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 in order to focus its resources on the development and launch of the new 411 fleet vehicle model year 2023 refresh, the Vanish.
In
December 2021, the Company began design and development on the Vanish, 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
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 $16,234,682
for the nine months ended September 30, 2022,
and negative cash flows from operations of $12,959,204
for the nine months ended September 30, 2022.
At September 30, 2022, the Company had cash balances totaling $39,428,850
and marketable securities of $15,790,595.
In addition, as a result of the net losses incurred working capital has decreased by $15,768,697
during the nine months ended September 30, 2022.
Management believes that the existing cash at September 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 Vanish 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.
On October 3, 2022, AYRO, Inc. (the “Company”) received a letter
from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating that, based upon the closing bid
price of the Company’s common stock for the 30 consecutive business day period between August 19, 2022 and September 30, 2022, the
Company did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to
Nasdaq Listing Rule 5550(a)(2). The letter also indicated that the Company will be provided with a compliance period of 180 calendar days,
or until April 3, 2023 (the “Compliance Period”), in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).
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 nine months
ended September 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 $15,790,595 in marketable securities as of September 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 $79,767 and $98,464 for the three months ended September 30, 2022 and 2021 and $335,812 and $208,139 for the nine
months ended September 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
| |
|
2022 | | |
|
2021 | | |
|
2022 | | |
|
2021 | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Options to purchase common stock | |
| 785,422 | | |
| 1,362,765 | | |
| 785,422 | | |
| 1,362,765 | |
Restricted stock unvested | |
| 770,824 | | |
| 493,000 | | |
| 770,824 | | |
| 493,000 | |
Restricted stock vested – unissued | |
| - | | |
| 434,166 | | |
| - | | |
| 434,166 | |
Warrants outstanding | |
| 6,106,023 | | |
| 6,108,823 | | |
| 6,106,023 | | |
| 6,108,823 | |
Preferred stock outstanding | |
| 2,475 | | |
| 2,475 | | |
| 2,475 | | |
| 2,475 | |
Total | |
| 7,664,744 | | |
| 8,401,229 | | |
| 7,664,744 | | |
| 8,401,229 | |
NOTE
4. REVENUES
Disaggregation
of Revenue
Revenue
by type was as follows:
SCHEDULE OF DISAGGREGATION OF REVENUE
| |
|
2022 | | |
|
2021 | | |
|
2022 | | |
|
2021 | |
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenue type | |
| | | |
| | | |
| | | |
| | |
Product revenue | |
$ | 332,792 | | |
$ | 494,011 | | |
$ | 2,170,943 | | |
$ | 1,710,579 | |
Shipping revenue | |
| 35,507 | | |
| 65,359 | | |
| 165,762 | | |
| 123,040 | |
Miscellaneous income | |
| 4,887 | | |
| - | | |
| 44,887 | | |
| - | |
Service income | |
| - | | |
| - | | |
| - | | |
| 36,687 | |
Total Revenue | |
$ | 373,186 | | |
$ | 559,370 | | |
$ | 2,381,592 | | |
$ | 1,870,306 | |
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 September 30, 2022 and December 31, 2021, warranty reserves were recorded within
accrued expenses of $410,017 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
| |
|
2022 | | |
|
2021 | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Trade receivables | |
$ | 456,372 | | |
$ | 1,142,567 | |
Less: Allowance for doubtful accounts | |
| - | | |
| (173,138 | ) |
Accounts receivable,
net | |
$ | 456,372 | | |
$ | 969,429 | |
The
Company reduced allowance for doubtful accounts by $173,138
for the nine months ended September 30, 2022, due to collecting on past due accounts, and recorded $2,136
of bad debt expense of direct write off for the nine months ended September 30, 2022.
NOTE
6. INVENTORY
Inventory
consisted of the following:
SCHEDULE OF INVENTORY
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Raw materials | |
$ | 537,166 | | |
$ | 3,481,614 | |
Work-in-progress | |
| - | | |
| 51,441 | |
Finished goods | |
| 942,335 | | |
| 210,982 | |
Total | |
$ | 1,479,501 | | |
$ | 3,744,037 | |
For
the three months ended September 30, 2022 and 2021, depreciation recorded for fleet inventory was $23,886 and $23,886, and for the nine
months ended September 30, 2022 and 2021, was $71,661 and $71,658 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. The Club Car Discount during the three and nine months ended September 30, 2022 required a $413,561 net realizable value adjustment, necessitating the value of inventory
to be written down.
