreover, battery cell manufacturers may refuse to supply
electric vehicle manufacturers if they determine that the vehicles are not sufficiently safe. Furthermore, fluctuations or shortages
in petroleum and other economic conditions may cause the Company to experience significant increases in freight charges and raw material
costs. Substantial increases in the prices for our raw materials would increase operating costs and could reduce our margins if the increased
costs cannot be recouped through increased electric vehicle prices. There can be no assurance that the Company will be able to recoup
increasing costs of raw materials by increasing vehicle prices.
We
have made certain indemnities, under which we may be required to make payments to an indemnified party, in relation to certain transactions.
We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware. In connection with our
facility leases, we have indemnified our lessors for certain claims arising from the use of the facilities. The duration of the indemnities
vary and, in many cases, are indefinite. These indemnities do not provide for any limitation of the maximum potential future payments
we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities.
NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with
GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conformity with
the instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission
(“SEC”).
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements
reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation
of such statements. The results of operations for the three months ended March 31, 2022, are not necessarily indicative of the results
that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2021, which are included in the
Company’s Annual Report on Form 10-K, filed with the SEC on March 23, 2022, as amended on May 2, 2022.
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.
The
Company’s most significant estimates include allowance for doubtful accounts, valuation of inventory reserve, valuation of deferred
tax asset allowance, valuation of long lived assets, sales warranties, and the measurement of stock-based compensation expenses. Actual
results could differ from these estimates.
Marketable
Securities
Marketable
securities includes the investment in fixed income bonds and U.S. Treasury securities that are considered to be highly liquid and easily
tradeable. The marketable securities are considered trading securities and are measured at fair value and are accounted for in accordance
with ASC 320. The marketable securities are valued using inputs observable in active markets for identical securities and are therefore
classified as Level 1 within the Company’s fair value hierarchy.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled to receive in exchange for those goods or services.
To
achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer;
(2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to
performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
Nature
of goods and services
The
following is a description of the Company’s products and services from which the Company generates revenue, as well as the nature,
timing of satisfaction of performance obligations, and significant payment terms for each:
Product
revenue
Product
revenue from customer contracts is recognized on the sale of each electric vehicle as vehicles are shipped to customers. The majority
of the Company’s vehicle sales orders generally have only one performance obligation: sale and delivery of complete vehicles. Ownership
and risk of loss transfers to the customer based on FOB shipping point and freight charges are the responsibility of the customer. Revenue
is typically recognized at the point control transfers or in accordance with payment terms customary to the business. The Company provides
product warranties to assure that the product assembly complies with agreed upon specifications. The Company’s product warranty
is similar in all material respects to the product warranties provided by the Company’s suppliers, therefore minimizing the warranty
liability to the standard labor rates associated with the defective part replacement. Customers do not have the option to purchase a
warranty separately; as such, warranty is not accounted for as a separate performance obligation. The Company’s policy is to exclude
taxes collected from a customer from the transaction price of automotive contracts.
Shipping
revenue
Amounts
billed to customers related to shipping and handling are classified as shipping revenue. The Company has elected to recognize the cost
for freight and shipping when control over vehicles has transferred to the customer as an operating expense. The Company has reported
shipping expenses of $110,549 and $50,626 for the three months ended March 31, 2022 and 2021, respectively, included in General and Administrative
Expenses.
Services
and other revenue
Services
and other revenue consist of non-warranty after-sales vehicle services. Revenue is typically recognized at a point in time when services
and replacement parts are provided.
Warrants
and Preferred Shares
The
accounting treatment of warrants and preferred share series issued is determined pursuant to the guidance provided by ASC 470, Debt,
ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, as applicable. Each feature of a
freestanding financial instruments including, without limitation, any rights relating to subsequent dilutive issuances, dividend issuances,
equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions, dividends and exercise are assessed
with determinations made regarding the proper classification in the Company’s financial statements.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). The
Company recognizes all employee and non-employee share-based compensation as an expense in the financial statements on a straight-line
basis over the requisite service period, based on the terms of the awards. Equity-classified awards principally related to stock options,
restricted stock awards (“RSAs”) and equity-based compensation, are measured at the grant date fair value of the award. The
Company determines grant date fair value of stock option awards using the Black-Scholes option-pricing model. The fair value of RSAs
is determined using the closing price of the Company’s common stock on the grant date. For service based vesting grants, expense
is recognized ratably over the requisite service period based on the number of options or shares. For value-based vesting grants, expense
is recognized via straight line expense over the expected period per grant as determined by outside valuation experts. Stock-based compensation
is reversed for forfeitures in the period of forfeiture.
We
estimate the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. Key inputs
and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected term, the
risk-free interest rate over the expected term, the expected annual dividend yield and the expected stock price volatility. The expected
volatility is based on a combination of the historical and implied volatility of the Company’s publicly traded, near-the-money
stock options, and the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the
U.S. Treasury yield curve in effect at the time of grant and, since the Company does not currently pay or plan to pay a dividend on its
common stock, the expected dividend yield was zero.
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”).
ASU 2018-07 expands the guidance in ASC 718 to include share-based payments for goods and services to non-employees and generally aligns
it with the guidance for share-based payments to employees. In accordance with ASU 2018-07, these stock options and warrants issued as
compensation for services provided to the Company are accounted for based upon the fair value of the underlying equity instrument. The
attribution of the fair value of the equity instrument is charged directly to compensation expense over the period during which services
are rendered.
Basic
and Diluted Loss Per Share
Basic
and diluted net loss per share is determined by dividing net loss by the weighted average ordinary shares outstanding during the period.
For all periods presented with a net loss, the shares underlying the ordinary share options and warrants have been excluded from the
calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate both basic
and diluted loss per share are the same for periods with a net loss.
The
following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they
would be anti-dilutive:
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Options to purchase common stock | |
| 1,107,773 | | |
| 1,845,282 | |
Restricted stock unvested | |
| 892,248 | | |
| 1,244,503 | |
Warrants outstanding | |
| 6,106,023 | | |
| 7,361,083 | |
Preferred stock outstanding | |
| 2,475 | | |
| 2,475 | |
Totals | |
| 8,108,519 | | |
| 10,453,343 | |
NOTE
4. REVENUES
Disaggregation
of Revenue
Revenue
by type was as follows:
SCHEDULE OF DISAGGREGATION OF REVENUE
| |
| 2022 | | |
| 2021 | |
| |
Three Months Ended March 31, | |
| |
| 2022 | | |
| 2021 | |
Revenue type | |
| | | |
| | |
Product revenue | |
$ | 919,343 | | |
$ | 710,199 | |
Shipping revenue | |
| 107,503 | | |
| 41,983 | |
Service income | |
| - | | |
| 36,687 | |
Revenue | |
$ | 1,026,846 | | |
$ | 788,869 | |
Warranty
Reserve
The
Company records a reserve for warranty repairs upon the initial delivery of vehicles to its dealer network. The Company provides a product
warranty on each vehicle including powertrain, battery pack and electronics package. Such warranty matches the product warranty provided
by its supply chain for warranty parts for all unaltered vehicles and is not considered a separate performance obligation. The supply
chain warranty does not cover warranty-based labor needed to replace a part under warranty. Warranty reserves include management’s
best estimate of the projected cost of labor to repair/replace all items under warranty. The Company reserves a percentage of all dealer-based
sales to cover an industry-standard warranty fund to support dealer labor warranty repairs. Such percentage is recorded as a component
of cost of revenues in the statement of operations. As of March 31, 2022 and December 31, 2021, warranty reserves were recorded within
accrued expenses of $330,180 and $240,517, respectively.
