The following management's discussion and analysis should be read in conjunction
with our historical financial statements and the related notes thereto. This
management's discussion and analysis contains forward-looking statements, such
as statements of our plans, objectives, expectations and intentions. Any
statements that are not statements of historical fact are forward-looking
statements. When used, the words "believe," "plan," "intend," "anticipate,"
"target," "estimate," "expect" and the like, and/or future tense or conditional
constructions ("will," "may," "could," "should," etc.), or similar expressions,
identify certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those under "Risk
Factors" in our filings with the Securities and Exchange Commission ("SEC") that
could cause actual results or events to differ materially from those expressed
or implied by the forward-looking statements. Our actual results and the timing
of events could differ materially from those anticipated in these
forward-looking statements as a result of several factors. See "Forward-Looking
Statements."
References in this management's discussion and analysis to "we," "us," "our,"
"our Company" or "AYRO" refer to AYRO, Inc. and its subsidiaries.
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 ("AYRO Operating"), a Delaware
corporation previously known as AYRO, Inc., 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 ("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 ("Company
Common Stock"). As part of the Merger, we received cash of $3.06 million in
consideration for 2,337,663 shares of 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.
The Merger was treated as a reverse recapitalization effected by a share
exchange for financial accounting and reporting purposes because 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 was treated as the
accounting acquirer as its stockholders controlled 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 our consolidated
financial statements are those of AYRO Operating as if AYRO Operating had always
been the reporting company.
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.
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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
1,030,585 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 conjunction
with the bridge notes, we issued Palladium Capital Advisors, LLC (together with
its affiliates, "Palladium"), our advisor, a warrant to purchase 72,141 shares
of the Company's 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, 543,179 shares of
AYRO Operating Common Stock (or common stock equivalents or pre-funded warrants
to purchase 429,305 shares of Company Common Stock) 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 $1.2 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. On the closing date of the Merger, AYRO Operating issued
to the investors party to this second AYRO Operating Private Placement SPA (i)
an aggregate of approximately 1,030,039 shares of common stock and pre-funded
warrants to purchase 286,896 shares of Company Common Stock for an aggregate of
$0.85 million and warrants to purchase 1,316,936 shares of AYRO Operating Common
Stock at an exercise price of $0.7423 per share. In conjunction with the AYRO
Private Placement, we issued Palladium, our advisor, a warrant to purchase
92,186 shares of the Company's common stock at an exercise price of $0.7423 per
share and a warrant to purchase 68,074 shares of the Company's common stock at
an exercise price of $1.3599 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.
As part of the Merger, the Company issued to Palladium Holdings, LLC, its
advisor, 415,000 shares of the Company's common stock, par value $0.0001 per
share.
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 agreed to 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 $0.5 million secured loan from
certain existing investors in DropCar and AYRO Operating, and, in connection
therewith, we received $10,000 upon exercise of the previously issued warrants
to purchase 100,000 shares of common stock. The entire amount of the loan was
paid off upon closing of the Merger.
In April 2020, AYRO Operating issued a secured promissory note payable to an
individual investor providing $0.6 million of short-term financing. The note
carried an interest rate of fifteen percent (15%) and was to be repaid upon the
earlier of (1) closing date of the pending the Merger and (2) July 14, 2020.
Fifty percent (50%) of the principal amount was personally guaranteed by Mark
Adams, a former director of AYRO Operating and AYRO. In conjunction with the
notes 553,330 shares of common stock (276,665 shares of common stock
representing two percent (2%) of the combined company's post-merger outstanding
common stock each) were issued to the lender and to Mr. Adams as compensation
for his personal guarantee. The entire amount of the loan was paid off upon the
closing of the Merger.
Other AYRO Operating Warrants
At the effective time of the Merger, each AYRO Operating warrant that was
outstanding and unexercised immediately prior to the effective time was
converted pursuant to its terms and became a warrant to purchase Company Common
Stock.
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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 $0.03
million 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 approximately $0.18 million 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.
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. We are currently developing our next generation
three-wheeled vehicle that we expect to be 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 next generation three-wheeled vehicle is not expected to
be an LSV and is expected to be ideal for last-mile delivery applications. 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 us to scale production
without a large capital investment.
49
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 have agreed to jointly develop the
monetization of cloud-based vehicle applications with Autonomic.
Manufacturing Agreement with Cenntro
In April 2017, AYRO Operating entered into a Manufacturing Licensing Agreement
(the "MLA") with Cenntro Automotive Group, Ltd. ("Cenntro"), one of our equity
holders, that provides for its four-wheel sub-assemblies to be licensed and sold
to us for final manufacturing and sale in the United States.
Under the MLA, in order for us to maintain our exclusive territorial rights
pursuant to the MLA, for the first three years after March 22, 2020, we must
meet the following minimum purchase requirements, which we believe we satisfied
for the initial period: (i) a minimum of 300 units sold by the first anniversary
of the effective date of the MLA; (ii) a minimum of 800 units sold by the second
anniversary of the effective date of the MLA; and (iii) a minimum of 1,300 units
sold by the third anniversary of the effective date of the MLA. 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 time 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 seriously impacted.
Master Procurement Agreement with Club Car
In March 2019, AYRO Operating entered into a five-year Master Procurement
Agreement (the "MPA"), with Club Car for the sale of our four-wheeled vehicle.
The MPA grants Club Car the exclusive right to sell our four-wheeled vehicle in
North America, provided that Club Car orders at least 500 vehicles per year.