NOTE
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepaid final assembly services | |
$ | 167,331 | | |
$ | 439,660 | |
Prepayments for inventory | |
| 1,101,693 | | |
| 1,622,617 | |
Prepayments for insurance | |
| 207,599 | | |
| - | |
Prepayments on advances on design | |
| 608,159 | | |
| - | |
Prepayments on software | |
| 133,099 | | |
| - | |
Prepaid other | |
| 109,682 | | |
| 213,901 | |
Total Prepaid Expenses and Other Current Assets | |
$ | 2,327,563 | | |
$ | 2,276,178 | |
During the nine months ended September 30, 2022 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
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Computer and equipment | |
$ | 1,344,204 | | |
$ | 853,695 | |
Furniture and fixtures | |
| 316,665 | | |
| 173,155 | |
Lease improvements | |
| 662,013 | | |
| 282,271 | |
Prototypes | |
| 450,225 | | |
| 300,376 | |
Computer software | |
| 455,875 | | |
| 455,875 | |
Property and equipment, gross | |
| 3,228,982 | | |
| 2,065,372 | |
Less: Accumulated depreciation | |
| (1,565,597 | ) | |
| (1,230,212 | ) |
Property and equipment, net | |
$ | 1,663,385 | | |
$ | 835,160 | |
Depreciation
expense for the three months ended September 30, 2022 and 2021 was $151,980 and $74,655, and for the nine months ended September 30,
2022 and 2021 was $335,385 and $220,535, respectively.
NOTE
9. MARKETABLE SECURITIES
Marketable
securities consisted of the following:
SCHEDULE OF MARKETABLE SECURITIES
September 30, 2022 |
| |
| | |
Realized | | |
Unrealized | | |
Transferred | | |
| |
| |
Cost Basis | | |
Gains | | |
Loss | | |
to Cash | | |
Total | |
Bonds | |
$ | 12,235,258 | | |
$ | 110,490 | | |
$ | (75,204 | ) | |
$ | (4,244,691 | ) | |
$ | 8,025,853 | |
US Treasury securities | |
| 7,764,742 | | |
| - | | |
| - | | |
| - | | |
| 7,764,742 | |
| |
$ | 20,000,000 | | |
$ | 110,490 | | |
$ | (75,204 | ) | |
$ | (4,244,691 | ) | |
$ | 15,790,595 | |
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 nine months ended September 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 nine months ended September 30, 2022, 221,424 shares were issued and
vested.
Preferred
Stock
Series
H Convertible Preferred Stock
As
of September 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 September 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 September 30, 2022 | |
$ | 0.59 | |
Liquidation Value | |
$ | 4 | |
Series
H-3 Convertible Preferred Stock
As
of September 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 September 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 September 30, 2022 | |
$ | 0.59 | |
Liquidation Value | |
$ | 607 | |
Series
H-6 Convertible Preferred Stock
As
of September 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 September 30, 2022 | |
| 50 | |
Number of Series H Preferred Stock outstanding as of September 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 September 30, 2022 | |
$ | 0.59 | |
Liquidation Value | |
$ | 850 | |
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 | | |
| 2.31 | |
Granted | | |
| - | | |
| - | | |
| | |
Exercised | | |
| - | | |
| - | | |
| | |
Expired | | |
| (2,800 | ) | |
| 165.60 | | |
| | |
Outstanding at September 30, 2022 | | |
| 6,106,023 | | |
$ | 7.30 | | |
| 1.57 | |
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 September 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 September 30, 2022. At September 30, 2022, no shares remained available
for grant under future awards under the 2017 Long-Term Incentive Plan. In conjunction with the 2020 incentive plan, the remaining unissued amounts were cancelled.
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 1,366,183
shares of common stock outstanding under the Plan at September 30, 2022, including stock options and restricted stock.