NOTE
5. ACCOUNTS RECEIVABLE, NET
Accounts
receivable, net, consists of amounts due from invoiced customers and product deliveries and were as follows:
SCHEDULE OF ACCOUNTS RECEIVABLE
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Trade receivables | |
$ | 1,388,615 | | |
$ | 1,142,567 | |
Less: Allowance for doubtful accounts | |
| (184,795 | ) | |
| (173,138 | ) |
Accounts receivable,
net | |
$ | 1,203,820 | | |
$ | 969,429 | |
NOTE
6. INVENTORY, NET
Inventory
consisted of the following:
SCHEDULE OF INVENTORY
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Raw materials | |
$ | 3,585,607 | | |
$ | 3,481,614 | |
Work-in-progress | |
| 91,969 | | |
| 51,441 | |
Finished goods | |
| 179,827 | | |
| 210,982 | |
Total | |
$ | 3,857,403 | | |
$ | 3,744,037 | |
For
the three months ended March 31, 2022 and 2021, depreciation recorded for fleet inventory was $23,892 and $23,886, respectively. Reserve
for inventory was $388,735 as of December 31, 2021. Management has determined that no additional reserve for inventory obsolescence was
required as of March 31, 2022.
NOTE
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepaid final assembly services | |
$ | 350,660 | | |
$ | 439,660 | |
Prepayments for inventory | |
| 1,764,198 | | |
| 1,622,617 | |
Prepaid other | |
| 474,312 | | |
| 213,901 | |
Total | |
$ | 2,589,170 | | |
$ | 2,276,178 | |
NOTE
8. PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Computer and equipment | |
$ | 913,882 | | |
$ | 853,695 | |
Furniture and fixtures | |
| 204,756 | | |
| 173,155 | |
Lease improvements | |
| 304,121 | | |
| 282,271 | |
Prototypes | |
| 300,376 | | |
| 300,376 | |
Computer software | |
| 455,875 | | |
| 455,875 | |
Property and Equipment gross | |
| 2,179,010 | | |
| 2,065,372 | |
Less: Accumulated depreciation | |
| (1,314,704 | ) | |
| (1,230,212 | ) |
Property and Equipment
net | |
$ | 864,306 | | |
$ | 835,160 | |
Depreciation
expense for the three months ended March 31, 2022 and 2021 was $84,492 and $71,128, respectively.
NOTE
9. MARKETABLE SECURITIES
Marketable
securities consisted of the following:
SCHEDULE
OF MARKETABLE SECURITIES
| |
Cost Basis | | |
Gross Unrealized Losses | | |
Total | |
Bonds | |
$ | 12,178,027 | | |
$ | (22,101 | ) | |
$ | 12,155,926 | |
US treasury securities | |
| 7,821,973 | | |
| - | | |
| 7,821,973 | |
| |
$ | 20,000,000 | | |
$ | (22,101 | ) | |
$ | 19,977,899 | |
NOTE
10. STOCKHOLDERS’ EQUITY
Restricted
Stock
On
February 24, 2021, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company issued 172,000
shares of restricted stock to non-executive directors
at a value of $7.66
per share. 43,000
shares of common stock remained unissued as of
December 31, 2021; these shares were issued during the three months ended March 31, 2022.
Series
H Convertible Preferred Stock
As
of March 31, 2022, such payment would be calculated as follows:
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H Preferred Stock outstanding as of March 31, 2022 | |
| 8 | |
Multiplied by the stated value | |
$ | 154 | |
Equals the gross stated value | |
$ | 1,232 | |
Divided by the conversion price | |
$ | 184.8 | |
Equals the convertible shares of Company Common Stock | |
| 7 | |
Multiplied by the fair market value of Company Common Stock as of March 31, 2022 | |
$ | 1.28 | |
Equals the payment | |
$ | 9 | |
Series
H-3 Convertible Preferred Stock
As
of March 31, 2022, such payment would be calculated as follows:
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H-3 Preferred Stock outstanding as of March 31, 2022 | |
| 1,234 | |
Multiplied by the stated value | |
$ | 138.00 | |
Equals the gross stated value | |
$ | 170,292 | |
Divided by the conversion price | |
$ | 165.6 | |
Equals the convertible shares of Company Common Stock | |
| 1,028 | |
Multiplied by the fair market value of Company Common Stock as of March 31, 2022 | |
$ | 1.28 | |
Equals the payment | |
$ | 1,316 | |
Series
H-6 Convertible Preferred Stock
As
of March 31, 2022, such payment would be calculated as follows:
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H-6 Preferred Stock outstanding as of March 31, 2022 | |
| 50 | |
Multiplied by the stated value | |
$ | 72.00 | |
Equals the gross stated value | |
$ | 3,600 | |
Divided by the conversion price | |
$ | 2.5 | |
Equals the convertible shares of Company Common Stock | |
| 1,440 | |
Multiplied by the fair market value of Company Common Stock as of March 31, 2022 | |
$ | 1.28 | |
Equals the payment | |
$ | 1,843 | |
SCHEDULE OF WARRANT ACTIVITY
| | |
Shares Underlying Warrants | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (in years) | |
Outstanding at December 31, 2021 | | |
| 6,108,823 | | |
$ | 7.37 | | |
| 2.56 | |
Granted | | |
| - | | |
| - | | |
| | |
Exercised | | |
| - | | |
| - | | |
| | |
Expired | | |
| (2,800 | ) | |
| 165.60 | | |
| | |
Outstanding at March 31, 2022 | | |
| 6,108,823 | | |
$ | 7.30 | | |
| 2.07 | |
NOTE
11. STOCK-BASED COMPENSATION
AYRO
2020 Long Term Incentive Plan
The
Company has reserved a total of 4,089,650 shares of its common stock pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, including
shares of restricted stock that have been issued. The Company has 1,255,590 stock options, restricted stock and warrants remaining under
this plan as of March 31, 2022.
