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)
| |
Shares | | |
|
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
(Deficit) | | |
Total | |
| |
Three
and Six Months Ended June 30, 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 | |
Beginning 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 | ) |
Balance, March 31, 2021 | |
| 8 | | |
| - | | |
| 1,234 | | |
| - | | |
| 50 | | |
| - | | |
| 35,213,048 | | |
| 3,521 | | |
| 124,761,589 | | |
| (30,788,650 | ) | |
| 93,976,460 | |
Issuance of common stock for
services | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 15,000 | | |
| 2 | | |
| 42,298 | | |
| | | |
| 42,300 | |
Stock Based Compensation | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 1,638,071 | | |
| | | |
| 1,638,071 | |
Exercise Options | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 394,589 | | |
| 39 | | |
| 1,041,452 | | |
| | | |
| 1,041,491 | |
Restricted stock vesting | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 681,725 | | |
| 68 | | |
| (68 | ) | |
| | | |
| 0 | |
Net
Loss | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| | | |
| | | |
| (7,663,749 | ) | |
| (7,663,749 | ) |
Balance,
June 30, 2021 | |
| 8 | | |
$ | - | | |
| 1,234 | | |
$ | - | | |
| 50 | | |
$ | - | | |
| 36,304,362 | | |
$ | 3,630 | | |
$ | 127,483,342 | | |
$ | (38,452,399 | ) | |
$ | 89,034,573 | |
Ending
Balance | |
| 8 | | |
$ | - | | |
| 1,234 | | |
$ | - | | |
| 50 | | |
$ | - | | |
| 36,304,362 | | |
$ | 3,630 | | |
$ | 127,483,342 | | |
$ | (38,452,399 | ) | |
$ | 89,034,573 | |
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 (as discussed below) 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 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. In connection with the strategic review,
we canceled development of our planned next-generation three-wheeled high speed vehicle.
For the past several years, the Company’s
primary supplier has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory in
the automotive district in Hangzhou, China. As a result of rising shipping costs, quality issues with certain components and
persistent delays, the Company has decided to cease production of the AYRO 411x from Cenntro in September 2022 and focus its
resources on the development and launch of the new 411 fleet vehicle model year 2023 refresh, the AYRO Z.
In
December 2021, the Company began design and development on the AYRO Z, including updates
on its supply chain evolution, offshoring/onshoring mix, manufacturing strategy, and annual model year refresh program.
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”).
NOTE
2. LIQUIDITY AND OTHER UNCERTAINTIES
Liquidity
and Other Uncertainties
The
unaudited condensed 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 $10,553,108 for the six months ended June 30, 2022, and negative
cash flows from operations of $9,831,514 for the six months ended June 30, 2022. At June 30, 2022, the Company had cash balances totaling
$40,890,769 and marketable securities of $17,970,906. In addition, overall working capital decreased by $9,815,833 during the six months
ended June 30, 2022. Management believes that the existing cash at June 30, 2022 will be sufficient to fund operations for at least the
next twelve months following the issuance of these unaudited 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 has
historically relied on foreign suppliers, including Cenntro which has been its largest supplier, for a number of raw materials,
instruments and technologies that the Company purchases. The Company intends to reduce its reliance on foreign suppliers by sourcing
components for the AYRO Z from vendors in the United States and in Europe, but its vendors may be reliant on foreign suppliers. The
Company’s success is dependent on the ability for it and its suppliers to import or transport such products from 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 worldwide, and as a result, receipt of imported products by the Company or its vendors 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 and its vendors. A port worker strike, work slow-down or other transportation disruption
in domestic ports 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, (including shipments
of components from overseas to the Company’s vendors), 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 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 has a corresponding impact on profitability. The Company and its vendors 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 further
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 Company’s business, prospects, financial condition and
operating results.
The Company and its vendors
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 Company’s
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. Even if the Company reduces its reliance
on foreign vendors, it still may be impacted by such shortages if its domestic vendors rely upon foreign sources for components. 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
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”). All intercompany accounts and transactions have been eliminated in consolidation.
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AYRO Operating
and DropCar Operating Company, Inc. 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 and six months
ended June 30, 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 May 2, 2022.
Use
of Estimates
The
preparation of the accompanying 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 accompanying unaudited condensed 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 include 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. The Company held $17,970,906 in marketable securities as of June 30, 2022.
