AYRO, INC. 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
References in this management's discussion and analysis to "we," "us," "our,"
"our Company" or "AYRO" refer to
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 the Company's product development strategy and other statements that
are not historical facts. We have based these forward-looking statements largely
on our current expectations and projections about future events and financial
trends that we believe may affect our business, financial condition, and results
of operations. These forward-looking statements speak only as of the date of
this Form 10-Q and are subject to a number of risks, uncertainties, and
assumptions that could cause actual results to differ materially from our
historical experience and our present expectations, or projections described
under the sections in this Form 10-Q and our other reports filed with the
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 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.
? 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.
? increases in costs, disruption of supply or shortage of raw materials, in
particular lithium-ion cells and other critical components, could harm our
business;
? we may be acquired by a third party based on preexisting agreements;
? 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;
? the market for our products is developing and may not develop as expected;
? 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 recent COVID-19 outbreak;
? our limited operating history makes evaluating our business and future
prospects difficult and may increase the risk of any investment in our
securities;
? we may experience lower-than-anticipated market acceptance of our vehicles;
? 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 are derived from a single customer;
? we rely on and intend to continue to rely on a single third-party supplier and
manufacturer located in
in a semi-knocked-down state for our current vehicles;
2
? 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;
? 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;
? our business may be adversely affected by labor and union activities;
? 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 environmental and safety laws and regulations;
? our proprietary designs are susceptible to reverse engineering by our
competitors;
? if we are unable to protect the confidentiality of our trade secrets or
know-how, such proprietary information may be used by others to compete against
us;
? should we begin transacting business in other currencies, we are subject to
exposure from changes in the exchange rates of local currencies; and
? we are subject to governmental export and import controls that could impair our
ability to compete in international market due to licensing requirements and
subject us to liability if we are not in compliance with applicable laws.
For a more detailed discussion of these and other factors that may affect our
business and that could cause the actual results to differ materially from those
projected in these forward-looking statements, see the risk factors and
uncertainties set forth in Part I, Item 1A of our Annual Report on Form 10-K as
filed on
Overview Merger
On
3
The Merger was treated as a reverse recapitalization effected by a share
exchange for financial accounting and reporting purposes since substantially all
of
Reverse Stock Split and Stock Dividend
On
The net result of the Reverse Stock Split and the Stock Dividend was a 1-for-5
reverse stock split. We made proportionate adjustments to the per share exercise
price and/or the number of shares issuable upon the exercise or vesting of all
stock options, restricted stock units (if any) and warrants outstanding as of
the effective times of the Reverse Stock Split and the Stock Dividend in
accordance with the terms of each security based on the split or dividend ratio.
Also, we reduced the number of shares reserved for issuance under our equity
compensation plans proportionately based on the split and dividend ratios.
Except for adjustments that resulted from the rounding up of fractional shares
to the next whole share, the Reverse Stock Split and Stock Dividend affected all
stockholders uniformly and did not change any stockholder's percentage ownership
interest in the Company. The Reverse Stock Split did not alter the par value of
Company Common Stock,
Closing of Asset Purchase Agreement
On
4 Business
Prior to the Merger, DropCar provided consumer and enterprise solutions to urban automobile-related logistical challenges. Following the Merger, we design and manufacture compact, sustainable electric vehicles for closed campus mobility, 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.
Products
AYRO 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 and cargo
services, at a lower total cost. The majority of our sales are comprised of
sales of our four-wheeled vehicle to
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, and smart payload markets. While we complete our strategic review, we have paused all material research and development activity and expenditures, including expenses associated with our planned next generation three-wheeled vehicle.
This process may result in us deciding to modify or discontinue current or planned products, in reallocating time and resources among existing products, in exploring new products or in making other operational changes, including to our reliance on internal and external resources. It could also result in delays in the expected timing for the launch of new products, if we determine to continue their development. Any decisions on advancing, reprioritizing or eliminating any of our products will be based on an evaluation of a number of factors, including our assessment of internal and external resources, the potential market for such products, the costs and complexities of manufacturing, the potential of competing products, the likelihood of any challenges to our intellectual property, regardless of merit, the ongoing and potential effects of the COVID-19 or any future pandemics, and industry and market conditions generally, and will be subject to the approval of the strategic and budget committee of the board of directors. We intend to provide updates as we review and finalize our assessment.