Stock-based
compensation, including restricted stock awards, stock options and warrants is included in the unaudited condensed consolidated statement
of operations as follows:
SCHEDULE OF STOCK-BASED COMPENSATION
| |
2022 | | |
2021 | |
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Research and development | |
$ | 16,704 | | |
$ | 23,486 | |
Sales and marketing | |
| 12,945 | | |
| 63,449 | |
General and administrative | |
| 258,461 | | |
| 1,612,488 | |
Total | |
$ | 288,110 | | |
$ | 1,699,423 | |
Options
The
following table reflects the stock option activity:
SCHEDULE OF STOCK-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY
| | |
Number of Shares | | |
Weighted
Average
Exercise Price | | |
Contractual Life (Years) | |
Outstanding at December 31, 2021 | | |
|
| 1,338,675 | | |
$ | 5.14 | | |
| 8.26 | |
Exercised | | |
|
| - | | |
| | | |
| | |
Forfeitures | | |
|
| (230,903 | ) | |
| 3.19 | | |
| | |
Outstanding at March 31, 2022 | | |
|
| 1,107,773 | | |
$ | 5.59 | | |
| 7.88 | |
Of
the outstanding options, 1,068,318 were vested and exercisable as of March 31, 2022. At March 31, 2022 the aggregate intrinsic value
of stock options vested and exercisable was $0.
The
Company recognized $32,376
and $269,895
of stock option expense for the three months
ended March 31, 2022 and 2021, respectively. Total compensation cost related to non-vested stock option awards not yet recognized as
of March 31, 2022 was $58,199
and
will be recognized on a straight-line basis through the end of the vesting periods through December 2023. The amount of future stock
option compensation expense could be affected by any future option grants or by any forfeitures.
Restricted
SCHEDULE OF STOCK-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY
| | |
Number of Shares | | |
Weighted Average Grant Price | |
Outstanding at December 31, 2021 | | |
| 450,000 | | |
$ | 2.48 | |
Granted | | |
| 442,248 | | |
| | |
Vested | | |
| - | | |
| | |
Forfeitures | | |
| - | | |
| | |
Outstanding at March 31, 2022 | | |
| 892,248 | | |
$ | 1.89 | |
On
February 1, 2022, pursuant to the AYRO, INC. 2020 Long-Term Incentive Plan, the Company issued 442,248
shares of restricted stock to non-executive directors
at a value of $1.29
per share. The Company recognized compensation
expense related to all restricted stock issued during the three months ended March 31, 2022 and 2021 of $255,734
and $1,429,528,
respectively. Total compensation cost related to non-vested restricted stock not yet recognized as of March 31, 2022 was $1,250,305.
NOTE
12. CONCENTRATIONS AND CREDIT RISK
Revenues
In
March 2019, the Company entered into a five-year Master Procurement Agreement, or the MPA, with Club Car, LLC (“Club Car”)
for the sale of AYRO’s four-wheeled vehicle. The MPA grants Club Car the exclusive right to sell AYRO’s four-wheeled vehicle
in North America, provided that Club Car orders at least 500 vehicles per year. The MPA has an initial term of five (5) years commencing
January 1, 2019 and may be renewed by Club Car for successive one-year periods upon 60 days’ prior written notice. Two customers
accounted for approximately 99% and 1%, respectively, of the Company’s revenues for the three months ended March 31, 2022 and for
72% and 24%, respectively, for the three months ended March 31, 2021.
Accounts
Receivable
As
of March 31, 2022 one customer accounted for approximately 99%
of the Company’s gross accounts receivable. As of December 31, 2021 two customers accounted for more than 10% of the Company’s
gross accounts receivable. One customer accounted for approximately 87%
of the Company’s gross accounts receivable and a second customer accounted for approximately 10%
of the Company’s gross accounts receivable.
Purchasing
The
Company places orders with various suppliers. During the three months ended March 31, 2022 and 2021, multiple suppliers provided more
than 10% of the Company’s raw materials purchases. During the three months ended March 31, 2022, one supplier accounted for approximately
65%, and another supplier accounted for 15% of the Company’s raw materials purchases. During the three months ended March 31, 2021
one supplier accounted for approximately 30%, another supplier accounted for 22%, and a third supplier accounted for 16% of the Company’s
raw materials purchases. Any disruption in the operation of any of these suppliers could adversely affect the Company’s operations.
Manufacturing
Cenntro
owns the design of the AYRO 411x model and has granted the Company an exclusive license to manufacture AYRO 411x model for sale in North
America. The Company’s business is dependent on such license, and if it fails to comply with its obligations to maintain that license,
the Company’s business will be substantially harmed. Under the Manufacturing License Agreement, dated April 27, 2017, between Cenntro
and the Company, the Company is granted an exclusive license to manufacture and sell the AYRO 411x in the United States, and the Company
is required to purchase the minimum volume of product units from Cenntro, among other obligations.
In
April 2022, the Company received a letter from Cenntro claiming that it had not met the minimum purchase requirements under the MLA and
that Cenntro would therefore be terminating its exclusive license. Although AYRO’s purchases were below the numerical minimums
set forth in the MLA, the Company believes it should retain its exclusive license, as the failure to meet such minimums was not due to
the Company’s failure to perform under the MLA. The Company is in discussions with Cenntro concerning the continued applicability
of its exclusive license. If AYRO loses this license, Cenntro could sell identical or similar products through other companies or directly
to the Company’s customers, which could have a material adverse effect on its results of operations and financial condition.
NOTE
13. COMMITMENTS AND CONTINGENCIES
Manufacturing
Agreements
On
September 25, 2020, AYRO entered into a Master Manufacturing Services Agreement (the “Karma Agreement”) with Karma Automotive,
LLC (“Karma”). The term of the contract is for 12 months. Pursuant to the agreement Karma will provide certain manufacturing
services, starting in 2021, under an attached statement of work including final assembly, raw material storage and logistical support
of our vehicles in return for compensation of $1,160,800.
The
Company paid Karma an amount of $440,000 for the first production level builds and $80,000 for setup costs. In addition, the Company
issued warrants to an advisor to the transaction with a fair value of $66,845 due at signing of the contract, which amount was expensed
in the prior year. The payment was recorded as prepaid expense as of December 31, 2020. For the year ended December 31, 2021, the Company
recorded expense of $641,140 related to the Karma Agreement for the assembly of the AYRO 411 and 411x vehicles (the “AYRO 411 Fleet”),
of which $468,480 was recorded to reduce the total remain prepaid to match the expected number of 411x vehicles to be built in 2022.
This amount was recorded against cost of goods for direct labor as part of the first production level builds, and $73,333 was recorded
for pre-production costs. $350,660 prepaid balance remained as of March 31, 2022.
Litigation
The
Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business,
that it believes are incidental to the operation of its business. While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations,
financial positions or cash flows.