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 $145,496 and $59,229 for the three months ended June 30, 2022 and 2021 and $256,045 and $109,855 for the six months
ended June 30, 2022 and 2021 respectively, included in SG&A.
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.
Miscellaneous
income
Miscellaneous
income consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding
customer receivable balance. This revenue is earned when a customer’s receivable balance becomes delinquent and its collection
is reasonably assured and is calculated using a stated late fee rate multiplied by the outstanding balance that is subject to a late
fee charge.
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.
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 June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Options to purchase common stock | |
| 788,546 | | |
| 1,448,193 | | |
| 788,546 | | |
| 1,448,193 | |
Restricted stock unvested | |
| 781,686 | | |
| 520,167 | | |
| 781,686 | | |
| 520,167 | |
Warrants outstanding | |
| 6,106,023 | | |
| 7,346,447 | | |
| 6,106,023 | | |
| 7,346,447 | |
Preferred stock outstanding | |
| 2,475 | | |
| 2,475 | | |
| 2,475 | | |
| 2,475 | |
Total | |
| 7,678,730 | | |
| 9,317,282 | | |
| 7,678,730 | | |
| 9,317,282 | |
NOTE
4. REVENUES
Disaggregation
of Revenue
Revenue
by type was as follows:
SCHEDULE OF DISAGGREGATION OF REVENUE
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenue type | |
| | | |
| | | |
| | | |
| | |
Product revenue | |
$ | 918,808 | | |
$ | 506,369 | | |
$ | 1,838,150 | | |
$ | 1,216,568 | |
Shipping revenue | |
| 22,752 | | |
| 15,698 | | |
| 130,255 | | |
| 57,681 | |
Miscellaneous income | |
| 40,000 | | |
| - | | |
| 40,000 | | |
| - | |
Service income | |
| - | | |
| - | | |
| - | | |
| 36,687 | |
Total Revenue | |
$ | 981,560 | | |
$ | 522,067 | | |
$ | 2,008,405 | | |
$ | 1,310,936 | |
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 June 30, 2022 and December 31, 2021, warranty reserves were recorded within
accrued expenses of $404,557 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
| |
| | | |
| | |
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Trade receivables | |
$ | 2,046,968 | | |
$ | 1,142,567 | |
Less: Allowance for doubtful accounts | |
| (124,000 | ) | |
| (173,138 | ) |
Accounts receivable, net | |
$ | 1,922,968 | | |
$ | 969,429 | |
The
Company reduced allowance for doubtful accounts by $49,138 for the six months ending June 30, 2022, due to collecting on past due
accounts, and recorded $2,069 of bad debt expense for the six months ending June 30, 2022.
NOTE
6. INVENTORY, NET
Inventory
consisted of the following:
SCHEDULE OF INVENTORY
| |
| | | |
| | |
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Raw materials | |
$ | 936,880 | | |
$ | 3,481,614 | |
Work-in-progress | |
| 447,255 | | |
| 51,441 | |
Finished goods | |
| 669,556 | | |
| 210,982 | |
Total | |
$ | 2,053,691 | | |
$ | 3,744,037 | |
For
the three months ended June 30, 2022 and 2021, depreciation recorded for fleet inventory was $23,883
and $23,886,
and for the six months ended June 30, 2022 and 2021, was $47,775
and $47,772
respectively. The Company determined that testing of obsolescence was required for inventory due to the quality of certain purchased
components from Cenntro’s lithium-ion line (“NCM”). 17 vehicles tested in the second quarter of 2022 were
determined to have 49 unique failures. An inspection of the remaining NCM units discovered a 100% failure rate. As a result, all
inventory associated with Cenntro’s NCM line was written off to cost of goods sold for $1,317,289.
NOTE
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
| | | |
| | |
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
Prepaid final
assembly services | |
$ | 277,680 | | |
$ | 439,660 | |
Prepayments for inventory | |
| 351,961 | | |
| 1,622,617 | |
Prepayments for insurance | |
| 252,773 | | |
| - | |
Prepayments
on advances on design | |
| 505,104 | | |
| - | |
Prepayments
on software | |
| 158,449 | | |
| - | |
Prepaid other | |
| 136,794 | | |
| 213,901 | |
Total Prepaid Expenses and Other Current Assets | |
$ | 1,682,761 | | |
$ | 2,276,178 | |
The Company impaired prepaid balances of
$1,377,709 from Cenntro when purchase orders were on hold due to quality issues and refunds were not collectable.
