The following management's discussion and analysis should be read in conjunction
with our historical financial statements and the related notes thereto. This
management's discussion and analysis contains forward-looking statements, such
as statements of our plans, objectives, expectations and intentions. Any
statements that are not statements of historical fact are forward-looking
statements. When used, the words "believe," "plan," "intend," "anticipate,"
"target," "estimate," "expect" and the like, and/or future tense or conditional
constructions ("will," "may," "could," "should," etc.), or similar expressions,
identify certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those under "Risk
Factors" in our filings with the Securities and Exchange Commission that could
cause actual results or events to differ materially from those expressed or
implied by the forward-looking statements. Our actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of several factors.
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,"
and "would" 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 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 entitled "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations". These risks and
uncertainties include, but are not limited to:
? 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;
? 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;
1
? we rely on and intend to continue to rely on a single third-party supplier for
the sub-assemblies in semi-knocked-down for all of our vehicles;
? 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;
? increases in costs, disruption of supply or shortage of raw materials, in
particular lithium-ion cells, could harm our business;
? our business may be adversely affected by labor and union activities;
? we will 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 II, Item 1A of this Form 10-Q. Any one or more
of these uncertainties, risks and other influences could materially affect our
results of operations and whether forward-looking statements made by us
ultimately prove to be accurate. We undertake no obligation to publicly update
or revise any forward-looking statements, whether from new information, future
events or otherwise, except as required by law.
Overview
Merger
On May 28, 2020, pursuant to the previously announced Agreement and Plan of
Merger, dated December 19, 2019 (the "Merger Agreement"), 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, 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"). At the
effective time of the Merger, without any action on the part of any stockholder,
each issued and outstanding share of AYRO Operating's common stock, par value
$0.001 per share (the "AYRO Operating Common Stock"), including shares
underlying AYRO Operating's outstanding equity awards and warrants, was
converted into the right to receive 1.3634 pre-split and pre-stock dividend
shares (the "Exchange Ratio") of the Company's common stock, par value $0.0001
per share (the "Company Common Stock"). Upon completion of the Merger and the
transactions contemplated in the Merger Agreement and assuming the exercise in
full of all pre-funded warrants issued pursuant thereto, (i) the former AYRO
Operating equity holders (including the investors in a bridge financing and
private placements that closed prior to closing of the Merger) owned
approximately 79% of the outstanding equity of the Company; (ii) former DropCar
stockholders owned approximately 18% of the outstanding equity of the Company;
and (iii) a financial advisor to DropCar and AYRO owned approximately 3% of the
outstanding equity of the Company.
2
The Merger is being treated as a reverse recapitalization effected by a share
exchange for financial accounting and reporting purposes since substantially all
of DropCar, Inc.'s operations were disposed of as part of the consummation of
the Merger and therefore no goodwill or other intangible assets were recorded by
the Company as a result of the Merger. AYRO Operating is treated as the
accounting acquirer as its stockholders control the Company after the Merger,
even though DropCar, Inc. was the legal acquirer. As a result, the assets and
liabilities and the historical operations that are reflected in these financial
statements are those of AYRO Operating as if AYRO Operating had always been the
reporting company.
Closing of Asset Purchase Agreement
On December 19, 2019, DropCar entered into an asset purchase agreement (the
"Asset Purchase Agreement") with DC Partners Acquisition, LLC ("DC Partners"),
Spencer Richardson and David Newman, pursuant to which DropCar agreed to sell
substantially all of the assets associated with its business of providing
vehicle support, fleet logistics and concierge services for both consumers and
the automotive industry to an entity controlled by Messrs. Richardson and
Newman, the Company's Chief Executive Officer and Chief Business Development
Officer at the time, respectively. The aggregate purchase price for the
purchased assets consisted of the cancellation of certain liabilities pursuant
to those certain employment agreements by and between DropCar and each of
Messrs. Richardson and Newman, plus the assumption of certain liabilities
relating to, or arising out of, workers' compensation claims that occurred prior
to the closing date of the Asset Purchase Agreement. On May 28, 2020, the
parties to the Asset Purchase Agreement entered into Amendment No. 1 to the
Asset Purchase Agreement (the "Asset Purchase Agreement Amendment"), which Asset
Purchase Agreement Amendment (i) provides for the inclusion of up to $30,000 in
refunds associated with certain insurance premiums as assets being purchased by
DC Partners, (ii) amends the covenant associated with the funding of the DropCar
business, such that DropCar provided the DropCar business with additional
funding of $175,000 at the closing of the transactions contemplated by the Asset
Purchase Agreement and (iii) provides for a current employee of the Company
being transferred to DC Partners to provide transition services to the Company
for a period of three months after the closing of the transactions contemplated
by the Asset Purchase Agreement. The Asset Purchase Agreement closed on May 28,
2020, immediately following the consummation of the Merger.