Supply
Chain Agreements
In
2017, the Company executed a supply chain contract with Cenntro, the Company’s primary supplier, a manufacturer located in the
People’s Republic of China. Prior to the Merger, Cenntro was a significant shareholder in AYRO Operating. Cenntro owns the design
of the AYRO 411 Fleet vehicles and has granted the Company an exclusive license to purchase the AYRO 411 Fleet vehicles for sale in North
America. Currently, the Company purchases 100% of its vehicle chassis, cabs and wheels through this supply chain relationship with Cenntro.
The Company must sell a minimum number of units in order to maintain its exclusive supply chain contract upon availability of the 411x.
See Note 12 for concentration amounts.
Under
a memo of understanding signed between the Company and Cenntro on March 22, 2020, the Company agreed to purchase 300 units within the
following twelve months of signing the memo of understanding, and 500 and 800 in each of the following respective twelve-month periods;
however, these minimums were waived by Cenntro in 2021. As of March 31, 2022 and December 31, 2021, the total prepaid expenses were $1,483,546
and $1,469,743, respectively. As of March 31, 2022 and December 31, 2021 the Company’s total accrued expense balance was $780,340
and $867,727, respectively.
Other
As
of January 1, 2019, DropCar had accrued approximately $232,000 for the settlement of multiple employment disputes. As of March 31, 2022
and December 31, 2021, approximately $3,500 remained accrued as accounts payable and accrued
expenses for the settlement of the final remaining employment dispute.
On
March 23, 2018, DropCar was made aware of an audit being conducted by the New York State Department of Labor (“DOL”) regarding
a claim filed by an employee. The DOL is investigating whether DropCar properly paid overtime for which DropCar has raised several defenses.
In addition, the DOL is conducting its audit to determine whether the Company owes spread of hours pay (an hour’s pay for each
day an employee worked or was scheduled for a period over ten hours in a day). Management believes the case has no merit.
DropCar
was a defendant in a class action lawsuit which resulted in a judgement entered into whereby the Company is required to pay legal fees
in the amount of $45,000 to the plaintiff’s counsel. As of March 31, 2022 and December 31, 2021, the balance due remains $45,000,
recorded as a component of accounts payable on the accompanying consolidated balance sheet. In addition, this amount was included
in the $186,000 of prefunded liabilities assumed by AYRO in the Merger.
DropCar
was audited by the New York State Department of Taxation and Finance (“DOTF”) for its sales tax paid over the period of 2017
– 2020. The DOTF believes DropCar owes additional sales tax plus interest. Management is investigating the details this audit.
As of March 31, 2022 and December 31, 2021, the Company has an accrued balance of $476,280 for such additional sales tax and interest.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related
notes thereto. This management’s discussion and analysis contains forward-looking statements, such as statements of our plans,
objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When
used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,”
“expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,”
“should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements
are subject to risks and uncertainties, including those under “Risk Factors” in our filings with the Securities and Exchange
Commission (“SEC”) that could cause actual results or events to differ materially from those expressed or implied by the
forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking
statements as a result of several factors. See “Cautionary Note Regarding Forward-Looking Statements.”
References
in this management’s discussion and analysis to “we,” “us,” “our,” “the Company,”
“our Company,” or “AYRO” refer to AYRO, Inc. and its subsidiaries.
Cautionary
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking
terms such as “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,”
“expects,” “forecasts,” “guides,” “intends,” “is confident that,” “may,”
“plans,” “seeks,” “projects,” “targets,” “would” and “will” or
the negative of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, but
are not limited to, future financial and operating results, the company’s plans, objectives, expectations and intentions, statements
concerning the strategic review of our product development strategy and other statements that are not historical facts. We have based
these forward-looking statements largely on our current expectations and projections about future events and financial trends that we
believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the
date of this Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ
materially from our historical experience and our present expectations, or projections described under the sections in this Form 10-Q
and our other reports filed with the SEC titled “Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
A
summary of the principal risk factors that make investing in our securities risky and might cause our actual results to differ materially
from those projected in these forward-looking statements is set forth below. If any of the following risks occur, our business, financial
condition, results of operations, cash flows, cash available for distribution, ability to service our debt obligations and prospects
could be materially and adversely affected.
● |
we
may be acquired by a third party; |
|
|
● |
we
have a history of losses and have never been profitable, and we expect to incur additional losses in the future and may never be
profitable; |
● |
if
we lose our exclusive license to manufacture the AYRO 411x model in North America, Cenntro could sell identical or similar products
through other companies or directly to our customers; |
|
|
● |
the
market for our products is developing and may not develop as expected; |
|
|
● |
we
are currently evaluating our product development strategy, which may result in significant changes and have a material impact on
our business, results of operations and financial condition; |
|
|
● |
our
business is subject to general economic and market conditions, including trade wars and tariffs; |
|
|
● |
our
business, results of operations and financial condition may be adversely impacted by public health epidemics, including the COVID-19
outbreak; |
|
|
● |
if
disruptions in our transportation network continue to occur or our shipping costs continue to increase, we may be unable to sell
or timely deliver our products, and our gross margin could decrease; |
|
|
● |
our
limited operating history makes evaluating our business and future prospects difficult and may increase the risk of any investment
in our securities; |
|
|
● |
if
we are unable to effectively implement or manage our growth strategy, our operating results and financial condition could be materially
and adversely affected; |
|
|
● |
developments
in alternative technologies or improvements in the internal combustion engine may have a materially adverse effect on the demand
for our electric vehicles; |
|
|
● |
the
markets in which we operate are highly competitive, and we may not be successful in competing in these industries; |
● |
a
significant portion of our revenues is derived from a single customer; |
|
|
● |
our
future growth depends on customers’ willingness to adopt electric vehicles; |
|
|
● |
if
we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and
our reputation may be damaged; |
|
|
● |
unanticipated
changes in industry standards could render our vehicles incompatible with such standards and adversely affect our business; |
|
|
● |
our
future success depends on our ability to identify additional market opportunities and develop and successfully introduce new and
enhanced products that address such markets and meet the needs of customers in such markets; |
● |
through
the third quarter of calendar year 2022, we will rely upon a single third-party supplier and manufacturer located in the People’s
Republic of China for the sub-assemblies in a semi-knocked-down state for our current vehicles; |
|
|
● |
unforeseen
or recurring operational problems at ours or our prime supplier’s facilities, or a catastrophic loss of ours or our prime supplier’s
manufacturing facilities, may cause significant lost or delayed production and adversely affect our results of operations; |
|
|
● |
we
may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully
defend or insure against such claims; |
|
|
● |
we
currently have limited electric vehicles marketing and sales experience, and if we are unable to establish sales and marketing capabilities
or enter into dealer agreements to market and sell our vehicles, we may be unable to generate any revenue; |
|
|
● |
the
range of our electric vehicles on a single charge declines over time, which may negatively influence potential customers’ decisions