NOTE
8. PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
| |
| | | |
| | |
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Computer and equipment | |
$ | 1,077,252 | | |
$ | 853,695 | |
Furniture and fixtures | |
| 235,403 | | |
| 173,155 | |
Lease improvements | |
| 410,664 | | |
| 282,271 | |
Prototypes | |
| 300,376 | | |
| 300,376 | |
Computer software | |
| 455,875 | | |
| 455,875 | |
Property and equipment, gross | |
| 2,479,570 | | |
| 2,065,372 | |
Less: Accumulated depreciation | |
| (1,413,617 | ) | |
| (1,230,212 | ) |
Property and equipment, net | |
$ | 1,065,953 | | |
$ | 835,160 | |
Depreciation
expense for the three months ended June 30, 2022 and 2021 was $98,913 and $74,752, and for the six months ended June 30, 2022 and 2020
was $183,405 and $145,880, respectively.
NOTE
9. MARKETABLE SECURITIES
Marketable
securities consisted of the following:
SCHEDULE OF MARKETABLE SECURITIES
June 30, 2022 |
| |
Cost Basis | | |
Unrealized
Losses | | |
Transferred
to Cash | | |
Total | |
Bonds | |
$ | 12,178,027 | | |
$ | (35,580 | ) | |
$ | (1,993,514 | ) | |
$ | 10,148,933 | |
US Treasury securities | |
| 7,821,973 | | |
| - | | |
| - | | |
| 7,821,973 | |
| |
$ | 20,000,000 | | |
$ | (35,580 | ) | |
$ | (1,993,514 | ) | |
$ | 17,970,906 | |
NOTE
10. STOCKHOLDERS’ EQUITY
Restricted
Stock
On
February 24, 2021, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company granted 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 six months ended June 30, 2022.
On
February 1, 2022, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company granted 442,249 shares
of restricted stock to non-executive directors at a value of $1.29 per
share. During the six months ended June 30, 2022, 110,562
shares were issued and vested.
Preferred Stock
Series
H Convertible Preferred Stock
As
of June 30, 2022, in the event of liquidation, the holders of preferred stock were entitled to receive payments as
follows:
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H Preferred Stock outstanding as of June 30, 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 June 30, 2022 | |
$ | 0.84 | |
Equals the payment | |
$ | 6 | |
Series
H-3 Convertible Preferred Stock
As
of June 30, 2022, in the event of liquidation, the holders of preferred stock were entitled
to receive payments as follows:
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H-3 Preferred Stock outstanding as of June 30, 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 June 30, 2022 | |
$ | 0.84 | |
Equals the payment | |
$ | 864 | |
Series
H-6 Convertible Preferred Stock
As
of June 30, 2022, in the event of liquidation, the holders of preferred stock were entitled
to receive payments as follows:
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H-6 Preferred Stock outstanding as of June 30, 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 June 30, 2022 | |
$ | 0.84 | |
Equals the payment | |
$ | 1,714 | |
Warrants
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 June 30, 2022 | |
| 6,106,023 | | |
$ | 7.30 | | |
| 1.82 | |
NOTE
11. STOCK-BASED COMPENSATION
2014 Equity Incentive
Plan
The Company’s equity incentive plan created
in 2014 (the “2014 Plan”) was amended in 2018 to increase the number of shares of Company common stock available for issuance.
Pursuant to the 2014 Plan, 141,326
shares of common stock were reserved for issuance. As of June 30, 2022, there were no
shares available for grant under the 2014 Plan.
AYRO 2017 Long Term Incentive Plan
The Company has reserved a total of 477,983 shares
of its common stock pursuant to the AYRO, Inc. 2017 Long-Term Incentive Plan. The Company had 128,606 shares of common stock outstanding
under the plan at June 30, 2022. At June 30, 2022, no shares remained available for grant under future awards under the 2017 Long-Term
Incentive Plan.
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 (the “Plan”),
including shares of restricted stock that have been issued. The Company had awards concerning an aggregate of 1,570,232 shares of common
stock outstanding under the Plan at June 30, 2022, including stock options and restricted stock. At June 30, 2022, 1,243,715 shares remained
available for grant under future awards under the Plan.
