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,"
"the Company," "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 our product development strategy, the development and launch of the
AYRO Vanish (the "Vanish") 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
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;
? our failure to meet the continued listing requirements of
Market could result in a delisting of our common stock;
? a significant portion of our revenues has historically been derived from Club
Car pursuant to the MPA. Following our termination of the MPA, our sales could
decrease significantly, and we will need to identify new strategic channel
partners to support the sales of our vehicles;
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? we rely on a single third-party supplier and manufacturer located in
certain sub-assembly and assembly parts for the Vanish and any disruption in
the operations of this third-party supplier could adversely affect our business
and results of operations;
? if we lose our exclusive license to manufacture the
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;
? 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;
? our future growth depends on customers' willingness to adopt electric vehicles;
? we may experience lower-than-anticipated market acceptance of our current
models and the vehicles in development;
? 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;
? if we fail to include key feature sets relative to the target markets for our
electric vehicles, our business will be harmed;
? 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 our facilities, or a
catastrophic loss of our manufacturing facilities, may cause significant lost
or delayed production and adversely affect our results of operations;
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? 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;
? if our vehicles fail to perform as expected due to defects, our ability to
develop, market and sell our electric vehicles could be seriously harmed;
? we depend on key personnel to operate our business, and the loss of one or more
members of our management team, or our failure to attract, integrate and retain
other highly qualified personnel in the future, could harm our business;
? transitioning from an offshoring to an onshoring business model carries risk;
? 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;
? failure to maintain the strength and value of our brand could have a material
adverse effect on our business, financial condition, and results of operations;
? 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;
? an unexpected change in failure rates of our products could have a material
adverse impact on our business, financial condition, and operating results;
? 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 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;
? failure in our information technology and storage systems could significantly
disrupt the operation of our business;
? 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;
? our long-term capital requirements are subject to numerous risks;
? we may invest in or acquire other businesses, and our business may suffer if
we are unable to successfully integrate acquired businesses into our company
or otherwise manage the growth associated with multiple acquisitions;
? increased safety, emissions, fuel economy or other regulations may result in
higher costs, cash expenditures, and/or sales restrictions;
? our vehicles are subject to multi-jurisdictional motor vehicle standards;
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? 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;
? unusual or significant litigation, governmental investigations or adverse
publicity arising out of alleged defects in our vehicles, or otherwise, may
derail our business;
? we are required to comply with state-specific regulations regarding the sale of
vehicles by a manufacturer;
? 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 intellectual property from third parties in the
future, and if we fail to obtain licenses 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;
? many of our proprietary designs are in digital form, and a breach of our
computer systems could result in these designs being stolen;
? 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;
? legal proceedings or third-party claims of intellectual property infringement
and other challenges may require us to spend substantial time and money and
could harm our business;
? we are generally obligated to indemnify our sales channel partners, customers,
suppliers and contractors for certain expenses and liabilities resulting from
intellectual property infringement claims regarding our products, which could
force us to incur substantial costs;
? 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 our 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 with the
4 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 model year 2023 vehicle lineup in support of the aforementioned markets.
Strategic Review
Following the hiring of our current 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 our strategic review, we cancelled development of our planned next-generation three-wheeled high-speed vehicle.
For the past several years, our primary supplier has been
Club Car MPA Termination
The majority of our sales have historically been comprised of sales to
On
5
Nasdaq Minimum Bid Price Requirement
As previously reported, on
On
If compliance with the Minimum Bid Price Requirement cannot be demonstrated by
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.
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 ("
Under our Manufacturing License Agreement with Cenntro (the "Cenntro MLA"), in order for us to maintain our exclusive territorial rights pursuant to the Cenntro MLA, we must meet certain minimum purchase requirements.