whether to purchase our vehicles; |
|
|
● |
increases
in costs, disruption of supply or shortage of raw materials, in particular lithium-ion battery cells, chipsets and displays, could
harm our business; |
|
|
● |
customer
financing and insuring our vehicles may prove difficult because retail lenders are unfamiliar with our vehicles and our vehicles
have a limited loss history determining residual values and within the insurance industry; |
|
|
● |
our
electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been
observed to catch fire or vent smoke and flames; |
|
|
● |
our
business may be adversely affected by labor and union activities; |
|
|
● |
we
rely on our dealers for the service of our vehicles and have limited experience servicing our vehicles, and if we are unable to address
the service requirements of our future customers, our business will be materially and adversely affected; |
|
|
● |
if
we fail to deliver vehicles and accessories to market as scheduled, our business will be harmed; |
|
|
● |
we
may be required to raise additional capital to fund our operations, and such capital raising may be costly or difficult to obtain
and could dilute our stockholders’ ownership interests, and our long-term capital requirements are subject to numerous risks; |
|
|
● |
increased
safety, emissions, fuel economy or other regulations may result in higher costs, cash expenditures, and/or sales restrictions; |
|
|
● |
we
may fail to comply with evolving environmental and safety laws and regulations; |
|
|
● |
changes
in regulations could render our vehicles incompatible with federal, state or local regulations, or use cases. |
|
|
● |
we
have identified a material weakness in our internal control over financial reporting, and if we are unable to remediate the material
weakness, or if we experience additional material weaknesses in the future, our business may be harmed; |
|
|
● |
if
we are unable to adequately protect our proprietary designs and intellectual property rights, our competitive position could be harmed; |
|
|
● |
we
may need to obtain rights to other intellectual property in the future, and if we fail to obtain licenses we need or fail to comply
with our obligations in existing agreements under which we have licensed intellectual property and other rights from
third parties, we could lose our ability to manufacture our vehicles; |
|
|
● |
our
proprietary designs are susceptible to reverse engineering by our competitors; |
|
|
● |
if
we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others
to compete against us; |
|
|
● |
we
are subject to exposure from changes in the exchange rates of local currencies; and |
|
|
● |
we
are subject to governmental export and import controls that could impair our ability to compete in international market due to licensing
requirements and subject us to liability if we are not in compliance with applicable laws. |
For
a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ
materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part II, Item
1A of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K as filed on March 23, 2022, as amended on May 2, 2022
(“Form 10-K”). Any one or more of these uncertainties, risks and other influences could materially affect our results
of operations and whether forward-looking statements made by us ultimately prove to be accurate. We undertake no obligation to publicly
update or revise any forward-looking statements, whether from new information, future events or otherwise, except as required by law.
Merger
On
May 28, 2020, pursuant to the previously announced Agreement and Plan of Merger, dated December 19, 2019, by and among AYRO, Inc., a
Delaware corporation previously known as DropCar, Inc., ABC Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of
the Company (“Merger Sub”), and AYRO Operating Company, Inc., a Delaware corporation previously known as AYRO, Inc. (“AYRO
Operating”), Merger Sub was merged with and into AYRO Operating, with AYRO Operating continuing after the merger as the surviving
entity and a wholly owned subsidiary of the Company (the “Merger”).
Overview
We
design and manufacture compact, sustainable electric vehicles for closed campus mobility, low speed urban and community transport, local
on-demand and last mile delivery and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers,
including universities, business and medical campuses, last mile delivery services and food service providers. We are currently updating
our next model year (model year 2023) vehicle lineup in support of the aforementioned markets.
Strategic
Review
Following
the hiring of our new Chief Executive Officer in the third quarter of 2021, we initiated a strategic review of our product development
strategy, as we focus on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets.
While we complete our strategic review, we have paused all material research and development activity and expenditures associated with
our planned next-generation three-wheeled high speed vehicle.
In
December of 2021, we began research and development on the new 411 fleet vehicle model refresh, the AYRO Z, including updates
on our supply chain evolution, the offshoring/onshoring mix, our manufacturing strategy, and our annual model year refresh program.
Products
Our
vehicles provide the end user an environmentally friendly alternative to internal combustion engine vehicles (cars powered by gasoline
or diesel oil), for light duty uses, including low-speed logistics, maintenance services, cargo services, and personal/group transport
in a quiet, zero emissions vehicle with a lower total cost of ownership. The majority of our sales are comprised of sales of our four-wheeled
vehicle to Club Car, LLC (“Club Car”), through a strategic arrangement entered into in early 2019.
Manufacturing
Agreement with Cenntro
In
2017, AYRO Operating partnered with Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory
in the automotive district in Hangzhou, China, in a supply chain agreement to provide sub-assembly manufacturing services. Cenntro owns
the design of the AYRO Club Car 411 and 411x (“AYRO 411 Fleet”) vehicles and has granted us an exclusive license to
purchase the AYRO 411 Fleet vehicles for sale in North America.
Under
our Manufacturing License Agreement with Cenntro (the “MLA”), in order for us to maintain our exclusive territorial rights
pursuant to the MLA, for the first three years after the effective date of March 22, 2020, we must meet the following minimum purchase
requirements, which we believe we satisfied for the initial period: (i) a minimum of 300 units sold by the first anniversary of the effective
date of the MLA; (ii) a minimum of 800 units sold by the second anniversary of the effective date of the MLA; and (iii) a minimum of
1,300 units sold by the third anniversary of the effective date of the MLA. Cenntro will determine the minimum sale requirements for
the years thereafter, should the Company continue utilizing Cenntro as a vehicle supplier. Should any event of default occur, the other
party may terminate the MLA by providing written notice to the defaulting party, who will have 90 days from the effective date of the
notice to cure the default. Unless waived by the party providing notice, a failure to cure the default(s) within the 90-day time frame
will result in the automatic termination of the MLA. Events of default under the MLA include a failure to make a required payment when
due, the insolvency or bankruptcy of either party, the subjection of either party’s property to any levy, seizure, general assignment
for the benefit of creditors, and a failure to make available or deliver the products in the time and manner provided for in the MLA.
Cenntro waived these minimum requirements for the second year after the effective date.
We
import semi-knocked-down vehicle kits from Cenntro for the 411x models comprising our model year 2022 lineup. The vehicle kits are received
through shipping containers at the assembly facility of Karma Automotive LLC (“Karma”), our manufacturing partner, in southern
California, as well as at our customization, service and integration facility in Round Rock, Texas. The vehicles are then assembled with
tailored customization requirements per order.
In
April 2022, we received a letter from Cenntro claiming that we had not met the minimum purchase requirements under the MLA and that Cenntro
would therefore be terminating our exclusive license. Although our purchases were below the numerical minimums set forth in the MLA,
we believe we should retain our exclusive license, as the failure to meet such minimums was not due to our failure to perform under the
MLA. We are in discussions with Cenntro concerning the continued applicability of our exclusive license. If we lose this license, Cenntro
could sell identical or similar products through other companies or directly to our customers, which could have a material adverse effect
on our results of operations and financial condition.