Reverse Stock Split and Stock Dividend
On May 28, 2020, immediately following the effective time of the Merger, we
effected a reverse stock split of the issued and outstanding shares of our
common stock, at a ratio of one share for ten shares (the "Reverse Stock
Split"). Immediately following the Reverse Stock Split, we issued a stock
dividend of one share of the Company's common stock for each outstanding share
of common stock to all holders of record immediately following the effective
time of the Reverse Stock Split (the "Stock Dividend"). 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, $0.0001
per share, or modify any voting rights or other terms of the common stock.
Except as otherwise set forth herein, share and related option or warrant
information presented in this Management's Discussion and Analysis of Financial
Condition and Results of Operations have been adjusted to reflect the reduced
number of shares outstanding, the increase in share price which resulted from
these actions or otherwise to give effect to the Reverse Stock Split and the
Stock Dividend.
3
Business
Prior to the Merger, DropCar provided consumer and enterprise solutions to urban
automobile-related logistical challenges. Following the Merger, we design,
manufacture and market three- and four-wheeled purpose-built electric vehicles
primarily to commercial customers. These vehicles allow the end user an
environmentally friendly alternative to internal combustion engines for light
duty uses, including logistics, maintenance and cargo services, at a lower total
cost of ownership. Our four-wheeled vehicles are classified as low-speed
vehicles (LSVs) based on federal and state regulations and are ideal for both
college and corporate campuses. Our three-wheeled vehicle is classified as a
motorcycle for federal purposes and an autocycle in states that have passed
certain autocycle laws, allowing the user to operate the vehicle with a standard
automobile driver's license. Our three-wheeled vehicle is not an LSV and is
ideal for urban transport. The majority of our sales are comprised of sales of
our four-wheeled vehicle to Club Car, a division of Ingersoll Rand, Inc.,
through a strategic arrangement entered in early 2019. We plan to continue
growing our business through our experienced management team by leveraging our
supply chain, allowing it to scale production without a large capital
investment.
We have also developed a strategic partnership with Autonomic, a division of
Ford. Pursuant to our agreement with Autonomic, we received a license to use
Autonomic's transportation mobility cloud and has agreed to jointly develop the
monetization of cloud-based vehicle applications.
Manufacturing Agreement with Cenntro
In April 2017, AYRO entered into a Manufacturing Licensing Agreement with
Cenntro Automotive Group, Ltd., or Cenntro, one of AYRO's equity holders, that
provides for its four-wheel sub-assemblies to be licensed and sold to AYRO for
final manufacturing and sale in the United States.
Master Procurement Agreement with Club Car
In March 2019, AYRO entered into a five-year Master Procurement Agreement, or
the MPA, with 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. Under the
terms of the MPA, AYRO receives orders from Club Car dealers for vehicles of
specific configurations, and AYRO invoices Club Car once the vehicle has
shipped. The MPA has an initial term of five (5) years commencing January 1,
2019 and may be renewed by Club Car for successive one-year periods upon 60
days' prior written notice. Pursuant to the MPA, AYRO granted Club Car a right
of first refusal for sales of 51% or more of AYRO's assets or equity interests,
which right of first refusal is exercisable for a period of 45 days following
AYRO's delivery of an acquisition notice to Club Car. AYRO also agreed to
collaborate with Club Car on new products similar to its four-wheeled vehicle
and improvements to existing products and granted Club Car a right of first
refusal to purchase similar commercial utility vehicles AYRO develops during the
term of the MPA. AYRO is currently engaged in discussions with Club Car to
develop additional products to be sold by Club Car in Europe and Asia but there
can be no assurance that these discussions will be successful.