Although Club Car did not meet the volume threshold for 2020, we currently have
no intentions of selling our four-wheeled vehicles other than exclusively
through Club Car. Under the terms of the MPA, we receive orders from Club Car
dealers for vehicles of specific configurations, and we invoice Club Car once
the vehicle has shipped. The MPA has an initial term of five (5) years
commencing January 1, 2019 and may be renewed by Club Car for successive
one-year periods upon 60 days' prior written notice. Pursuant to the MPA, we
granted Club Car a right of first refusal for sales of 51% or more of AYRO
Operating's assets or equity interests, which right of first refusal is
exercisable for a period of 45 days following AYRO Operating's delivery of an
acquisition notice to Club Car. We also agreed to collaborate with Club Car on
new products similar to our four-wheeled vehicle and improvements to existing
products and granted Club Car a right of first refusal to purchase similar
commercial utility vehicles we develop during the term of the MPA. We are
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. For the year ended December 31, 2020, revenues
from Club Car constituted approximately 68% of our revenue, as compared to 75%
in 2019. Any loss of, or a significant reduction in purchases by, Club Car that
constitutes a significant portion of our sales could have an adverse effect on
our financial condition and operating results.
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Recent Developments
On June 17, 2020, we entered into a securities purchase agreement with certain
institutional and accredited investors, pursuant to which we agreed to issue and
sell in a registered direct offering an aggregate of 2,200,000 shares of our
common stock, par value $0.0001 per share, at an offering price of $2.50 per
share, for gross proceeds of approximately $5.50 million before the deduction of
fees and offering expenses.
On July 6, 2020, we entered into a securities purchase agreement with certain
institutional and accredited investors, pursuant to which we 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 $15.00 million before the deduction
of fees and offering expenses.
On July 21, 2020, we entered into a Securities Purchase Agreement with certain
existing investors, pursuant to which we sold, in a registered direct offering
an aggregate of 1,850,000 shares of common stock, par value $0.0001 per share,
at an offering price of $5.00 per share for gross proceeds of $9.25 million
before the deduction of fees and offering expenses. Each purchaser also had the
right to purchase, on or before October 19, 2020, additional shares of common
stock (the "Additional Shares") 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 an offering price of $5.00 per share. On October 16, 2020, the Company
entered into an addendum to the Agreement (the "Addendum"), which extended the
deadline for each purchaser to exercise the right to purchase the Additional
Shares by one year, to October 19, 2021. As of December 31, 2020, investors had
elected to purchase 420,000 of the Additional 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 $2.10 million before the deduction of fees and
offering expenses. Between January 1, 2021 and March 30, 2021, investors had
elected to purchase an additional 302,500 of the Additional 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 $1.51 million before the deduction of
fees and offering expenses.
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On September 25, 2020, we entered into a Master Manufacturing Services Agreement
(the "Karma Agreement") with Karma Automotive, LLC ("Karma"). The term of the
contract is for 12 months. Pursuant to the agreement Karma will provide certain
manufacturing services, starting in 2021, under an attached statement of work
including final assembly, raw material storage and logistical support of our
vehicles in return for compensation of $1.68 million. We paid Karma an amount of
$0.52 million and issued warrants to an advisor to the transaction with a fair
value of $0.07 million due at signing of the contract. The payment was recorded
as prepaid expense as of December 31, 2020. Pursuant to the Karma Agreement, we
paid cash of $0.08 and issued a warrant (the "September Warrants") to purchase
31,348 shares of our common stock at an exercise price of $3.19 per share to a
vendor for facilitating a manufacturing agreement. The September Warrant is
immediately exercisable and expires on September 25, 2025.
On November 22, 2020, we entered into a securities purchase agreement with
certain institutional and accredited investors, pursuant to which we agreed to
issue and sell in a registered direct offering an aggregate of 1,650,164 shares
of our common stock, par value $0.0001 per share, at an offering price of $6.06
per share, for gross proceeds of approximately $10.0 million before the
deduction of fees and offering expenses of $0.85 million. Pursuant to the
Securities Purchase Agreement, the Company agreed to issue to the investors,
unregistered Series A Warrants to purchase up to 1,237,624 shares of common
stock and unregistered Series B Warrants to purchase up to 825,084 shares of
common stock. The Series A Warrants are exercisable immediately upon issuance
and terminate six months following issuance and are exercisable at an exercise
price of $8.09 per share, subject to adjustment as set forth therein. The Series
B Warrants are exercisable immediately upon issuance and terminate five years
following issuance and are exercisable at an exercise price of $8.90 per share,
subject to adjustment as set forth therein. Subject to certain limitations, we
have a call right with respect to the warrants.
On January 25, 2021, we entered into a securities purchase agreement with
certain institutional and accredited investors, pursuant to which we agreed to
issue and sell in a registered direct offering an aggregate of 3,333,334 shares
at an offering price of $6.00 per share, for gross proceeds of approximately
$20.0 million before the deduction of fees and offering expenses. In a
concurrent private placement, we sold to such investors warrants to purchase, at
any time on or after July 26, 2021 and on or before July 26, 2023, additional
shares of common stock equal to the full amount of the common stock it purchased
at the initial closing, or an aggregate of 3,333,334 shares, at an exercise
price of $6.93 per share.
Additionally, AYRO issued Palladium a warrant to purchase 233,334 shares of
common stock (which equals 7.0% of the aggregate number of shares of common
stock sold in the January 2021 registered direct offering). The warrants issued
to Palladium have the same terms as the warrants issued in January 2021.
On February 11, 2021, we entered into a securities purchase agreement with
certain institutional and accredited investors, pursuant to which we agreed to
issue and sell in a registered direct offering an aggregate of 4,400,001 shares
of common stock at an offering price of $9.50 per share, for gross proceeds of
approximately $41.8 million before the deduction of fees and offering expenses.
Each purchaser was also granted an option to purchase, on or before February 16,
2022, 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 3,300,000
shares, at an exercise price of $11.50 per share.