We
intend for the new AYRO Z to utilize assemblies and products that will reduce the Company’s dependency on Chinese imports and on-shore
the supply chain to North America and European sources.
Master
Procurement Agreement with Club Car
In
March 2019, we entered into a five-year Master Procurement Agreement (the “MPA”) with Club Car for the sale of our four-wheeled
vehicles. The MPA grants Club Car the exclusive right to sell our four-wheeled vehicles in North America, provided that Club Car orders
at least 500 vehicles per year.
Although
Club Car did not meet the volume threshold for 2020 or 2021, we currently have no intention of selling our model year 2022 411x vehicles
commercially other than through Club Car. Under the terms of the MPA, we receive orders from Club Car dealers for vehicles of specific
configurations, and we invoice Club Car once the vehicle has shipped. The MPA has an initial term of five (5) years commencing January
1, 2019 and may be renewed by Club Car for successive one-year periods upon 60 days’ prior written notice. Pursuant to the MPA,
we granted Club Car a right of first refusal for sales of 51% or more of AYRO Operating’s assets or equity interests, which right
of first refusal is exercisable for a period of 45 days following delivery of an acquisition notice to Club Car. We also agreed to collaborate
with Club Car on new products similar to our four-wheeled vehicle and improvements to existing products and granted Club Car a
right of first refusal to purchase similar commercial utility vehicles which we may develop during the term of the MPA. For
the three months ended March 31, 2022, revenues from Club Car constituted approximately 99% of our revenues. Any loss of Club Car as
a customer, or significant reduction in purchases by Club Car, could have an adverse impact on our financial condition and operating
results.
Manufacturing
Services Agreement with Karma
On
September 25, 2020, we entered into a Master Manufacturing Services Agreement (the “Karma Agreement”) with Karma, pursuant
to which Karma agreed to provide certain manufacturing services for the production of our vehicles. The initial statement of work provides
that Karma will perform assembly of a certain quantity of the AYRO 411 vehicles and provide testing, materials management and outbound
logistics services. For such services in the initial statement of work, we agreed to pay $1.2 million to Karma, of which (i) $0.52 million
was paid at closing and (ii) $0.64 million was due and payable five months following the satisfaction of certain production requirements.
This second payment was accrued for as of December 31, 2021. As of March 31, 2022, $350,660 was included in prepaid expenses.
The
Karma Agreement expires (i) 12 months from the start of volume production of the vehicles or (ii) such earlier time as the parties mutually
agree in writing. In addition, Karma, in its sole discretion, may terminate the Karma Agreement at any time, without cause, upon twelve
months’ prior written notice. We may terminate the Karma Agreement, without cause, upon six months’ prior written notice.
On February 24, 2021, the Karma Agreement was amended to allow Karma to assemble a certain number of units of the AYRO 411 vehicle.
Supply
Agreement with Gallery Carts
During
2020, we entered into a supply agreement with Gallery Carts (“Gallery”), a leading provider of food and beverage kiosks,
carts, and mobile storefront solutions. Joint development efforts have led to the launch of the parties’ first all-electric configurable
mobile hospitality vehicle for “on-the-go” venues across the United States. This innovative solution permits food, beverage
and merchandising operators to bring goods directly to consumers.
The
configurable Powered Vendor Box, in the rear of the vehicle, features long-life lithium batteries that power the preconfigured hot/cold
beverage and food equipment and is directly integrated with the 411 and 411x. The canopy doors, as well as the full vehicle, can be customized
with end-user logos and graphics to enhance the brand experience. Gallery, with 40 years of experience delivering custom food kiosk solutions,
has expanded into electric mobile delivery vehicles, as customers increasingly want food, beverages and merchandise delivered to where
they are gathering. For example, a recent study conducted by Technomic found that a large majority of students, 77%, desired alternative
mobile and to-go food options on campuses.
Gallery,
a premier distributor of 411 and 411x low-speed electric vehicles manufactured by AYRO, has a diverse clientele throughout mobile food,
beverage and merchandise distribution markets, for key customer applications such as university, corporate and government campuses, major
league and amateur-level stadiums and arenas, resorts, airports and event centers. In addition to finding innovative and safe ways to
deliver food and beverages to their patrons, reducing and ultimately eliminating their carbon footprint is a top priority for many of
these customers.
Recent
Developments
On
January 14, 2022, Curtis Smith, who served as our Chief Financial Officer, resigned from his role as an officer and employee
of the Company. The Company and Mr. Smith entered into a General Release and Severance Agreement (the “Smith Severance Agreement”).
Pursuant to the Smith Severance Agreement, Mr. Smith received a cash separation payment in the amount of $237,500. The Smith Severance
Agreement also provides for certain customary mutual covenants regarding confidentiality, indemnification and non-disparagement. Under
the Smith Severance Agreement, the treatment of any outstanding equity awards to Mr. Smith shall be determined in accordance with the
terms of our 2017 Long Term Incentive Plan (the “2017 LTIP”) and the applicable award agreement.
On
January 14, 2022, Brian Groh, who served as our Chief of Business Development, terminated his engagement with the Company. As
such, the independent contractor agreement between the Company and 2196005 Ontario, Inc., an Ontario corporation owned and controlled
by Mr. Groh, dated September 16, 2019 was terminated. The Company and Mr. Groh entered into a General Release Agreement (the “Groh
Release Agreement”). Pursuant to the Groh Release Agreement, Mr. Groh received a cash separation payment in the amount of $237,500.
The Groh Release Agreement also provides for certain customary mutual covenants regarding confidentiality, indemnification and non-disparagement.
Under the Groh Release Agreement, the treatment of any outstanding equity awards to Mr. Groh shall be determined in accordance with the
terms of the 2017 LTIP and the applicable award agreement.
On
January 14, 2022, Richard Perley, who served as our Chief Marketing Officer, terminated his engagement with the Company. As such,
the independent contractor agreement between the Company and PerlTek, a corporation owned and controlled by Mr. Perley, dated August
27, 2018, was terminated. In connection with the termination of such agreement, the Company and Mr. Perley entered into a General
Release Agreement (the “Perley Release Agreement”). Pursuant to the Perley Release Agreement, Mr. Perley received a cash
separation payment in the amount of $237,500. The Perley Release Agreement also provides for certain customary mutual covenants regarding
confidentiality, indemnification and non-disparagement. Under the Perley Release Agreement, the treatment of any outstanding equity awards
to Mr. Perley shall be determined in accordance with the terms of the 2017 LTIP and the applicable award agreement.
Factors
Affecting Results of Operations
Master
Procurement Agreement
In
March 2019, we entered into the MPA with Club Car. In partnership with Club Car and in interaction with its substantial dealer network,
we have redirected our business development resources towards supporting Club Car’s enterprise and fleet sales function as Club
Car proceeds in its new product introduction initiatives.