4
Recent Developments
On June 17, 2020, AYRO entered into a Securities Purchase Agreement with certain
institutional and accredited investors, pursuant to which AYRO agreed to issue
and sell in a registered direct offering an aggregate of 2,200,000 shares (the
"June 2020 Shares") of common stock of AYRO, par value $0.0001 per share, at an
offering price of $2.50 per share, for gross proceeds of approximately $5.5
million before the deduction of fees and offering expenses.
On July 6, 2020, AYRO entered into a Securities Purchase Agreement with certain
institutional and accredited investors, pursuant to which AYRO agreed to issue
and sell in a registered direct offering an aggregate of 3,157,895 shares (the
"July 6 2020 Shares") of common stock of AYRO, par value $0.0001 per share, at
an offering price of $4.75 per share, for gross proceeds of approximately $15.0
million before the deduction of fees and offering expenses.
On July 21, 2020, AYRO entered into a Securities Purchase Agreement with certain
institutional and accredited investors, pursuant to which AYRO agreed to issue
and sell in a registered direct offering an aggregate of 1,850,000 shares (the
"July 21 2020 Shares") of common stock of AYRO, par value $0.0001 per share, at
an offering price of $5.00 per share, for gross proceeds of approximately $9.25
million before the deduction of fees and offering expenses. Each purchaser also
has the right to purchase, on or before October 19, 2020, additional shares of
common stock equal to the full amount of 75% of the common stock it purchased at
the initial closing, or an aggregate of 1,387,500 shares, at a price of $5.00
per share.
Transactions Related to the Merger
Simultaneous with the signing of the Merger Agreement, accredited investors,
including certain investors in DropCar, purchased $1.0 million of AYRO
Operating's convertible bridge notes bearing interest at the rate of 5% per
annum (the "Bridge Notes"). The Bridge Notes automatically converted into
1,030,584 shares of AYRO Operating Common Stock immediately prior to the
consummation of the Merger representing an aggregate of 7.45% of the outstanding
common stock of the combined company after giving effect to the Merger. Pursuant
to the terms of the Bridge Notes, immediately prior to the closing of the
Merger, the five lenders received warrants to purchase 1,030,585 shares of AYRO
Operating Common Stock at an exercise price of $1.1159 per share
In addition, immediately prior to the execution and delivery of the Merger
Agreement, AYRO Operating entered into agreements with accredited investors,
including certain stockholders of DropCar, pursuant to which such investors
agreed to purchase, prior to the consummation of the Merger, 2,289,419 shares of
AYRO Operating Common Stock (or common stock equivalents or pre-funded warrants)
representing an aggregate of 16.55% of the outstanding common stock of the
combined company after giving effect to the Merger and warrants to purchase an
equivalent number of shares of AYRO Operating Common Stock for an aggregate
purchase price of $2.0 million (the "AYRO Private Placement"). Pursuant to the
terms of the AYRO Private Placement, immediately prior to the closing of the
Merger, the investors received warrants to purchase 972,486 shares of AYRO
Operating Common Stock at an exercise price of $1.3599 per share and warrants to
purchase 1,316,936 shares of AYRO Operating Common Stock at an exercise price of
$0.7423 per share.
As additional consideration to the lead investor in the AYRO Private Placement,
AYRO Operating also entered into a stock subscription agreement with the lead
investor, pursuant to which, immediately prior to the Merger, AYRO Operating
issued pre-funded warrants to purchase an aggregate of 477,190 shares of AYRO
Operating Common Stock for the nominal per share purchase price of $0.000367 per
share (the "Nominal Stock Subscription").
On December 19, 2019, AYRO Operating entered into a letter agreement with ALS
Investment, LLC ("ALS"), pursuant to which AYRO Operating issued ALS 622,496
shares of AYRO Operating Common Stock, which equaled 4.5% of the outstanding
shares of common stock of the combined company giving effect to the Merger. In
addition to introducing AYRO Operating and DropCar, ALS will provide, as an
independent contractor, consulting services to us relating to financial, capital
market and investor relations for twelve months following the closing of the
Merger.