Manufacturing License Agreement with Cenntro
In 2017, AYRO Operating partnered with
Under our Manufacturing License Agreement with Cenntro (the "MLA"), in order for
us to maintain our exclusive territorial rights pursuant to the MLA, for the
first three years after the effective date of
Cenntro will determine the minimum sale requirements for the years thereafter. Should any event of default occur, the other party may terminate the MLA by providing written notice to the defaulting party, who will have 90 days from the effective date of the notice to cure the default. Unless waived by the party providing notice, a failure to cure the default(s) within the 90-day time frame will result in the automatic termination of the MLA. Events of default under the MLA include a failure to make a required payment when due, the insolvency or bankruptcy of either party, the subjection of either party's property to any levy, seizure, general assignment for the benefit of creditors, and a failure to make available or deliver the products in the time and manner provided for in the MLA. We are dependent on the MLA, and in the event of its termination our manufacturing operations and customer deliveries would be materially impacted.
5
Master Procurement Agreement with Club Car
In
Manufacturing Services Agreement with Karma
On
On
Supply Agreement with Gallery Carts
During 2020, we entered into a supply agreement with Gallery Carts, a leading
provider of food and beverage kiosks, carts, and mobile storefront solutions
(the "Gallery Agreement). 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 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 AYRO 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 mobile electric vehicles as
customers increasingly want food, beverages and merchandise delivered to where
they are gathering. For example, a recent study conducted by
Gallery Carts, a premier distributor of AYRO 411x low-speed electric vehicles manufactured by AYRO, has a diverse clientele throughout mobile food, beverage and merchandise distribution markets, for key customer applications such as university, corporate and government campuses, major league and amateur-level stadiums and arenas, resorts, airports and event centers. In addition to finding innovative and safe ways to deliver food and beverages to their patrons, reducing and ultimately eliminating their carbon footprint is a top priority for many of these customers.
Recent Developments
On
6
In connection with the
On
Pursuant to the Securities Purchase Agreement dated
On
Factors Affecting Results of Operations
Master Procurement Agreement
In
COVID-19 Pandemic
Our business, results of operations and financial condition have been adversely
impacted by the recent coronavirus outbreak both in
Tariffs
Countervailing tariffs on certain goods from
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 first three quarters of 2021, we have 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 continue impacting our business through at least the end of 2021. 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.
Shipping Costs and Delays
A majority of our raw materials are shipped via container from overseas vendors
in
The shipping industry is also experiencing issues with port congestion and
pandemic-related port closures and ship diversions. A port worker strike, work
slow-down or other transportation disruption in the port of
The global shipping industry is also experiencing unprecedented increases in shipping rates from the trans-Pacific ocean carriers due to various factors, including limited availability of shipping capacity. For example, the cost of shipping our products by ocean freight has recently increased to at least three times historical levels and will have a corresponding impact upon our profitability. Additionally, if increases in fuel prices occur, our transportation costs would likely further increase. Shipping pricing and logistical challenges have had an unfavorable impact on our margins and our ability to assemble vehicles during 2021. We expect these impacts to continue into 2022.
7
Components of Results of Operations
Revenue
We derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts and service fees. In the past we also derived rental revenue from vehicle revenue sharing agreements with our tourist destination fleet operators, or Destination Fleet Operators ("DFOs"), 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 dollar, as product revenue increases.
Operating Expenses
Our operating expenses consist of general and administrative, sales and marketing and research and development ("R&D") 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
R&D expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for R&D, amortization of product development costs, product strategic advisory fees, third-party engineering and contractor support costs and allocated overhead. We have ceased large R&D expenses as we conduct a strategic review.
Sales and Marketing Expense
Sales and marketing expense consist primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications and brand-building activities. We expect sales and marketing expenses to increase in absolute dollars as we expand our sales force, expand our product lines, increase marketing resources, and further develop sales channels.
General and Administrative Expense
General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources and fees for third-party professional services, and allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing our business.
8 Stock-based compensation
We account for stock-based compensation expense in accordance with ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for share-based awards based on the estimated fair value on the date of grant.
The fair value of each stock option granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award. The fair value of the options granted to non-employees is measured and expensed as the options vest.
Restricted stock grants are stock awards that entitle the holder to receive shares of our common stock as the award vests over time. The fair value of each restricted stock grant is based on the fair market value price of common stock on the date of grant, and it is measured and expensed as the options vest.