COVID-19
Pandemic
Our
business, results of operations and financial condition have been adversely impacted by the coronavirus outbreak both in China and the
United States. This has delayed our ability to timely procure raw materials from our supplier in China, which in turn, has delayed shipments
to and corresponding revenue from customers. The pandemic and social distancing directives have interfered with our ability, and the
ability of our employees, workers, contractors, suppliers and other business partners to perform our and their respective responsibilities
and obligations relative to the conduct of our business. The COVID-19 pandemic poses restrictions on our employees’ and other service
providers’ ability to travel on pre-sales meetings, customers’ abilities to physically meet with our employees and the ability
of our customers to test drive or purchase our vehicles and shutdowns that may be requested or mandated by governmental authorities,
and we expect these restrictions to continue at least through the third quarter of 2022. The pandemic adversely impacted our sales and
the demand for our products in 2021 and the first quarter of 2022, and is expected to continue adversely impacting demand for our products
at least through the third quarter of 2022.
Tariffs
Countervailing
tariffs on certain goods from China continued to have an adverse impact on raw material costs throughout 2021 and the first
quarter of 2022, and are expected to continue to do so through the third quarter of 2022.
Shipping
Costs and Delays
A
majority of our raw materials are shipped via container from overseas vendors in China, such as Cenntro, our largest supplier. We rely
heavily on third parties, including ocean carriers and truckers, in that process. The global shipping industry is experiencing a shortage
of shipping capacity from China, trucking shortages, increased ocean shipping rates and increased trucking and fuel costs. As a result,
our receipt of imported products has been, and may continue to be, disrupted or delayed.
The
shipping industry is also experiencing issues with port congestion and pandemic-related port closures and ship diversions. A port worker
strike, work slow-down or other transportation disruption in the port of Long Beach, California could significantly disrupt our business.
We are currently experiencing such disruption at both ports due to multiple factors brought about by the COVID-19 pandemic, such as supply
and demand imbalance, a shortage of warehouse workers, truck drivers, transport equipment (tractors and trailers) and other causes, which
have resulted in heightened congestion, bottlenecks and gridlock, leading to abnormally high transportation delays. This has materially
and adversely affected our business and financial results for the three months ended March 31, 2022 and could continue to materially
and adversely affect our business and financial results throughout the remainder of 2022. If significant disruptions along these lines
continue, this could lead to further significant disruptions in our business, delays in shipments, and revenue and profitability shortfalls,
which could adversely affect our business, prospects, financial condition and operating results.
The
global shipping industry is also experiencing unprecedented increases in shipping rates from the trans-Pacific ocean carriers due to
various factors, including limited availability of shipping capacity. For example, the cost of shipping our products by ocean freight
has recently increased to at least three times historical levels and will have a corresponding impact upon our profitability. Additionally,
if increases in fuel prices occur, our transportation costs would likely further increase. Shipping pricing and logistical challenges
have had an unfavorable impact on our margins and our ability to assemble vehicles during 2021. We expect these impacts to continue through
the third quarter of 2022.
Supply
Chain
Beginning
in the second quarter of 2021, we offered a configuration of our 411x powered by lithium-ion battery technology. Additionally, our powered
food box offerings are currently powered by lithium-ion battery technology. Our business depends on the continued supply of battery cells
and other parts for our vehicles. During the year 2021, we at times experienced supply chain shortages of both lithium-ion battery cells
and other critical components used to produce our vehicles, which has slowed our planned production of vehicles. We expect these shortages
of lithium-ion battery cells and the varying supply limitations of other critical components to continued impacting our business through
the third quarter of 2022. In addition, we could be impacted by shortages of other products or raw materials, including silicon chips
that we use or our suppliers use in the production of our vehicles or parts sourced for our vehicles.
In
December 2021 we began research and development on the new 411 fleet vehicle model refresh, the AYRO Z, including updates on our
supply chain evolution, the offshoring/onshoring mix, our manufacturing strategy, and our annual model year refresh program. We intend
for the new AYRO Z to utilize assemblies and products that will reduce the Company’s dependency on Chinese imports and on-shore
the supply chain to North America and European sources.
Components
of Results of Operations
Revenue
We
derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts and service fees. In the
past we also derived rental revenue from vehicle revenue sharing agreements with our tourist destination fleet operators, or Destination
Fleet Operators, and, to a lesser extent, shipping, parts and service fees. Provided that all other revenue recognition criteria have
been met, we typically recognize revenue upon shipment, as title and risk of loss are transferred to customers and channel partners at
that time. Products are typically shipped to dealers or directly to end customers, or in some cases to our international distributors.
These international distributors assist with import regulations, currency conversions and local language. Our vehicle product sales revenues
vary from period to period based on, among other things, the customer orders received and our ability to produce and deliver the ordered
products. Customers often specify requested delivery dates that coincide with their need for our vehicles.
Because
these customers may use our products in connection with a variety of projects of different sizes and durations, a customer’s orders
for one reporting period generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily
correlate amongst customers.
Cost
of Goods Sold
Cost
of goods sold primarily consists of costs of materials and personnel costs associated with manufacturing operations, and an accrual for
post-sale warranty claims. Personnel costs consist of wages and associated taxes and benefits. Cost of goods sold also includes freight
and changes to our warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue
to increase in absolute dollars, as product revenue increases.
Operating
Expenses
Our
operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related
costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating
expenses also include allocated overhead costs for facilities and utility costs.
Stock-based
compensation
We
account for stock-based compensation expense in accordance with Accounting Standards Codification (“ASC”) 718, Compensation—Stock
Compensation, which requires the measurement and recognition of compensation expense for share-based awards based on the estimated
fair value on the date of grant.
The
fair value of each stock option granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model
and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide
service in exchange for the award. The fair value of the options granted to non-employees is measured and expensed as the options vest.
Restricted
stock grants are stock awards that entitle the holder to receive shares of our common stock as the award vests over time. The fair value
of each restricted stock grant is based on the fair market value price of common stock on the date of grant, and it is measured and expensed
as the options vest.
We
estimate the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. Key inputs
and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected term, the
risk-free interest rate over the expected term, the expected annual dividend yield and the expected stock price volatility. The expected
volatility is based on a combination of the historical and implied volatility of our publicly traded, near-the-money stock options, and
the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the U.S. Treasury yield
curve in effect at the time of grant and, since we do not currently pay or plan to pay a dividend on its common stock, the expected dividend
yield was zero.
Our
operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related
costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating
expenses also include allocated overhead costs for facilities and utility costs.
Research
and Development Expense
Research
and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated
with assets acquired for research and development, amortization of product development costs, product strategic advisory fees, third-party
engineering and contractor support costs and allocated overhead. We expect our research and development expenses to increase in absolute
dollars as we continue to invest in new and existing products.