In February 2020, AYRO Operating received a $500,000 secured loan from certain
DropCar investors, and, in connection therewith, we issued warrants to purchase
100,000 shares of common stock at an exercise price of $0.05 per share upon
closing of the Merger. The entire amount of the loan was paid off upon closing
of the Merger
In April 2020, AYRO Operating received a $600,000 secured loan from an investor
of AYRO Operating, pursuant to which Mark Adams entered into a personal guaranty
for up to $300,000 of amounts owing under such secured loan, and, in connection
therewith, AYRO Operating agreed to grant 276,665 shares of AYRO Operating
Common Stock to each of the investor and Mark Adams each representing two
percent (2%) of the aggregate issued and outstanding shares of DropCar
immediately post-merger. The entire amount of the loan was paid off upon closing
of the Merger.
5
Factors Affecting Results of Operations
Master Procurement Agreement. In March 2019, AYRO entered into the MPA with Club
Car. In partnership with Club Car and its interaction with its substantial
dealer network, AYRO has redirected its business development resources towards
supporting Club Car's enterprise and fleet sales function as Club Car proceeds
in its new product introduction initiatives.
COVID-19 Pandemic. AYRO's business, results of operations and financial
condition have been adversely impacted by the recent coronavirus outbreak both
in China and the United States. This has delayed AYRO's ability to timely
procure raw materials from its supplier in China, which in turn, has delayed
shipments to and corresponding revenue from customers. The pandemic and social
distancing directives have interfered with AYRO's ability, or the ability of its
employees, workers, contractors, suppliers and other business partners to
perform AYRO's and their respective responsibilities and obligations relative to
the conduct of AYRO's business. The COVID-19 pandemic poses restrictions on
AYRO's employees' and other service providers' ability to travel on pre-sales
meetings, customers' abilities to physically meet with AYRO employees and the
ability of AYRO's customers to test drive or purchase AYRO's vehicles and
shutdowns that may be requested or mandated by governmental authorities. AYRO
expects the pandemic to adversely impact AYRO's sales and the demand for AYRO
products in 2020.
Components of Results of Operations
Revenue
AYRO derives revenue from the sale of its three-and four-wheeled electric
vehicles, rental revenue from vehicle revenue sharing agreements with AYRO's
tourist destination fleet operators, or DFOs, and, to a lesser extent, shipping,
parts and service fees. Provided that all other revenue recognition criteria
have been met, AYRO typically recognizes 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 AYRO's international distributors. These international
distributors assist with import regulations, currency conversions and local
language. AYRO's vehicle product sales revenues vary from period to period based
on, among other things, the customer orders received and AYRO's ability to
produce and deliver the ordered products. Customers often specify requested
delivery dates that coincide with their need for AYRO's vehicles.
Because these customers may use AYRO's 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.
AYRO has observed limited seasonality trends in the sales of its vehicles,
depending on the model.
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 AYRO's warranty reserves.
Allocated overhead costs consist of certain facilities and utility costs. AYRO
expects cost of revenue to increase in absolute dollars, as product revenue
increases.
Operating Expenses
AYRO's 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.
6
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. AYRO expects its research and development
expenses to increase in absolute dollars as it continues to invest in new and
existing products.
Sales and Marketing Expense
Sales and marketing expense consist primarily of employee compensation and
related expenses, sales commissions, marketing programs, travel and
entertainment expenses and allocated overhead. Marketing programs consist of
advertising, tradeshows, events, corporate communications and brand-building
activities. AYRO expects sales and marketing expenses to increase in absolute
dollars as AYRO expands its sales force, expands its product lines, increases
marketing resources, and further develops 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. AYRO expects its general and administrative expense to increase in
absolute dollars as it continues to invest in growing its business.
Other (Expense) Income
Other (expense) income consists of income received or expenses incurred for
activities outside of AYRO's core business. Other expense consists primarily of
interest expense.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to the United
States government and to the state tax authorities in jurisdictions in which
AYRO conducts business.
Results of Operations
The following set forth our results of operations for the periods presented. The
period-to-period comparison of financial results is not necessarily indicative
of future results.