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Palladium and Spartan Capital Securities, LLC "Spartan," or collectively with
Palladium, the "Financial Advisors" are entitled to a fee equal to 8% of the
gross proceeds raised in the February 2021 registered direct offering, or an
aggregate of approximately $3.3 million, and warrants to purchase an aggregate
of 271,158 shares of common stock at an exercise price of $10.925 per share and
35,885 shares of common stock at an exercise price of $10.45 per share. The
warrants are exercisable immediately following issuance and terminate five years
following issuance.
Factors Affecting Results of Operations
Master Procurement Agreement
In March 2019, we entered into the MPA with Club Car. In partnership with Club
Car and in interaction with its substantial dealer network, we have redirected
our business development resources towards supporting Club Car's enterprise and
fleet sales function as Club Car proceeds in its new product introduction
initiatives.
COVID-19 Pandemic
Our 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 our ability to timely procure raw materials from our supplier
in China, which in turn, has delayed shipments to and corresponding revenue from
customers. The pandemic and social distancing directives have interfered with
our ability, and the ability of our employees, workers, contractors, suppliers
and other business partners to perform our and their respective responsibilities
and obligations relative to the conduct of our business. The COVID-19 pandemic
poses restrictions on our employees' and other service providers' ability to
travel on pre-sales meetings, customers' abilities to physically meet with our
employees and the ability of our customers to test drive or purchase our
vehicles and shutdowns that may be requested or mandated by governmental
authorities, and we expect these restrictions to continue at least until the
second quarter of 2021. The pandemic adversely impacted our sales and the demand
for our products in 2020 and is expected to continue adversely impacting demand
for our products in 2021.
AYRO 311
We previously manufactured and sold the AYRO 311 Autocycle, a compact,
three-wheeled electric vehicle. As the AYRO 311 was nearing end-of-life, on
August 17, 2020 we sold our remaining AYRO 311 Fleet inventory to a third party
for $0.12 million (the "311 Fleet Sale"). Upon such sale, we sustained a loss on
disposal of $0.28 million. Subsequent to the 311 Fleet Sale, on February 12,
2021, we entered into an agreement with Arcimoto, Inc. to settle certain patent
infringement claims (the "Arcimoto Settlement"), pursuant to which we agreed to
cease the production, importation and sale of the AYRO 311, among other things.
Accordingly, we would not be contractually permitted to resume production of the
AYRO 311. We are continuing the development of an all-new, three-wheeled
electric vehicle, which we intend to replace the AYRO 311 as our three-wheeled
electric vehicle product offering. We expect to begin manufacturing our next
generation three-wheeled vehicle in the first half of 2022.
Components of Statements of Operations
Revenue Recognition
We derive revenue from the sale of our three-and 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.
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Because these customers may use our products in connection with a variety of
projects of different sizes and durations, a customer's orders for one reporting
period generally do not indicate a trend for future orders by that customer.
Additionally, order patterns do not necessarily correlate amongst customers.
Cost of Goods Sold
Cost of goods sold primarily consists of costs of materials and personnel costs
associated with manufacturing operations, and an accrual for post-sale warranty
claims. Personnel costs consist of wages and associated taxes and benefits. Cost
of goods sold also includes freight and changes to our warranty reserves.
Allocated overhead costs consist of certain facilities and utility costs. We
expect cost of revenue to increase in absolute dollars, as product revenue
increases.
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.
Research and Development Expense
Research and development expense consists primarily of employee compensation and
related expenses, prototype expenses, depreciation associated with assets
acquired for research and development, amortization of product development
costs, product strategic advisory fees, third-party engineering and contractor
support costs and allocated overhead. We expect our research and development
expenses to increase in absolute dollars as we continue to invest in new and
existing products.
Sales and Marketing Expense
Sales and marketing expense 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.
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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.
Other (Expense) Income
Other (expense) income consists of income received or expenses incurred for
activities outside of our core business, including forgiveness of our PPP loan.
Other expense consists primarily of interest expense, discount on debt
amortization and the related loss on extinguishment of debt as it applies to the
debt discount.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to the United
States government and to the state tax authorities in jurisdictions in which we
conduct business. In the case of a tax deferred asset, we reserve the entire
value for future periods.
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Results of Operations
Year Ended December 31, 2020 Compared with Year ended December 31, 2019.
The following table sets forth our results of operations for each of the periods
set forth below:
Years Ended December 31,
2020 2019 Change
Revenue $ 1,604,069 $ 890,152 $ 713,917
Cost of goods sold 1,770,552 691,843 1,078,709
Gross (loss)/profit (166,483 ) 198,309 (364,792 )
Operating expenses:
Research and development 1,920,548 714,281 1,206,267
Sales and marketing 1,415,282 1,300,120 115,162
General and administrative 6,603,935 6,678,310 (74,375 )
Total operating expenses 9,939,765 8,692,711 1,247,054
Loss from operations (10,106,248 ) (8,494,402 ) (1,611,846 )
Other income and expense:
Other income 236,923 2,188 234,735
Interest expense (327,196 ) (172,479 ) (154,717 )
Loss on extinguishment of debt (566,925 ) - (566,925 )
Net loss $ (10,763,446 ) $ (8,664,693 ) $ (2,098,753 )
Deemed dividend on modification of Series
H-5 warrants (432,727 ) - (432,727 )
Net loss Attributable to Common
Stockholders $ (11,196,173 ) $ (8,664,693 ) $ (2,531,480 )
Revenue
Revenue was $1.60 million for the year ended December 31, 2020 as compared to
$0.89 million for the year ended December 31, 2019, an increase of 80.2%, or
$0.71 million. The increase in revenue was the result of an increase in sales of
our vehicles, deriving from our Master Agreement with Club Car, related
powered-food box sales and other vehicle options for the year ended December 31,
2020. Additionally, we recorded a one-time sale of the remaining vehicles, raw
materials, and parts from our AYRO 311 product of $0.12 million. We also had
revenue of $0.09 million from shipping and a de minimis amount for service
revenue for the year ended December 31, 2020. As discussed under "Factors
Affecting Results of Operations," the COVID-19 pandemic adversely impacted sales
and the demand for our vehicles during 2020.