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
| |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Research and development | |
$ | (6,904 | ) | |
$ | 20,708 | | |
$ | 9,800 | | |
$ | 44,194 | |
Sales and marketing | |
| 870 | | |
| 60,633 | | |
| 13,815 | | |
| 124,082 | |
General and administrative | |
| 309,587 | | |
| 1,556,730 | | |
| 568,048 | | |
| 3,169,218 | |
Total | |
$ | 303,553 | | |
$ | 1,638,071 | | |
$ | 591,663 | | |
$ | 3,337,494 | |
Stock based compensation | |
$ | 303,553 | | |
$ | 1,638,071 | | |
$ | 591,663 | | |
$ | 3,337,494 | |
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 | |
Granted | |
| 173,500 | | |
| 0.97 | | |
| | |
Forfeitures | |
| (723,629 | ) | |
| 3.14 | | |
| | |
Outstanding at June 30, 2022 | |
| 788,546 | | |
$ | 6.08 | | |
| 8.13 | |
Of
the outstanding options, 607,633 were vested and exercisable as of June 30, 2022. At June 30, 2022 the aggregate intrinsic value of stock
options vested and exercisable was $0.
The
Company recognized $(6,298) and $231,059 of stock option expense for the three months ended June 30, 2022 and 2021, and $26,078 and $500,953
for the six months ended June 30, 2022 and June 30, 2021, respectively. Total compensation cost related to non-vested stock option awards
not yet recognized as of June 30, 2022 was $210,538 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.
The Company
uses the following inputs when valuing stock-based awards.
SCHEDULE
OF FUTURE STOCK OPTION COMPENSATION EXPENSE
| |
For
the six months ended June 30, 2022
| |
Company Common Stock as of Grant Date May 6, 2022 | |
| 0.97 | |
Time to Maturity | |
| 6 | |
Dividend | |
| - | |
Annual risk-free interest rate | |
| 2.04 | % |
Annualized volatility | |
| 130.23 | % |
Black-Scholes Value | |
| 0.87 | |
Restricted
Stock
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 | | |
| 1.29 | |
Vested | |
| (110,562 | ) | |
| 1.29 | |
Outstanding at June 30, 2022 | |
| 781,686 | | |
$ | 1.98 | |
On
February 1, 2022, pursuant to the 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 during the three months ended June 30, 2022
and 2021 of $309,850 and $198,763 and for the six months ended June 30, 2022 and 2021 of $565,585 and $699,528, respectively. Total compensation
cost related to non-vested restricted stock not yet recognized as of June 30, 2022 was $941,803.
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, so long as those minimums are met. Two customers accounted for approximately 89%
and 10%,
respectively, of the Company’s revenues for the three months ended June 30, 2022 and for 39%
and 65%,
respectively, for the three months ended June 30, 2021. Two customers accounted for approximately 95%
and 4%,
respectively, of the Company’s revenues for the six months ended June 30, 2022 and for 59%
and 40%,
respectively, of the Company’s revenues for the six months ended June 30, 2021.
In connection
with the forthcoming introduction of the AYRO Z, the Company is reevaluating their channel strategy with an eye towards distributing
their next-generation platform and payloads in a manner that maximizes visibility, moderates channel costs and creates value. Accordingly,
the Company is evaluating their relationship with Club Car and may seek to replace Club Car with new business partners and channel partners
for selling their products beginning with the AYRO Z. Any loss of Club Car as a customer, or significant reduction in purchases by Club
Car, could have an adverse impact on the Company’s financial condition and operating results.
Accounts
Receivable
As
of June 30, 2022 one customer accounted for approximately 91% of the Company’s net accounts receivable. As of December 31, 2021
two customers accounted for more than 10% of the Company’s net accounts receivable. One customer accounted for approximately 87%
of the Company’s gross account receivable and a second customer accounted for approximately 10% of the Company’s net accounts
receivable.