Three months ended June 30, 2020 compared to June 30, 2019
For the three months ended
June 30,
2020 2019
Revenue $ 285,927 $ 396,098
Cost of goods sold 205,637 308,742
Gross profit 80,290 87,356
Operating expenses:
Research and development 180,605 283,191
Sales and marketing 239,065 298,440
General and administrative 714,679 1,242,606
Total operating expenses 1,134,349 1,824,237
Loss from operations (1,054,059 ) (1,736,881 )
Other (expense) income:
Other income 3 28
Interest expense (123,576 ) (72,796 )
Loss on extinguishment of debt (353,225 ) -
Net loss $ (1,530,857 ) $ (1,809,649 )Weighted-average common shares outstanding 8,291,351 2,793,592
Net loss per common share $ (0.18 ) $ (0.65 )
7
Revenue
For the three months ended June 30, 2020, total revenue decreased $110,171, or
27.8%, as compared to the same period in 2019. The decrease in revenue was
primarily due to the COVID-19 pandemic, which has temporarily closed many of our
customers' facilities.
Cost of goods sold and gross profit
Cost of goods sold decreased by $103,105, or 33.4% for the three months ended
June 30, 2020, as compared to the same period in 2019, corresponding with the
decrease in revenue.
Gross margin percentage was 28.1% for the three months ended June 30, 2020, as
compared to 22.1% for the three months ended June 30, 2019. The increase in
gross margin percentage was primarily driven by sales of time-of-order options
for our vehicles and specialty product sales, both of which carry higher gross
margins.
Research and development expense
Research and development expense decreased by $102,586, or 36.2%, for the three
months ended June 30, 2020, as compared to the same period in 2019. Contracting
for professional service and design costs decreased by $78,092 for the three
months ended June 30, 2020 from the same period in 2019. Stock-based
compensation decreased by $28,775 for the three months ended June 30, 2020, as
compared to the same period in 2019. Additionally, termination of the
royalty-based service fees provided under the Chief Visionary Officer, or CVO,
agreement in October 2019 reduced research and development expenses by $18,000.
Sales and marketing expense
Sales and marketing expense decreased by $59,375, or 19.9%, for the three months
ended June 30, 2020, as compared to same period in 2019. The decrease was
primarily due to a $136,527 reduction in marketing programs and marketing firm
support in 2020 versus the same period in 2019. Salaries and wages increased by
$75,538 in 2020 versus the same period in 2019 due to the addition of our Chief
Marketing Officer and Chief of Business Development and other resources.
Stock-based compensation increased by $27,663 for the three months ended June
30, 2020, as compared to the same period in 2019.
General and administrative expenses
General and administrative expense decreased by $527,927, or 42.5%, for the
three months ended June 30, 2020, as compared to the same period in 2019.
Stock-based compensation expense decreased by $293,225 for the three months
ended June 30, 2020, as compared to the same period in 2019 primarily due to a
one-time recognition of stock-based compensation expense in the first half of
2019 for options issued to Christian Okonsky and Mark Adams, founding board
members. Additionally, we relocated to larger facilities in January 2020,
resulting in higher rent and utilities expense for the three months ended June
30, 2020 versus the same period in 2019.
8
Other income and expense
Interest expense increased $50,780 for the three months ended June 30, 2020, as
compared to the same period in 2019, primarily due to the increase in the
discount on debt recorded from the equity issuances associated with certain debt
instruments issued prior to the Merger. Interest expense in the three months
ended June 30, 2020 also includes noncash amortization of warrant discounts
issued in conjunction with certain debt offerings. A loss on the extinguishment
of debt related to the early redemption of the 2020 $600,000 bridge note was
recorded for $353,225.
Six months ended June 30, 2020 compared to June 30, 2019
The following table sets forth AYRO's results of operations for the six months
ended June 30, 2020 and 2019.
For the six months ended
June 30,
2020 2019
Revenue $ 432,743 $ 480,049
Cost of goods sold 318,792 375,510
Gross profit 113,951 104,539
Operating expenses:
Research and development 335,304 482,925
Sales and marketing 558,519 500,627
General and administrative 1,963,730 2,025,800
Total operating expenses 2,857,553 3,009,352
Loss from operations (2,743,602 ) (2,904,813 )
Other income and expense:
Other income 20 56
Interest expense (229,202 ) (167,981 )
Loss on extinguishment of debt (353,225 ) -
Net loss $ (3,326,009 ) $ (3,072,738 )Weighted-average common shares outstanding 6,131,712 2,793,592
Net loss per common share $ (0.54 ) $ (1.10 )
Revenue
For the six months ended June 30, 2020, total revenue decreased $47,306, or 9.9%
as compared to the same period in 2019. The decrease in revenue was primarily
due to the COVID-19 pandemic, which has temporarily closed many of our
customers' facilities.