Cost of goods sold and gross profit
Cost of goods sold increased by $1.08 million, or 155.9% for the year ended
December 31, 2020 as compared to the year ended December 31, 2019, due to an
increase in vehicle sales and an increase in time-of order options for our
vehicles and specialty products. Of this increase, $0.38 million was recorded
for the one-time sale of the remaining vehicles, raw materials and parts from
our AYRO 311 product line.
Gross margin percentage was (10.4)% for the year ended December 31, 2020 as
compared to 22.3% for the year ended December 31, 2019. The decrease in gross
margin percentage in the core business was primarily due to an increase in
tariffs on raw materials imported from China, an increase in shipping costs due
to the global COVID-19 pandemic and an increase in overhead allocation resulting
from the move to our new facility in January 2020. In 2020, we phased-out the
production of our AYRO 311 line of vehicles in order to develop our next
generation three-wheeled vehicle. The change in production did not represent a
strategic shift that will have a major effect on our operations or financial
results. Our end-of-life product costs of the AYRO 311 decreased our gross
profit margin by 16.6% for the year ended December 31, 2020. Vehicle prices
increased in January 2021 to offset the standard cost increases.
56
Research and development expenses
Research and development expense was $1.92 million for the year ended December
31, 2020 as compared to $0.71 million for the year ended December 31, 2019, an
increase of $1.21 million, or 168.9%. The increase was primarily due to research
and development ("R&D") expenses related to personnel costs for our engineering,
design, and research teams as we expanded the suite of option packages for our
vehicles and initiated development of our next-generation three-wheeled vehicle.
We had an increase in salaries and related expenses of $0.56 million, an
increase of $0.46 million from R&D contracting for professional service and
design costs and an increase in stock-based compensation of $0.11 million.
Sales and marketing expense
Sales and marketing expense increased by $0.12 million, or 8.9%, for the year
ended December 31, 2020, as compared to the year ended December 31, 2019, as we
redirected our marketing focus in-house rather than outsourced contractors and
marketing programs. Salaries and wages increased by $0.40 million and
stock-based compensation increased by $0.11 million due to the addition of our
Chief Marketing Officer and Chief of Business Development in late 2019 as well
as the addition of other sales and marketing resources. Discretionary marketing
programs decreased by $0.03 million and contracting for professional marketing
services decreased by $0.47 million. These reductions in 2020 relative to 2019
were due to the redirection of our marketing focus in-house. Additionally,
depreciation expense for demonstration vehicles assigned to the sales and
marketing team increased by $0.12 million as compared to 2019 due to a
reclassification from general and administration expenses to sales and marketing
expense for demonstration vehicles assigned to the sales and marketing team.
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 $6.60 million for the year ended December 31,
2020, compared to $6.68 million for 2019, a decrease of $0.07 million.
Contractor and consulting expenses decreased by $1.77 million. Contractor and
consulting expenses for 2019 included $2.64 million of stock-based compensation
paid to Christian Okonsky and Mark Adams, founders of AYRO and former board
members and we also incurred an expense of $0.27 million for warrants issued for
advisory services in 2019. Neither of these equity-related expenses were
repeated in 2020. The reduction in contractor and consulting expenses was offset
by an increase in contracting for professional services of $1.14 million,
primarily a result of additional audit, legal and investor relations expenses
incurred to support public reporting requirements. Board compensation expense
increased by $0.22 million. Salaries and related costs increased by $0.17
million due to corporate expansion. Other public company-related expenses
increased by $0.46 million. Stock-based compensation expense increased by $1.17
million, primarily due to the expense of director and employee equity awards in
2020. Depreciation decreased by $0.41 million, primarily driven by fully
depreciating the tooling for our AYRO 311 product line during 2019 and the
reclassification of the $0.12 million depreciation expense for demonstration
vehicles assigned to the sales and marketing team due to our redirection of our
marketing focus in-house.
57
Other income and expense
Other income increased by $0.23 million in 2020 compared to 2019. The increase
was primarily due to the forgiveness of our Paycheck Protection Program ("PPP")
loan in the amount of $0.22 million in principal and interest effective December
29, 2020. In addition, we received $0.02 million during 2020 as an incentive for
hiring additional personnel in the city of Round Rock, Texas under the city's
standard economic development grant. Interest expense increased $0.15 million,
for the year ended December 31, 2020, as compared to 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 also
included noncash amortization of warrant discounts issued in conjunction with
certain debt offerings. A loss on the extinguishment of debt related to the
early redemptions of a note in the principal amount of $0.14 million previously
converted from a vendor payable was recorded for $0.02 million, a loss on the
extinguishment of debt for a bridge note in the principal amount of $0.60
million was recorded for $0.35 million and a loss on the extinguishment of debt
for a bridge note in the principal amount of $0.50 million was recorded for
$0.19 million.
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 the United States, or GAAP. 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:
Year Ended December 31,
2020 2019
Net loss to common stockholders $ (10,763,446 ) $ (8,664,693 )
Depreciation and amortization
447,283 722,566
Stock-based compensation expense 1,827,008 3,336,394
Amortization of discount on debt
236,398 152,243
Interest expense 90,798 20,236
Loss on extinguishment of debt 566,925 -
Gain on debt forgiveness (PPP loan) (219,363 ) -
Adjusted EBITDA $ (7,814,397 ) $ (4,433,254 )
58
Liquidity and Capital Resources
As of December 31, 2020, we had $36.54 million in cash and working capital of
$38.50 million. As of December 31, 2019, we had $0.64 million in cash and
working capital deficit of $0.40 million. The increase in cash and working
capital was primarily a result of our capital raising activities from June 2020
through December of 2020 in addition to cash received as a result of the Merger.