Purchasing
The
Company places orders with various suppliers. During the six months ended June 30, 2022 and 2021, two suppliers provided more than
10% of the Company’s raw materials purchases. During the six months ended June 30, 2022, one supplier accounted for
approximately 61%,
and another supplier accounted for 13%
of the Company’s raw materials purchases. During the six months ended June 30, 2021 one supplier accounted for approximately 45%,and
another supplier accounted for 12%
of the Company’s raw materials purchases. The Company’s purchases of raw materials from these two suppliers were
approximately 43%
and 9%
respectively, of its total purchases of raw materials for the three months ended June 30, 2022, and approximately 63%
and 8%, respectively, of such purchases
for the three months ended June 30, 2021. 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 the AYRO 411x model for sale in North America. Under the Manufacturing License
Agreement, dated April 27, 2017, between Cenntro and the Company(the “MLA”), the Company is required to purchase a minimum
volume of product units from Cenntro, among other obligations, to maintain the license.
On May 31, 2022, the Company received a letter
from Cenntro purporting to terminate all agreements and contracts between the Company and Cenntro. Although the
Company does not believe Cenntro’s termination of the MLA is valid, the Company has determined to cease production of
the AYRO 411x and focus its resources on the development and launch of the AYRO Z. The Company has canceled all purchase orders and
future builds with Cenntro and currently intends to only order replacement parts for vehicles from Cenntro in the future. The
Company is in discussions with Cenntro concerning the potential repurchase by Cenntro of unsaleable inventory due to quality concerns. AYRO expects to lose
its exclusive license under the MLA, in which case Cenntro could sell 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 Karma Agreement expires in September 2022. Pursuant to the agreement Karma agreed to 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 remaining prepaid expense 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. $277,680 prepaid
balance remained as of June 30, 2022. During the three and six months ended June 30, 2022, $72,980
and $161,980
was expensed, respectively. During the three and six months ended June 30, 2021, $23,140
was expensed.
The
Company and Karma are working to wind down production of the AYRO 411x platform as the Company transitions to production of the AYRO
Z, and the Company intends to retire the 411x assembly line in late September 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, which has historically been the Company’s primary supplier. 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. The Company purchased 100% of its vehicle chassis, cabs and wheels for AYRO 411
Fleet Vehicles 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. See Note 12 for concentration amounts.
As of December 31, 2021 the net balance between prepaid expenses and accrued expenses with Cenntro was a prepaid balance of $602,016. As of June 30, 2022 the balance was zero. Impairments of
prepaid expenses led to a write-down, netted with the balance in accrued expenses. The remainder of the balance was expensed through
cost of goods sold for $621,097. Additionally, all inventory associated with Cenntro’s NCM line was written off to cost of
goods sold for $1,317,289.
The Company has canceled all purchase orders and future
builds with Cenntro and currently intends to only order replacement parts from Cenntro in the future. The Company is in discussions with
Cenntro to determine the amount of prepaid expenses to be returned to AYRO as a result of Cenntro’s delivery of unsaleable inventory.
Other
As
of January 1, 2019, DropCar had accrued approximately $232,000 for the settlement of multiple employment disputes. As of June 30, 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 June 30, 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 December 31, 2021 the Company had accrued the balance and as of June 30, 2022 paid the 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, the development and launch of the AYRO Z 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 our Master Procurement Agreement with Club Car is terminated, we will need to identify new strategic channel partners to support the
sales of our vehicles; |
|
|
● |
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; |
|
|
● |
we may be unable to replace lost manufacturing capacity on a timely and cost-effective basis, which could adversely impact our operations
and ability to meet delivery timelines; |
|
|
● |
we may experience delays in the development and introduction of new products; |
|
|
● |
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; |
|
|
● |
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; |
|
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● |
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. |
|
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● |
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; |
|
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● |
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 markets 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 and 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.
In connection with the strategic review, we canceled development of our planned next-generation three-wheeled high
speed vehicle.
For the past several years, our primary supplier
has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory in the automotive
district in Hangzhou, China. As a result of rising shipping costs, quality issues with certain components and persistent delays, we
have decided to cease production of the AYRO 411x from Cenntro in September 2022 and focus our resources on the development and
launch of the new 411 fleet vehicle model year 2023 refresh, the AYRO Z.
In
December 2021, we began design and development on 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 expect to unveil the first AYRO
Z prototype in the fourth quarter of 2022.
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
currently 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 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, we must meet certain minimum
purchase requirements.
We have imported semi-knocked-down vehicle kits
from Cenntro for the AYRO 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.