We imported semi-knocked-down vehicle kits from Cenntro for the
On
We intend for the new Vanish to utilize assemblies and products that will
largely eliminate our dependency on Chinese imports and optimize the supply
chain to rely primarily upon North American and European sources. Final assembly
of the Vanish will occur in our
6
Manufacturing Agreement with Linamar
On
In the event we terminate the Linamar MLA prior to its expiration, whether
following a change in control or otherwise, we must purchase any remaining raw
material inventory, finished goods inventory, work in progress and any
unamortized capital equipment used in production and testing of the Products and
pay a termination fee of
Under the Linamar MLA, we must commit to certain minimum purchases, to be
determined by
We import the Products from Linamar in
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 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
Gallery, a premier distributor of
7
Factors Affecting Results of Operations
Master Procurement Agreement
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 2021 and 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. In addition, we could be impacted by shortages of other products or raw materials, including silicon chips that we or our suppliers use in the production of our vehicles or parts sourced for our vehicles.
We intend for the Vanish to utilize assemblies and products that will eliminate our dependency on Chinese imports and optimize the supply chain to North American and European sources.
Components of Results of Operations
Revenue
We derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts, and service fees. In the past we also derived rental revenue from vehicle revenue sharing agreements with 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.
8 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 the cost of revenue to increase in absolute dollars as product revenue increases.
Operating Expenses
Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.
Stock-based compensation
We account for stock-based compensation expense in accordance with Accounting Standards Codification ("ASC") 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for share-based awards based on the estimated fair value on the date of grant.
The fair value of each stock option granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award. The fair value of the options granted to non-employees is measured and expensed as the options vest.
Restricted stock grants are stock awards that entitle the holder to receive shares of our common stock as the award vests over time. The fair value of each restricted stock grant is based on the fair market value price of common stock on the date of grant, and it is measured and expensed as the restricted stock 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
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 expenses 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 potential sales channels.
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General and Administrative Expense
General and administrative expenses consist 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
Results of Operations
Three months ended
The following table sets forth our results of operations for each of the periods
set forth below:
For the Three Months Ended March 31,
2023 2022 Change
Revenue $ 113,084 $ 1,026,846 $ (913,762 )
Cost of goods sold 219,792 1,177,145 (957,353 )
Gross loss (106,708 ) (150,299 ) 43,591
Operating expenses:
Research and development 2,129,990 872,631 1,257,359
Sales and marketing 718,092 844,816 (126,724 )
General and administrative 2,843,317 2,697,704 145,613
Total operating expenses 5,691,399 4,415,151 1,276,248
Loss from operations (5,798,107 ) (4,565,450 ) (1,232,657 )
Other income and (expense):
Other income, net 61,698 - 61,698
Interest income 144,360 8,891 135,469
Unrealized gain (loss) on marketable
securities 51,280 (22,101 ) 73,381
Realized gain on marketable
securities 65,000 - 65,000
Net loss $ (5,475,769 ) $ (4,578,660 ) $ (897,109 )
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Revenue
Revenue was
Cost of goods sold and gross loss
Cost of goods decreased by
Research and development expense
Research and development ("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
Other income and expense
We recorded a
Liquidity and Capital Resources
As of
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Our business is capital-intensive, and future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the results of our strategic review, the expansion of our sales and marketing teams, the timing of new product introductions and the continuing market acceptance of our products and services. We are working to control expenses and deploy our capital in the most efficient manner.
We are evaluating other options for the strategic deployment of capital beyond our ongoing strategic initiatives, including potentially entering other segments of the electric vehicle market. We anticipate being opportunistic with our capital, and we intend to explore potential partnerships and acquisitions that could be synergistic with our competitive stance in the market.
We are subject to a number of risks similar to those of earlier stage commercial
companies, including dependence on key individuals and products, the
difficulties inherent in the development of a commercial market, the potential
need to obtain additional capital, and competition from larger companies, other
technology companies and other technologies. Based on the foregoing, management
believes that the existing cash at
As discussed above, in connection with our strategic review we canceled development of our planned next-generation three-wheeled vehicle. In December of 2022 we completed pre-production on the new 411 fleet vehicle model refresh, the Vanish.
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