Our sources of cash since inception have been predominantly from the sale of
equity and debt.
In October 2019, we raised $0.50 million in a 120-day short-term loan from Mark
Adams, a former director of AYRO Operating and AYRO. This loan had a 14%
interest rate per annum, was 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. The loan was repaid September 30, 2020.
In December 2019, a local marketing firm agreed to convert 90% of trade accounts
payable the Company owed that firm to a term loan with a principal amount of
$137,729.03 and bearing interest at the rate of 15% per annum, payable
quarterly, with a maturity date of May 31, 2021. The Company also issued the
marketing firm 66,000 shares of common stock in conjunction with this term loan.
A discount on debt of $46,683 was recorded in the transaction and is being
amortized over the life of the debt. The loan was repaid September 30, 2020.
In December 2019, we entered into a convertible bridge loan with five
institutional lenders totaling $1.0 million. On May 28, 2020, immediately prior
to the closing of the Merger, the five lenders received warrants (the "Bridge
Loan Warrants") to purchase 1,030,585 shares of common stock at an exercise
price of $1.1159 per share. The Bridge Loan Warrants had full ratchet
anti-dilution price protection with respect to future issuances of securities at
an effective price below the exercise price, with the exercise price per share
reducing to such exercise price and the number of shares deliverable upon
exercise of the warrants increasing such that the aggregate exercise price under
each warrant remains constant. The Bridge Loan Warrants would have terminated
after a period of five years on May 28, 2025. All Bridge Loan Warrants were
exercised prior to December 31, 2020.
In February 2020, we entered into secured promissory notes with three
institutional lenders totaling $0.50 million. On May 28, 2020, immediately after
the closing of the Merger, pursuant to and in connection with the issuance of
these notes, we issued warrants (the "Secured Loan Warrants") to purchase an
aggregate of 100,000 shares of common stock to the three lenders for an
aggregate purchase price of $0.01 million. Proceeds from the Merger were used to
fully repay the $0.50 million promissory note on May 28, 2020. The Secured Loan
Warrants were exercised in full during the three months ended June 30, 2020.
In April 2020, the Company issued a secured promissory note payable to an
individual investor providing $600,000 of short-term financing. The notes
carried an interest rate of fifteen percent (15%) and were to be repaid upon the
earlier of (1) closing date of the pending the Merger and (2) July 14, 2020.
Fifty percent (50%) of the principal amount was personally guaranteed by Mark
Adams, a former director of AYRO Operating and AYRO. In conjunction with the
notes, 553,330 shares of common stock (276,665 shares of common stock
representing two percent (2%) of the combined company's post-merger outstanding
common stock each) were issued to the lender and to Mr. Adams as compensation
for his personal guarantee.
On May 28, 2020, we completed our reverse merger with DropCar, which resulted in
cash received from the merger of $3.1 million, represented by 2,337,663 shares
of common stock.
59
On May 28, 2020, we entered into the first AYRO Operating Private Placement SPA
with current stockholders of the Company and AYRO Operating, pursuant to which
such stockholders agreed to purchase, prior to the consummation of the Merger,
shares of AYRO Operating Common Stock and warrants (the "First Private Placement
Warrants") to purchase AYRO Operating's common stock for an aggregate purchase
price of $1.2 million. Prior to the closing of the Merger, AYRO Operating issued
to the investors party to this first AYRO Private Placement SPA (i) an aggregate
of approximately 543,179 shares of common stock and pre-funded warrants to
purchase 429,305 shares of Company Common Stock at an exercise price of
$0.000367 per share, and (ii) First Private Placement Warrants to purchase
972,486 shares of common stock at an exercise price of $1.3599 per share. The
First Private Placement Warrants issued pursuant to the first AYRO Operating
Private Placement SPA had full ratchet anti-dilution price protection with
respect to future issuances of securities at an effective price below the
exercise price with the exercise price per share reducing to such exercise price
and the number of shares deliverable upon exercise of the warrant increasing
such that the aggregate exercise price under each warrant remains constant. The
First Private Placement Warrants would have terminated after a period of five
years on May 28, 2025. All First Private Placement Warrants were exercised prior
to December 31, 2020.
On May 28, 2020, we entered into the second AYRO Operating Private Placement SPA
with current investors of the Company and AYRO Operating, pursuant to which such
investors agreed to purchase, prior to the consummation of the Merger, shares of
AYRO Operating Common Stock and warrants (the "Second Private Placement
Warrants") to purchase AYRO Operating Common Stock for an aggregate purchase
price of $0.85 million. On the closing date of the Merger, AYRO Operating issued
to the investors party to this second AYRO Operating Private Placement SPA (i)
an aggregate of approximately 1,030,039 shares of common stock and pre-funded
warrants to purchase 286,896 shares of Company Common Stock at an exercise price
of $0.000367 per share, and (ii) Second Private Placement Warrants to purchase
1,316,936 shares of common stock at an exercise price of $0.7423 per share. The
Second Private Placement Warrants issued pursuant to the second AYRO Operating
Private Placement SPA had full ratchet anti-dilution price protection with
respect to future issuances of securities at an effective price below the
exercise price with the exercise price per share reducing to such exercise price
and the number of shares deliverable upon exercise of the warrant increasing
such that the aggregate exercise price under each warrant remains constant. The
Second Private Placement Warrants would have terminated after a period of five
years on May 28, 2025. All Second Private Placement Warrants were exercised
prior to December 31, 2020.