Sales
and Marketing Expense
Sales
and marketing expense consist primarily of employee compensation and related expenses, sales commissions, marketing programs, travel
and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications
and brand-building activities. We expect sales and marketing expenses to increase in absolute dollars as we expand our sales force, expand
our product lines, increase marketing resources and further develop sales channels.
General
and Administrative Expense
General
and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance,
legal, human resources and fees for third-party professional services, and allocated overhead. We expect our general and administrative
expense to increase in absolute dollars as we continue to invest in growing our business.
Other
(Expense) Income
Other
(expense) income consists of income received or expenses incurred for activities outside of our core business. Other expense consists
primarily of interest expense.
Provision
for Income Taxes
Provision
for income taxes consists of estimated income taxes due to the United States government and to the state tax authorities in jurisdictions
in which we conduct business. In the case of a tax deferred asset, we reserve the entire value for future periods.
Results
of Operations
Three
months ended March 31, 2022 compared to three months ended March 31, 2021
The
following table sets forth our results of operations for each of the periods set forth below:
| |
For the Three Months Ended March 31, | |
| |
2022 | | |
2021 | | |
Change | |
Revenue | |
$ | 1,026,846 | | |
$ | 788,869 | | |
$ | 237,977 | |
Cost of goods sold | |
| 1,177,145 | | |
| 644,503 | | |
| 532,642 | |
Gross profit (loss) | |
| (150,299 | ) | |
| 144,366 | | |
| (294,665 | ) |
Operating expenses: | |
| | | |
| | | |
| | |
Research and development | |
| 872,631 | | |
| 1,927,561 | | |
| (1,054,930 | ) |
Sales and marketing | |
| 844,816 | | |
| 558,404 | | |
| 286,412 | |
General and administrative | |
| 2,697,704 | | |
| 3,301,309 | | |
| (603,605 | ) |
Total operating expenses | |
| 4,415,151 | | |
| 5,787,274 | | |
| (1,372,123 | ) |
Loss from operations | |
| (4,565,450 | ) | |
| (5,642,908 | ) | |
| 1,077,458 | |
Other income and (expense): | |
| | | |
| | | |
| | |
Other income, net | |
| 8,891 | | |
| 9,926 | | |
| (1,035 | ) |
Unrealized loss on marketable securities | |
| (22,101 | ) | |
| - | | |
| (22,101 | ) |
Interest expense | |
| - | | |
| (851 | ) | |
| 851 | |
Net loss | |
$ | (4,578,660 | ) | |
$ | (5,633,833 | ) | |
$ | 1,055,173 | |
Revenue
Revenue
was $1.03 million for the three months ended March 31, 2022 as compared to $0.79 million for the same period in 2021, an increase of
30.2%, or $0.24 million. The increase in revenue was the result of an increase in the volume of sales of our vehicles and in the price
per unit of the 411x, deriving from our MPA with Club Car, related powered-food box sales and other vehicle options.
Cost
of goods sold and gross profit
Cost
of goods sold increased by $0.53 million, or 82.6% for the three months ended March 31, 2022, as compared to the same period in 2021,
corresponding with the increase in vehicle sales, an increase in time-of-order options for our vehicles and specialty products, and an
increase in shipping costs from China.
Gross
margin percentage was (14.6%) for the three months ended March 31, 2022, as compared to 18.3% for the three months ended March 31, 2021.
The decrease in gross margin percentage was primarily due to an increase in shipping costs due to the global COVID-19 pandemic and global
supply chain constraints, as well as out of scope costs from the Karma facility. Vehicle sales prices were increased in
both January 2021 and October 2021 to partially offset these cost increases.
Research
and development expense
Research
and development (“R&D”) expense was $0.87 million for the three months ended March 31, 2022, as compared to $1.93 million
for the same period in 2021, a decrease of $1.06 million, or 54.7%. The decrease was primarily due to a repositioning of expenses related
to personnel costs for our engineering, design, and research teams from the initiated development of our next-generation three-wheeled
vehicle to the AYRO Z. We had a decrease in R&D contracting for professional service and design costs of $0.72 million, a decrease
in design and testing material of $0.27 million, and a decrease in salaries and related expenses of $0.05 million.
Sales
and marketing expense
Sales
and marketing expense was $0.84 million for the three months ended March 31, 2022, as compared to $0.56 million for the same period in
2021, an increase of $0.28 million, or 150%, as we expanded our sales and marketing staff and marketing-related initiatives surrounding
our new AYRO Z. Salaries and related expenses increased by $0.39 million due to the addition of our sales and marketing resources. Contracting
for professional marketing services decreased by $0.03 million.
General
and administrative expenses
The
majority of our operating losses from continuing operations resulted from general and administrative expenses. General and administrative
expenses consist primarily of costs associated with our overall operations and with being a public company. These costs include personnel,
legal and financial professional services, insurance, investor relations, and compliance related fees. General and administrative expense
was $2.70 million for the three months ended March 31, 2022, compared to $3.30 million for the same period in 2021, a decrease of $0.60
million, or 18.3%, primarily due to a repositioning of engineering, design, and manufacturing partnerships. Salaries
and related expenses decreased by $0.87 million, primarily due to a reduction in headcount. Fulfillment expense and rent expense increased
by $0.16 million and $0.07 million, respectively. We also recorded a loss on investment of $0.03 million. Depreciation increased by $0.01
million.
Liquidity
and Capital Resources
As
of March 31, 2022, we had $43.49 million in cash, $19.98 million in marketable securities and working capital of $68.34 million. As of
December 31, 2021, we had $69.16 million in cash and working capital of $72.31 million. The decrease in cash and working capital was
primarily a result of our operating loss.
Our
business is capital-intensive, and future capital requirements will depend on many factors, including our growth rate, the timing and
extent of spending to support development efforts, the results of our strategic review, the expansion of our sales and marketing teams,
the timing of new product introductions and the continuing market acceptance of our products and services. We are working to control
expenses and deploy our capital in the most efficient manner.
We
are evaluating other options for the strategic deployment of capital beyond our ongoing strategic initiatives, including potentially
entering other segments of the electric vehicle market. We anticipate being opportunistic with our capital, and we intend to explore
potential partnerships and acquisitions that could be synergistic with our competitive stance in the market.
We
are subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and
products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, competition
from larger companies, other technology companies and other technologies. Based on the foregoing, management believes that the existing
cash at March 31, 2022 will be sufficient to fund operations for at least the next twelve months following the date of this report.
As
discussed above under “Strategic Review,” we suspended all material research and development activity and expenditures, including
expenses associated with our planned next-generation three-wheeled vehicle, while we conduct a strategic review of our product development
strategy. In December of 2021 we began research and development on the new 411 fleet vehicle model refresh, the AYRO Z.