Cost of goods sold and gross profit
Cost of goods sold decreased by $56,718 for the six months ended June 30, 2020,
as compared to the same period in 2019, corresponding with the decrease in
revenue.
Gross profit percentage was 26.3% for the six months ended June 30, 2020, as
compared to 21.8% for the six months ended June 30, 2019. The increase in gross
profit percentage was primarily driven by 2020 sales of time-of-order options
for our vehicles and specialty product sales, both of which carry higher gross
margins.
Research and development expense
Research and development expense decreased by $147,621, or 30.6%, for the six
months ended June 30, 2020, as compared to the same period in 2019. Contracting
for professional service and design costs decreased by $76,917 in 2020 for the
six months ended June 30, 2020 from the same period in 2019. Stock-based
compensation decreased by $44,561 for the six months ended June 30, 2020, as
compared to the same period in 2019. Additionally, termination of the
royalty-based service fees provided under the Chief Visionary Officer, or CVO,
agreement in October 2019 reduced research and development expenses by $36,000.
9
Sales and marketing expense
Sales and marketing expense increased by $57,892, or 11.6%, for the six months
ended June 30, 2020, as compared to same period in 2019. The increase in
salaries and wages of $219,621 for the six months ended June 30, 2020 versus the
same period in 2019 was due to the addition of our Chief Marketing Officer and
Chief of Business Development and other sales resources. Stock-based
compensation increased by $60,831 for the six months ended June 30, 2020, as
compared to the same period in 2019 These increases were partially offset by a
decrease in marketing programs and marketing firm support of $195,653 for the
six months ended June 30, 2020 versus the same period in 2019.
General and administrative expenses
General and administrative expense decreased overall by $62,070, or 3.1%, for
the six months ended June 30, 2020, as compared to the same period in 2019.
Additionally, we relocated to larger facilities in January 2020, resulting in a
$89,625 increase in rent and utilities expense for the six months ended June 30,
2020 versus the same period in 2019. This was offset by a decrease in
stock-based compensation of $246,823 for the six months ended June 30, 2020, as
compared to the same period in 2019 primarily due to a one-time recognition of
stock-based compensation expense in the first half of 2019 for options issued to
Christian Okonsky and Mark Adams.
Other income and expense
Interest expense increased $61,221 for the six months ended June 30, 2020, as
compared to the same period in 2019, primarily due to the increase in the
discount on debt recorded from the equity issuances associated with certain debt
instruments issued prior to the Merger. Interest expense in 2020 also includes
non-cash amortization of warrant discounts issued in conjunction with certain
debt offerings. A loss on the extinguishment of debt related to the early
redemption of the 2020 $600,000 bridge note was recorded for $353,225.
Non-GAAP Financial Measure
AYRO presents Adjusted EBITDA because AYRO considers it to be an important
supplemental measure of AYRO's operating performance, and AYRO believes it may
be used by certain investors as a measure of AYRO's 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,
acquisition and financing costs, stock-based compensation expense and certain
non-recurring expenses.
Adjusted EBITDA is not a measurement of financial performance under generally
accepted accounting principles in the United States, or GAAP. Because of varying
available valuation methodologies, subjective assumptions and the variety of
equity instruments that can impact AYRO's non-cash operating expenses, AYRO
believes that providing a non-GAAP financial measure that excludes non-cash and
non-recurring expenses allows for meaningful comparisons between AYRO's core
business operating results and those of other companies, as well as providing
AYRO with an important tool for financial and operational decision making and
for evaluating AYRO's own core business operating results over different periods
of time.
AYRO's Adjusted EBITDA measure may not provide information that is directly
comparable to that provided by other companies in AYRO's industry, as other
companies in AYRO's industry may calculate non-GAAP financial results
differently, particularly related to non-recurring, unusual items. AYRO's
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. AYRO does not consider Adjusted EBITDA to be a
substitute for, or superior to, the information provided by GAAP financial
results.