In May 2020, the Company entered into a Paycheck Protection Program Term Note
(the "PPP Note") with Pacific Western Bank, NA in the amount of $218,000. The
PPP Note was issued to the Company pursuant to the Coronavirus, Aid, Relief, and
Economic Security Act's (the "CARES Act") (P.L. 116-136) Paycheck Protection
Program (the "Program"). The PPP Note carries a maturity date of May 20, 2022,
at a 1% interest rate. On December 29, 2020, notice of the PPP Note forgiveness
was granted to the Company. The forgiveness amount of $218,000 in principal and
$1,363 in interest was recorded in the other income line item on the statement
of operations for the year ended December 31, 2020.
On June 17, 2020, we entered into a securities purchase agreement with certain
institutional and accredited investors, pursuant to which we agreed to issue and
sell in a registered direct offering an aggregate of 2,200,000 shares of common
stock at an offering price of $2.50 per share, for gross proceeds of
approximately $5.50 million before the deduction of fees and offering expenses
of $0.44 million.
On July 6, 2020, we entered into a securities purchase agreement with certain
institutional and accredited investors, pursuant to which we agreed to issue and
sell in a registered direct offering an aggregate of 3,157,895 shares of our
common stock at an offering price of $4.75 per share, for gross proceeds of
approximately $15.00 million before the deduction of fees and offering expenses
of $1.25 million.
On July 21, 2020, we entered into a securities purchase agreement with certain
existing investors, pursuant to which we sold, in a registered direct offering
an aggregate of 1,850,000 shares of common stock, par value $0.0001 per share,
at an offering price of $5.00 per share for gross proceeds of $9.25 million
before offering expenses of $0.74 million. Each purchaser also had the right to
purchase, on or before October 19, 2020, additional shares of common stock (the
"Additional Shares") 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 price
of $5.00 per share. On October 16, 2020, we entered into an addendum to the
Agreement (the "Addendum"), which extended the deadline for each purchaser to
exercise the right to purchase the Additional Shares by one year, to October 19,
2021. As of December 31, 2020, investors had elected to purchase 420,000 of the
Additional 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 $2.10
million before offering expenses of $0.17 million. Between January 1, 2021 and
March 30, 2021, investors had elected to purchase an additional 302,500 of the
Additional 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 $1.51
million before the deduction of fees and offering expenses.
60
On November 22, 2020, we entered into a securities purchase agreement with
certain institutional and accredited investors, pursuant to which we agreed to
issue and sell in a registered direct offering an aggregate of 1,650,164 shares
of our common stock, par value $0.0001 per share, at an offering price of $6.06
per share, for gross proceeds of approximately $10.00 million before the
deduction of fees and offering expenses of $0.85 million. Pursuant to the
securities purchase agreement, we issued to the investors unregistered Series A
Warrants to purchase up to 1,237,624 shares of common stock and unregistered
Series B Warrants to purchase up to 825,084 shares of common stock. The Series A
Warrants are exercisable immediately upon issuance and terminate six months
following issuance and are exercisable at an exercise price of $8.09 per share,
subject to adjustment as set forth therein. The Series B Warrants are
exercisable immediately upon issuance and terminate five years following
issuance and are exercisable at an exercise price of $8.90 per share, subject to
adjustment as set forth therein. In addition, subject to certain limitations, we
have a call right with respect to the warrants.
On January 25, 2021, we entered into a securities purchase agreement with
certain institutional and accredited investors, pursuant to which we agreed to
issue and sell in a registered direct offering an aggregate of 3,333,334 shares
at an offering price of $6.00 per share, for gross proceeds of approximately
$20.00 million before the deduction of fees and offering expenses. In a
concurrent private placement, we sold to such investors warrants to purchase, at
any time on or after July 26, 2021 and on or before July 26, 2023, additional
shares of common stock equal to the full amount of the common stock it purchased
at the initial closing, or an aggregate of 3,333,334 shares, at an exercise
price of $6.93 per share.
On February 11, 2021, we entered into a securities purchase agreement with
certain institutional and accredited investors, pursuant to which we agreed to
issue and sell in a registered direct offering an aggregate of 4,400,001 shares
of common stock at an offering price of $9.50 per share, for gross proceeds of
approximately $41.8 million before the deduction of fees and offering expenses.
Each purchaser was also granted the option to purchase, on or before February
16, 2022, 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
3,300,000 shares, at a purchase price of $11.50 per share.
Between May 28, 2020 (the Merger closing) and December 31, 2020, holders of
warrants have exercised warrants to purchase an aggregate of 5,074,645 shares of
our common stock for aggregate net proceeds to us of $3.93 million. This is
inclusive of warrants exercised as noted above.
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 December 31, 2020,
together with net proceeds of approximately $56.8 million raised through
registered direct offerings in January 2021 and February 2021, will be
sufficient to fund operations for at least the next twelve months following the
date of this report.
61
Summary of Cash Flows
The following table summarizes our cash flows:
Years Ended December 31,
2020 2019
Cash Flows:
Net cash used in operating activities $ (10,019,344 ) $ (4,104,286 )Net cash provided by (used in) investing activities $ 2,542,020 $ (374,352 )
Net cash provided by financing activities
$ 43,372,599 $ 5,081,217
Operating Activities
During the year ended December 31, 2020, we used $10.02 million in cash in
operating activities, an increase in use of $5.92 million when compared to the
cash used in operating activities of $4.10 million during the same period in
2019. The increase in cash used in operating activities was primarily a result
of prepayments for inventory and manufacturing services, an increase in accounts
receivable, payments of accrued expenses, purchases of inventory and an increase
in our operating loss as we continue to build our core business. This was offset
by a reduction in cash used from our payments of outstanding accounts payable to
Cenntro in March 2019 that did not occur in 2020.