We estimate the fair value of stock-based and cash unit awards containing a
market condition using a Monte Carlo simulation model. Key inputs and
assumptions used in the Monte Carlo simulation model include the stock price of
the award on the grant date, the expected term, the risk-free interest rate over
the expected term, the expected annual dividend yield and the expected stock
price volatility. The expected volatility is based on a combination of the
historical and implied volatility of 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
Other (Expense) Income
Other (expense) income consists of income received or expenses incurred for activities outside of our core business. Other expense consists primarily of interest expense.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to
Results of Operations
Three months ended
The following table sets forth our results of operations for the three months
ended
For the three months ended September 30,
2021 2020 Change
Revenue $ 559,370 $ 388,654 $ 170,716
Cost of goods sold 955,466 326,671 628,795
Gross profit (loss) (396,096 ) 61,983 (458,079 )
Operating expenses:
Research and development 4,165,732 664,145 3,501,587
Sales and marketing 646,713 304,880 341,833
General and administrative 6,805,788 1,482,018 5,323,770
Total operating expenses 11,618,233 2,451,043 9,167,190
Loss from operations (12,014,329 ) (2,389,060 ) (9,625,269 )
Other income and expense:
Other income, net 12,254 17,503 (5,249 )
Interest expense - (95,469 ) 95,469
Loss on extinguishment of debt - (213,700 ) 213,700
Net loss $ (12,002,075 ) $ (2,680,726 ) $ (9,321,349 )
Revenue
Revenue was
9
Cost of goods sold and gross profit
Cost of goods sold increased by
Gross margin percentage was -70.8% for the three months ended
Research and development expense
R&D expense was
Sales and marketing expense
Sales and marketing expense was
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
Depreciation decreased by
10 Other income and expense
Interest expense decreased by
Nine months ended
The following table sets forth our results of operations for the nine months
ended
For the nine months ended September 30,
2021 2020 Change
Revenue $ 1,870,306 $ 821,398 $ 1,048,908
Cost of goods sold 2,030,447 645,463 1,384,984
Gross profit (loss) (160,141 ) 175,935 (336,076 )
Operating expenses:
Research and development 9,135,410 999,449 8,135,961
Sales and marketing 1,873,955 863,400 1,010,555
General and administrative 14,168,782 3,445,749 10,723,033
Total operating expenses 25,178,147 5,308,598 19,869,549
Loss from operations (25,338,288 ) (5,132,663 ) (20,205,625 )
Other income and expense:
Other income, net 40,943 17,523 23,420
Interest expense (2,312 ) (324,670 ) 322,358
Loss on extinguishment of debt - (566,925 ) 566,925
Net loss $ (25,299,657 ) $ (6,006,735 ) $ (19,292,922 )
Revenue
For the nine months ended
Cost of goods sold and gross profit
Cost of goods sold increased by
Gross margin percentage was -8.6% for the nine months ended
11
Research and development expense
R&D expense was
We had an increase in salaries and related expenses of
Sales and marketing expense
Sales and marketing expense was
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
Depreciation decreased by
Other income and expense
Interest expense decreased by
12 Non-GAAP Financial Measure
We present Adjusted EBITDA because we consider it to be an important
supplemental measure of our operating performance, and we believe it may be used
by certain investors as a measure of our operating performance. Adjusted EBITDA
is defined as income (loss) from operations before interest income and expense,
income taxes, depreciation, amortization of intangible assets, amortization of
discount on debt, impairment of long-lived assets, stock-based compensation
expense and certain non-recurring expenses. Adjusted EBITDA is not a measurement
of financial performance under generally accepted accounting principles in
Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time.
Adjusted EBITDA may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items.
Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider Adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results.
Below is a reconciliation of Adjusted EBITDA to net loss to common stockholders
for the three months ended
Three Months Ended
September 30,
2021 2020
Net Loss $ (12,002,075 ) $ (2,680,726 )
Depreciation and Amortization 130,483 115,468Stock-based compensation expense 3,660,492 167,769 Amortization of Discount on Debt
- 66,659
Interest expense - 28,809
Loss on extinguishment of debt - 213,700
Adjusted EBITDA $ (8,211,100 ) $ (2,088,321 ) Below is a reconciliation of Adjusted EBITDA to net loss to common stockholders
for the nine months ended
Nine Months Ended
September 30,
2021 2020
Net Loss $ (25,299,657 ) $ (6,006,735 )
Depreciation and Amortization 384,157 343,932Stock-based compensation expense 6,997,986 475,175 Amortization of Discount on Debt
- 236,398
Interest expense 2,312 88,272
Loss on extinguishment of debt - 566,925
Adjusted EBITDA $ (17,915,202 ) $ (4,296,033 )
13
Liquidity and Capital Resources
As of
Our sources of cash since inception have been predominantly from the sale of equity and debt.
On
On
Pursuant to the Securities Purchase Agreement dated
During the nine months ended
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 expansion of our sales and marketing teams, the timing of new product introductions and the continuing market acceptance of our products and services. We may also use capital for strategic acquisitions or transactions.
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
As discussed above under "Strategic Review," we suspended all material research and development activity and expenditures, including expenses associated with our planned next generation three-wheeled vehicle, while we conduct a strategic review of our product development strategy.
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