On May 31, 2022, we received a letter from Cenntro
purporting to terminate all agreements and contracts between the Company and Cenntro. Although we do not believe Cenntro’s
termination of the MLA is valid, we have determined to cease production of the AYRO 411x and focus our resources on the development and
launch of the AYRO Z. We have canceled all purchase orders and future builds with Cenntro and currently intend to only order replacement
parts for vehicles from Cenntro in the future. We are in discussions with Cenntro concerning the potential repurchase by Cenntro
of unsaleable inventory. We expect to lose our exclusive license under the MLA, in which case 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 largely eliminate our dependency on Chinese imports and optimize the supply chain to North American and European
sources. Final assembly of the AYRO Z is expected to occur in our Round Rock, Texas facilities, which we are currently building out in anticipation of AYRO Z production.
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 have not sold 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, so long as those minimums are met. 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 AYRO Operating may develop during the term of
the MPA. For the three and six months ended June 30, 2022, revenues from Club Car constituted approximately 89% and 95% respectively
of our revenues.
In
connection with the forthcoming introduction of the AYRO Z, we are reevaluating our channel strategy with an eye towards distributing
our next-generation platform and payloads in a manner that maximizes visibility, moderates channel costs and creates value. Accordingly, we are evaluating our relationship
with Club Car and may seek to replace Club Car with new business partners and channel partners for selling our products beginning with the AYRO Z. 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 and paid February 3, 2022.
On February 24, 2021, the Karma Agreement was amended
to allow Karma to assemble a certain number of units of the AYRO 411x vehicle. The Karma Agreement expires (i) in September 2022 or (ii)
at such earlier time as the parties mutually agree in writing.
We are working with Karma to wind down production of
the AYRO 411x platform as we transition to production of the AYRO Z, and we intend to retire the 411x assembly line in late September 2022.
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.
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. We are evaluating our relationship with Club Car and may
seek to replace Club Car with a new business partner for selling our products beginning with the AYRO Z.
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 half 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 half 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 have historically
been shipped via container from overseas vendors in China, such as Cenntro, which has been our largest supplier. Although we intend to
reduce our reliance on foreign suppliers by sourcing components for the AYRO Z from vendors in the United States, our vendors may be reliant
on foreign suppliers. 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, 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 domestic ports could significantly disrupt our business or that of our vendors. We are currently experiencing
such disruption 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 and six months ended June 30, 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 to us and our vendors, 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 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 has had a corresponding impact upon our profitability. Additionally, if further 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 and the first half of 2022. 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 and the first half of 2022 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 design and development on the new 411 fleet vehicle model year 2023 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 largely eliminate our dependency on Chinese
imports and optimize the supply chain to North American and European sources. We expect to unveil the first AYRO Z prototype in the
fourth quarter of 2022.
Inventory
Obsolescence
As of June 30, 2022, we determined that testing
of obsolescence was required for inventory due to the quality of certain purchased components from Cenntro’s lithium-ion line
(“NCM”). 17 vehicles tested in the second quarter of 2022 were determined to have 49 unique failures. An inspection of
the remaining NCM units revealed a 100% failure rate. As a result, all inventory associated with Cenntro’s NCM line was
written off for $1,317,289 to cost of goods sold. As of December 31, 2021 the balance of prepaid expenses and accrued expenses with Cenntro
was $602,016. As of June 30, 2022, there was no longer a balance. Impairments of prepaid expenses led to a write-down, netted with the
balance in accrued expenses. The remainder of the balance was expensed through cost of goods sold for $621,097.
Executive Transitions
On January 14, 2022, Curtis Smith, who served as
the Company’s 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
the Company’s 2017 Long Term Incentive Plan (the “2017 LTIP”) and the applicable award agreement.
On
January 14, 2022, Brian Groh, who served as the Company’s 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 the Company’s 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 Company’s
2017 LTIP and the applicable award agreement.
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, 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. As of June 30, 2022, we determined that testing of
obsolescence was required for inventory due to the quality of NCM received from Cenntro. 17 vehicles tested in the second quarter of
2022 were determined to have 49 unique failures. An inspection of the remaining NCM units revealed a 100% failure rate. As a result,
all inventory associated with Cenntro’s NCM line was written off to cost of goods sold for $1,317,289. Impairments of
prepaid expenses led to a write-down, netted with the balance in accrued expenses. The remainder of the balance was expensed through
cost of goods sold for $621,097.