Our ability to generate cash from operations in future periods will depend in
large part on profitability, the rate and timing of collections of our accounts
receivable, inventory turns and our ability to manage other areas of working
capital.
Investing Activities
During the year ended December 31, 2020, we were provided cash of $2.54 million
from investing activities as compared to $0.37 million cash used in investing
activities during 2019, an increase of $2.91 million. The net increase was
primarily due to proceeds of $3.06 million from the Merger.
Financing Activities
During the year ended December 31, 2020, we received net proceeds of an
aggregate of $39.86 million from the issuance of common stock, net of fees and
expenses, $0.02 million from the exercise of options to purchase additional
shares of common stock, and $3.93 million from the exercise of warrants for
cash. In addition, during 2020, we received $0.50 million of debt financing from
certain DropCar investors and $0.60 million of debt financing from a private
investor, both of which notes were repaid upon closing of the Merger.
Additionally, in May 2020, we received $0.22 million in a PPP loan from our
bank, which was forgiven in December 2020. In December 2020, we were notified
that the PPP loan principal and accrued interest were forgiven in full under the
PPP terms, which is reflected in the non-cash section of cash flows from
operating activities. The debt proceeds were netted with $1.74 million of loan
repayments. During the year ended December 31, 2019, $2.52 million was generated
through the sale of AYRO Operating's Preferred Stock. Additionally, during 2019
$0.80 million in proceeds were received from the sale of promissory notes
convertible into AYRO Operating's Series Seed 2 Preferred Stock, $0.33 million
in proceeds were received from the sale of promissory term notes, $0.50 million
in proceeds were received from the sale of a promissory note to Mark Adams, a
former AYRO board member, $1.00 million in proceeds were received from the sale
of promissory notes from certain DropCar investors, convertible into the
Company's common stock upon the Merger, and a short-term loan of $0.05 million
was received and repaid in the first quarter of 2019, netted with $0.12 million
of repayment of loan principal. No warrants were exercised in 2019.
62
Contractual Obligations and Commitments
We have made certain indemnities, under which we may be required to make
payments to an indemnified party, in relation to certain transactions. We
indemnify our directors and officers to the maximum extent permitted under the
laws of the State of Delaware. In connection with our facility leases, we have
indemnified our lessors for certain claims arising from the use of the
facilities. The duration of the indemnities vary and, in many cases, are
indefinite. These indemnities do not provide for any limitation of the maximum
potential future payments we could be obligated to make. Historically, we have
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities.
Off-Balance Sheet Arrangements
Other than business and certain indemnification provisions, we do not have any
off-balance sheet financing arrangements or liabilities, guarantee contracts,
retained or contingent interests in transferred assets, or any obligation
arising out of a material variable interest in an unconsolidated entity. Other
than AYRO Operating Company, Inc. and DropCar Operating Company, Inc., we do not
have any subsidiaries to include or otherwise consolidate into the consolidated
financial statements. Additionally, we do not have interests in, nor
relationships with, any special purpose entities.
Related Party Transactions
Supply Chain Agreements
In 2017, we executed a supply chain contract with Cenntro Automotive Group
("Cenntro"), our primary supplier, a manufacturer located in the People's
Republic of China. Through our partnership with Cenntro, Cenntro acquired 19% of
AYRO Operating's common stock in 2017. As of December 31, 2020, Cenntro
beneficially owned approximately 4.38% of our common stock. Currently, we
purchase 100% of our vehicle chassis, cabs and wheels through this supply chain
relationship with Cenntro. We must sell a minimum number of units in order to
maintain our exclusive supply chain contract. We were in default of the original
exclusive term of the contract; however, in 2019 and 2020, the contract was
amended to remove the default clause. In December 2019, Cenntro agreed to
convert $1.10 million of trade accounts payable due from us to 299,948 shares of
AYRO Operating's Seed Preferred Stock. The parties also agreed that any accrued
interest on the trades payable as a result of this conversion would be forgiven,
which resulted in a recapture of interest expense in the amount of $0.17 million
in the year ended December 31, 2019. As of December 31, 2020 and 2019, the
amounts outstanding to Cenntro as a component of accounts payable were $0.05
million and $0.08 million, respectively. Under a memorandum of understanding
signed between us and Cenntro on March 22, 2020, upon availability of the 411x
product, we agreed to purchase 300 units within the twelve months following the
signing of the memorandum of understanding, and 500 units and 800 units in each
of the following respective twelve-month periods. On July 9, 2020, in exchange
for certain percentage discounts for raw materials, we made a $1.2 million
prepayment for inventory. As of December 31, 2020 and 2019, the prepayment
deposits were $0.98 million and $0.05 million.
In October 2019, we borrowed $0.50 million under a bridge loan from Mark Adams,
a founding board member. As an inducement for the bridge loan, we granted Mr.
Adams 143,975 shares of common stock and in December 2019, the Company granted
an additional 136,340 shares of common stock to Mr. Adams as consideration for
extending the term date of the loan to April 30, 2021. In September 2020, the
loan principal and accrued interest were paid in full.
63
On March 1, 2017, we entered into a royalty-based agreement with Sustainability
Initiatives, LLC ("SI") an entity that is controlled by Mark Adams, a former
director of AYRO and AYRO Operating, and Christian Okonsky, a former director of
AYRO Operating in the effort to accelerate our operations. Royalties accrued
were included as a component of research and development expense in the
accompanying consolidated statements of operations. In return for acceleration
assistance and for serving as our Chief Visionary Officer, the agreement
provided for a monthly retainer. On a quarterly basis, we remitted a royalty of
a percentage (see table below) of company revenues less the retainer amounts.