10
Below is a reconciliation of Adjusted EBITDA to net loss for the three months
ended June 30, 2020 and 2019.
For the three months ended
June 30,
2020 2019
Net Loss $ (1,530,857 ) $ (1,809,649 )
Depreciation and Amortization 114,189 151,012
Stock-based compensation expense 150,948 476,214
Amortization of Discount on Debt 105,995
17,294
Interest expense 123,576 55,502
Loss on extinguishment of debt 353,225 -
Adjusted EBITDA $ (682,924 ) $ (1,109,627 )
Below is a reconciliation of Adjusted EBITDA to net loss for the six months
ended June 30, 2020 and 2019.
For the six months ended
June 30,
2020 2019
Net Loss $ (3,326,009 ) $ (3,072,738 )
Depreciation and Amortization 228,464 259,279
Stock-based compensation expense 307,408 607,658
Amortization of Discount on Debt 169,739
27,883
Interest expense 229,202 140,098
Loss on extinguishment of debt 353,225 -
Adjusted EBITDA $ (2,037,971 ) $ (2,037,820 )Liquidity and Capital Resources
As of June 30, 2020, AYRO had approximately $7,918,000 in cash and working
capital of approximately $7,906,000. As of December 31, 2019, AYRO had
approximately $642,000 in cash and cash equivalents and working capital deficit
of approximately $(395,000). The increase in working capital was primarily a
result of our capital raising activities during the quarter.
AYRO's sources of cash since AYRO's inception have been predominantly from the
sale of equity and debt.
In October 2019, AYRO raised $500,000 in a 120-day short-term loan from Mark
Adams. This loan has a 14% interest rate per annum, payable quarterly and an
equity incentive of 143,795 shares of AYRO Operating common stock. In December
2019, this loan term was extended to April 30, 2021 in exchange for the issuance
of 136,340 shares of AYRO Operating common stock.
On June 17, 2020, AYRO entered into a Securities Purchase Agreement with certain
institutional and accredited investors, pursuant to which AYRO agreed to issue
and sell in a registered direct offering an aggregate of 2,200,000 shares of
common stock of AYRO, par value $0.0001 per share, at an offering price of $2.50
per share, for gross proceeds of approximately $5.5 million before the deduction
of fees and offering expenses.
On July 6 2020, AYRO entered into a Securities Purchase Agreement with certain
institutional and accredited investors, pursuant to which AYRO agreed to issue
and sell in a registered direct offering an aggregate of 3,157,895 shares of our
common stock, par value $0.0001 per share, at an offering price of $4.75 per
share, for gross proceeds of approximately $15.0 million before the deduction of
fees and offering expenses.
11
On July 23 2020, AYRO entered into a Securities Purchase Agreement with certain
institutional and accredited investors, pursuant to which AYRO agreed to issue
and sell in a registered direct offering an aggregate of 1,850,000 shares of our
common stock, par value $0.0001 per share, at an offering price of $5.00 per
share, for gross proceeds of approximately $9.25 million before the deduction of
fees and offering expenses. Each purchaser also has the right to purchase, on or
before October 19, 2020, additional shares of common stock equal to the full
amount of 75% of the common stock it purchased a the initial closing, or an
aggregate of 1,387,500 shares, at price of $5.00 per share.
Between May 28, 2020 (the Merger closing) and July 31, 2020, holders of warrants
have converted warrants to purchase 4,407,842 shares of AYRO's common stock for
aggregate gross proceeds to AYRO of approximately $3,232,383.
AYRO's business is capital intensive, and future capital requirements will
depend on many factors including AYRO's growth rate, the timing and extent of
spending to support development efforts, the expansion of AYRO's sales and
marketing teams, the timing of new product introductions and the continuing
market acceptance of AYRO's products and services. 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. Based on the foregoing and approximately an
additional $24,800,000 raised subsequent to June 30, 2020, management believes
that the existing cash at June 30, 2020 will be sufficient to fund operations
for at least the next twelve months following the date of this report.
© Edgar Online, source Glimpses
AYRO, INC. 