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 it vests.
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 consists 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 and unrealized gain/loss on marketable securities.
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 June 30, 2022 compared to three months ended June 30, 2021
The
following table sets forth our results of operations for each of the periods set forth below:
| |
For the Three Months Ended June 30, | |
| |
2022 | | |
2021 | | |
Change | |
Revenue | |
$ | 981,560 | | |
$ | 522,067 | | |
$ | 459,493 | |
Cost of goods sold | |
| 2,827,512 | | |
| 430,478 | | |
| 2,397,034 | |
Gross profit (loss) | |
| (1,845,952 | ) | |
| 91,589 | | |
| (1,937,541 | ) |
Operating expenses: | |
| | | |
| | | |
| | |
Research and development | |
| 1,046,797 | | |
| 3,042,117 | | |
| (1,995,320 | ) |
Sales and marketing | |
| 337,226 | | |
| 668,838 | | |
| (331,612 | ) |
General and administrative | |
| 2,741,700 | | |
| 4,061,681 | | |
| (1,319,981 | ) |
Total operating expenses | |
| 4,125,723 | | |
| 7,772,636 | | |
| (3,646,913 | ) |
Loss from operations | |
| (5,971,675 | ) | |
| (7,681,048 | ) | |
| 1,709,373 | |
Other income and (expense): | |
| | | |
| | | |
| | |
Other income, net | |
| 10,706 | | |
| 18,419 | | |
| (7,713 | ) |
Interest expense | |
| - | | |
| (1,121 | ) | |
| 1,121 | |
Unrealized loss on marketable securities | |
| (13,479 | ) | |
| - | | |
| (13,479 | ) |
Net loss | |
$ | (5,974,448 | ) | |
$ | (7,663,749 | ) | |
$ | 1,689,301 | |
Revenue
Revenue was $0.98 million for the three months ended
June 30, 2022 as compared to $0.52 million for the same period in 2021, an increase of 88%, or $0.46 million. The increase in revenue
was the result of increases in the volume of sales of our vehicles and in the price per unit of the AYRO 411x, related powered-food box
sales and other vehicle options.
Cost of goods sold and gross profit
Cost of goods sold increased by $2.4 million, or
556.8% for the three months ended June 30, 2022, as compared to the same period in 2021, corresponding with a $1.32 million
write-off of NCM inventory, due to a 100% failure rate, and $0.62 million of Cenntro prepaid and accrued balances, as well as an
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 (188.1)% for the
three months ended June 30, 2022, as compared to 17.5% for the three months ended June 30, 2021. The decrease in gross margin
percentage was primarily due to the write-off of NCM inventory, and the write down of Cenntro balances,
as well as to an increase in shipping costs due to the global COVID-19 pandemic, inflation and global supply chain constraints.
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 $1.05 million for the three months ended June 30, 2022, as compared to $3.04
million for the same period in 2021, a decrease of $2 million, or 65.6%. 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 planned
next-generation three-wheeled vehicle to the AYRO Z. We had a decrease in R&D contracting for professional service and design
costs of $1.85 million, and a decrease in salaries and related expenses of $0.11 million.
Sales
and marketing expense
Sales
and marketing expense was $0.34 million for the three months ended June 30, 2022, as compared to $0.67 million for the same period in
2021, a decrease of $0.33 million, or 49.3%, as we reduced the cost of marketing-related initiatives surrounding the AYRO Z. Salaries
and related expenses decreased by $0.22 million due to the restructuring of our sales and marketing resources. Expenses related to consultants
for professional marketing services decreased by $0.05 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 $2.74 million for the three months
ended June 30, 2022, compared to $4.06 million for the same period in 2021, a decrease of $1.32 million, or 32.5% primarily due to a $1.2
million decrease in stock based compensation expense. Salaries and related expenses excluding stock based compensation increased by $0.49
million, primarily due to expanding headcount. Fulfillment expense and rent expense increased by $0.14 million and $0.01 million, respectively.
We also recorded a loss on investment of $0.01 million. Depreciation increased by $0.02 million.