Revenues Royalty Percentage
$0 - $25,000,000 3.0 %
$25,000,000 - $50,000,000 2.0 %
$50,000,000 - $100,000,000 1.0 %
Over $100,000,001 0.5 %
Effective January 1, 2019, we agreed to an amendment with SI to reduce the
royalty percentage to 0.5%. In relation to this amendment, we granted the SI
members an additional 381,752 stock options to vest over a nine-month vesting
term. On October 15, 2019, we and the SI members agreed to terminate the
agreement in full in exchange for 231,778 shares of the Company's common stock.
Stock-based compensation of $0.91 million was recorded on the transaction in
October 2019.
On December 9, 2019, we and the SI members agreed to cancel the outstanding
options to purchase 477,190 shares of our common stock in exchange for 434,529
shares of our common stock. Stock-based compensation of $1.50 million was
recorded for the transaction in December 2019.
On April 1, 2017, we entered into a fee-for-service agreement with SI. In return
for accounting, marketing, graphics and other services, we pay fixed,
market-standard hourly rates under the shared services agreement as services are
rendered. As of December 31, 2020 and 2019, we had a balance outstanding to SI
for $0.01 million for both periods included in accounts payable. Total expenses
paid or payable to SI were $0 and $0.06 million for the years ended December 31,
2020, and 2019, respectively.
In January 2019, we entered into a fee-for-service consulting agreement with
Sustainability Consultants, LLC, ("SCLLC") an entity that is controlled by Mark
Adams, Will Steakley and John Constantine, who were principal stockholders of
AYRO Operating. In exchange for consulting services provided, we paid $0.19
million in consulting fees to the firm during the year ended December 31, 2019.
As of December 31, 2020, the balance due to SCLLC is zero. Additionally, we
granted warrants to purchase 177,924 shares of our common stock. The warrants
have an exercise price of $7.33 per share with a five-year life. Stock-based
compensation consulting expense of $0.27 million was recorded in the general and
administrative expenses on the statement of operations in the fourth quarter of
2019 in conjunction with the warrant grant - see Note 11 - Stock Based
Compensation, of the Notes to the Consolidated Financial Statements. We also
granted 67,488 shares of our common stock and recorded stock-based compensation
of $0.23 million in the general and administrative expenses on the statement of
operations for the fourth quarter of 2019 related to the common stock
transaction.
64
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles, or
GAAP. The preparation of our consolidated financial statements and related
disclosures requires us to make estimates, assumptions and judgments that affect
the reported amount of assets, liabilities, revenue, costs and expenses and
related disclosures. We base our assumptions, estimates and judgments on
historical experience, current trends and other factors that management believes
to be relevant at the time our consolidated financial statements are prepared.
Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our
actual results may differ from these estimates under different assumptions and
conditions.
Our significant accounting policies are discussed in Note 2 to our consolidated
financial statements for the years ended December 31, 2020 and 2019 which are
included elsewhere in this Annual Report on Form 10-K. We believe that the
following accounting estimates are the most critical to aid in fully
understanding and evaluating our reported financial results. There have been no
changes to estimates during the periods presented in the filing. Historically,
changes in management estimates have not been material.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with
GAAP, requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenue and expenses during the reporting period. Our most
significant estimates include allowance for doubtful accounts, valuation of
inventory reserve, valuation of deferred tax asset allowance, and the
measurement of stock-based compensation expenses. Actual results could differ
from these estimates.
Reclassification
Certain reclassifications have been made to the prior period financial
statements to conform to the current period financial statement presentation.
These reclassifications had no effect on net earnings or cash flows as
previously reported.
Revenue Recognition
We recognize revenue in accordance with ASC 606, Revenue from Contracts with
Customers, the core principle of which is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be
entitled to receive in exchange for those goods or services. To achieve this
core principle, five basic criteria must be met before revenue can be
recognized: (1) identify the contract with a customer; (2) identify the
performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to performance obligations in the contract;
and (5) recognize revenue when or as we satisfy a performance obligation.
Warrants and Preferred Shares
We account for warrants issued for performance of services under fair value
recognition provisions. We calculate the fair value of the warrant utilizing the
Black-Scholes pricing based upon the estimated fair value of the underlying
common stock.
The accounting treatment of warrants and preferred share series issued is
determined pursuant to the guidance provided by ASC 470, Debt, ASC 480,
Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, as
applicable. Each feature of a freestanding financial instruments including,
without limitation, any rights relating to subsequent dilutive issuances,
dividend issuances, equity sales, rights offerings, forced conversions, optional
redemptions, automatic monthly conversions, dividends and exercise are assessed
with determinations made regarding the proper classification in the consolidated
financial statements.
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Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718,
Compensation-Stock Compensation ("ASC 718"). Under the fair value recognition
provisions, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as compensation expense on a
straight-line basis over the requisite service period, based on the terms of the
awards. We calculate the fair value of option grants utilizing the Black-Scholes
pricing model based upon the estimated fair value of the common stock.
In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU
2018-07, Compensation - Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). ASU 2018-07 expands
the guidance in ASC 718 to include share-based payments for goods and services
to non-employees and generally aligns it with the guidance for share-based
payments to employees. In accordance with ASU 2018-07, these stock options and
warrants issued as compensation for services provided to us are accounted for
based upon the fair value of the underlying equity instrument. The attribution
of the fair value of the equity instrument is charged directly to compensation
expense over the period during which services are rendered.
Basic and Diluted Loss Per Share
Basic and diluted net loss per share is determined by dividing net loss by the
weighted average ordinary shares outstanding during the period. For all periods
presented with a net loss, the shares underlying the ordinary share options and
warrants have been excluded from the calculation because their effect would be
anti-dilutive. Therefore, the weighted-average shares outstanding used to
calculate both basic and diluted loss per share are the same for periods with a
net loss.
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