At September 30, 2022, 1,151,399
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 September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Research and development | |
$ | 5,269 | | |
$ | 18,786 | | |
$ | 15,069 | | |
$ | 62,980 | |
Sales and marketing | |
| 6,001 | | |
| 60,771 | | |
| 19,816 | | |
| 184,853 | |
General and administrative | |
| 320,911 | | |
| 3,580,935 | | |
| 888,959 | | |
| 6,750,153 | |
Total | |
$ | 332,181 | | |
$ | 3,660,492 | | |
$ | 923,844 | | |
$ | 6,997,986 | |
Stock based compensation | |
$ | 332,181 | | |
$ | 3,660,492 | | |
$ | 923,844 | | |
$ | 6,997,986 | |
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 | | |
| (726,753 | ) | |
| 3.14 | | |
| | |
Outstanding at September 30, 2022 | | |
| 785,422 | | |
$ | 6.10 | | |
| 7.97 | |
Of
the outstanding options, 608,726 were vested and exercisable as of September 30, 2022. At September 30, 2022 the aggregate intrinsic
value of stock options vested and exercisable was $0.
The
Company recognized $18,821 and $669,999 of stock option expense for the three months ended September 30, 2022 and 2021, and $44,899 and
$1,170,958 for the nine months ended September 30, 2022 and September 30, 2021, respectively. Total compensation cost related to non-vested
stock option awards not yet recognized as of September 30, 2022 was $191,176 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 nine months ended
September 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, RESTRICTED STOCK
| |
Number of Shares | | |
Weighted Average
Grant Price | |
Outstanding at December 31, 2021 | |
| 450,000 | | |
$ | 2.48 | |
Granted | |
| 542,248 | | |
| 1.06 | |
Vested | |
| (221,424 | ) | |
| 1.29 | |
Outstanding at September 30, 2022 | |
| 770,824 | | |
$ | 1.89 | |
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. On August 23, 2022, pursuant to the employment agreement with David E. Hollingsworth, the Company issued 100,000 shares
of restricted stock at a value of $0.03 per share. Vesting will occur as predetermined value-based targets are met. We estimate the fair
value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. The Company recognized
compensation expense related to all restricted stock during the three months ended September 30, 2022 and 2021 of $313,360 and $2,990,493
and for the nine months ended September 30, 2022 and 2021 of $878,945 and $5,827,028, respectively. Total compensation cost related to
non-vested restricted stock not yet recognized as of September 30, 2022 was $631,307.
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. One customer accounted for approximately 100% of the Company’s revenues for the three months ended September
30, 2022 and for 99% for the three months ended September 30, 2021. Two customers accounted for approximately 96% and 4%, respectively,
of the Company’s revenues for the nine months ended September 30, 2022 and for 71% and 28%, respectively, of the Company’s
revenues for the nine months ended September 30, 2021.
In
connection with the forthcoming introduction of the Vanish, the Company is reevaluating its 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 Vanish. 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 September 30, 2022 one customer accounted for approximately 100% 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 nine months ended September 30, 2022 and 2021, three suppliers provided more
than 10% of the Company’s raw materials purchases. During the nine months ended September 30, 2022, one supplier accounted for
approximately 57%, and two other suppliers accounted for 12% of the Company’s raw materials purchases. During the nine months ended
September 30, 2021 one supplier accounted for approximately 51%, and another supplier accounted for 11% of the Company’s raw materials
purchases. The Company’s purchases of raw materials from three suppliers were approximately 49%, 17%, and 13% respectively, of
its total purchases of raw materials for the three months ended September 30, 2022, and approximately 56% and 16%, respectively, of such
purchases for the three months ended September 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 Vanish. 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 expired 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. $167,331 prepaid balance remained as of September 30, 2022. During the three and nine months ended
September 30, 2022, $110,349 and $272,329 was expensed, respectively. During the three and nine months ended September 30, 2021, $60,520
and $90,780 was expensed respectively.
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 September 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.
Other
As
of January 1, 2019, DropCar had accrued approximately $232,000 for the settlement of multiple employment disputes. As of September 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 September 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 believed DropCar owed additional sales tax plus interest. Management investigated the details. 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.