Six
months ended June 30, 2022 compared to six months ended June 30, 2021
The
following table sets forth our results of operations for each of the periods set forth below:
| |
For the Six Months Ended June 30, | |
| |
2022 | | |
2021 | | |
Change | |
Revenue | |
$ | 2,008,405 | | |
$ | 1,310,936 | | |
$ | 697,469 | |
Cost of goods sold | |
| 4,004,657 | | |
| 1,074,981 | | |
| 2,929,676 | |
Gross profit (loss) | |
| (1,996,252 | ) | |
| 235,955 | | |
| (2,232,207 | ) |
Operating expenses: | |
| | | |
| | | |
| | |
Research and development | |
| 1,912,204 | | |
| 4,969,678 | | |
| (3,057,475 | ) |
Sales and marketing | |
| 1,182,042 | | |
| 1,227,242 | | |
| (45,200 | ) |
General and administrative | |
| 5,446,627 | | |
| 7,362,994 | | |
| (1,916,367 | ) |
Total operating expenses | |
| 8,540,873 | | |
| 13,559,914 | | |
| (5,019,041 | ) |
Loss from operations | |
| (10,537,125 | ) | |
| (13,323,959 | ) | |
| 2,786,834 | |
Other income and (expense): | |
| | | |
| | | |
| | |
Other income, net | |
| 19,597 | | |
| 28,689 | | |
| (9,092 | ) |
Interest expense | |
| - | | |
| (2,312 | ) | |
| 2,312 | |
Unrealized loss on marketable securities | |
| (35,580 | ) | |
| - | | |
| (35,580 | ) |
Net loss | |
$ | (10,553,108 | ) | |
$ | (13,297,582 | ) | |
$ | 2,744,474 | |
Revenue
Revenue was $2.01 million for the six months ended
June 30, 2022 as compared to $1.32 million for the same period in 2021, an increase of 53.2%, or $0.70 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 AYRO 411x, related powered-food
box sales and other vehicle options.
Cost of goods sold and gross profit
Cost of goods sold increased by $2.93 million,
or 272.5% for the six months ended June 30, 2022, as compared to the same period in 2021, corresponding with the $1.32 million
write-off of NCM inventory, due to a 100% failure rate, and a $0.62 million write down of Cenntro prepaid and accrued balances, as well as an 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 (99%) for the six
months ended June 30, 2022, as compared to 18% for the six months ended June 30, 2021. The decrease in gross margin percentage was
primarily due to the write-off of NCM inventory, and the write down of Cenntro
balances, as well as an increase in shipping costs due to the global COVID-19 pandemic, inflation and global supply chain constraints. 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 $1.91 million for the six months ended June 30, 2022, as compared to $4.97
million for the same period in 2021, a decrease of $3.06 million, or 61.5%. 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 planned
next-generation three-wheeled vehicle to the AYRO Z. We had a decrease in R&D contracting for professional service and design
costs of $2.57 million, and a decrease in salaries and related expenses of $0.16 million.
Sales
and marketing expense
Sales
and marketing expense was $1.18 million for the six months ended June 30, 2022, as compared to $1.23 million for the same period in 2021,
a decrease of $0.04 million, or 3.5%, as we reduced the cost of marketing-related initiatives surrounding the AYRO Z. Salaries and related
expenses increased by $0.18 million due to the restructuring of our sales and marketing resources. Expenses related to consultants for
professional marketing services decreased by $0.10 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 $5.45 million for the six months ended
June 30, 2022, compared to $7.36 million for the same period in 2021, a decrease of $1.91 million, or 26%, primarily due to a $2.6 million
decrease in stock based compensation expense. Salaries and related expenses excluding stock based compensation increased by $0.91 million,
primarily due to expanding headcount. Fulfillment expense and rent expense increased by $0.31 million and $0.09 million, respectively.
We also recorded a loss on investment of $0.04 million. Depreciation increased by $0.04 million.
Liquidity
and Capital Resources
As
of June 30, 2022, we had $40.89 million in cash, $17.97 million in marketable securities and working capital of $62.49 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 were
primarily a result of our inventory write-down and our operating loss, respectively.
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.
Following
the hiring of our new Chief Executive Officer in the third quarter of 2021, 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 June 30, 2022 will be sufficient to fund operations for at least the next twelve months following the date of this report.
In connection with the strategic review, we
canceled development of our planned next-generation three-wheeled vehicle. In December 2021, we began design and development on
the new 411 fleet vehicle model year 2023 refresh, the AYRO Z.