AYRO, INC. The following management's discussion and analysis should be read in conjunction
with our historical financial statements and the related notes thereto. This
management's discussion and analysis contains forward-looking statements, such
as statements of our plans, objectives, expectations and intentions. Any
statements that are not statements of historical fact are forward-looking
statements. When used, the words "believe," "plan," "intend," "anticipate,"
"target," "estimate," "expect" and the like, and/or future tense or conditional
constructions ("will," "may," "could," "should," etc.), or similar expressions,
identify certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those under "Risk
Factors" in our filings with the
References in this management's discussion and analysis to "we," "us," "our,"
"our Company" or "AYRO" refer to
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q (this "Form 10-Q") contains forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of forward-looking terms such as "anticipates," "assumes,"
"believes," "can," "could," "estimates," "expects," "forecasts," "guides,"
"intends," "is confident that," "may," "plans," "seeks," "projects," "targets,"
"would" and "will" or the negative of such terms or other variations on such
terms or comparable terminology. Such forward-looking statements include, but
are not limited to, future financial and operating results, the company's plans,
objectives, expectations and intentions and other statements that are not
historical facts. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
that we believe may affect our business, financial condition, and results of
operations. These forward-looking statements speak only as of the date of this
Form 10-Q and are subject to a number of risks, uncertainties, and assumptions
that could cause actual results to differ materially from our historical
experience and our present expectations, or projections described under the
sections in this Form 10-Q and our other reports filed with the
If any of the following risks occur, our business, financial condition, results of operations, cash flows, cash available for distribution, ability to service our debt obligations and prospects could be materially and adversely affected.'
? we may be acquired by a third party based on preexisting agreements;
? we have a history of losses and have never been profitable, and we expect to
incur additional losses in the future and may never be profitable;
? the market for our products is developing and may not develop as expected;
? our business is subject to general economic and market conditions, including
trade wars and tariffs;
? our business, results of operations and financial condition may be adversely
impacted by public health epidemics, including the recent COVID-19 outbreak;
? our limited operating history makes evaluating our business and future
prospects difficult and may increase the risk of any investment in our
securities; 1
? we may experience lower-than-anticipated market acceptance of our vehicles;
? developments in alternative technologies or improvements in the internal
combustion engine may have a materially adverse effect on the demand for our
electric vehicles;
? the markets in which we operate are highly competitive, and we may not be
successful in competing in these industries;
? a significant portion of our revenues are derived from a single customer;
? we rely on and intend to continue to rely on a single third-party supplier
and manufacturer located in
sub-assemblies in a semi-knocked-down state for our current 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 may be required to raise additional capital to fund our operations, and
such capital raising may be costly or difficult to obtain and could dilute
our stockholders' ownership interests, and our long-term capital requirements
are subject to numerous risks;
? increased safety, emissions, fuel economy, or other regulations may result in
higher costs, cash expenditures, and/or sales restrictions;
? we may fail to comply with environmental and safety laws and regulations;
? our proprietary designs are susceptible to reverse engineering by our
competitors;
? if we are unable to protect the confidentiality of our trade secrets or
know-how, such proprietary information may be used by others to compete
against us;
? should we begin transacting business in other currencies, we are subject to
exposure from changes in the exchange rates of local currencies; and
? we are subject to governmental export and import controls that could impair
our ability to compete in international market due to licensing requirements
and subject us to liability if we are not in compliance with applicable laws.
For a more detailed discussion of these and other factors that may affect our
business and that could cause the actual results to differ materially from those
projected in these forward-looking statements, see the risk factors and
uncertainties set forth in Part I, Item 1A of our Annual Report on Form 10-K as
filed on
2 Overview Merger
On
The Merger was treated as a reverse recapitalization effected by a share
exchange for financial accounting and reporting purposes since substantially all
of
Reverse Stock Split and Stock Dividend
On
The net result of the Reverse Stock Split and the Stock Dividend was a 1-for-5
reverse stock split. We made proportionate adjustments to the per share exercise
price and/or the number of shares issuable upon the exercise or vesting of all
stock options, restricted stock units (if any) and warrants outstanding as of
the effective times of the Reverse Stock Split and the Stock Dividend in
accordance with the terms of each security based on the split or dividend ratio.
Also, we reduced the number of shares reserved for issuance under our equity
compensation plans proportionately based on the split and dividend ratios.
Except for adjustments that resulted from the rounding up of fractional shares
to the next whole share, the Reverse Stock Split and Stock Dividend affected all
stockholders uniformly and did not change any stockholder's percentage ownership
interest in the Company. The Reverse Stock Split did not alter the par value of
Company Common Stock,
3
Closing of Asset Purchase Agreement
On
Business
Prior to the Merger, DropCar provided consumer and enterprise solutions to urban automobile-related logistical challenges. Following the Merger, we design and manufacture compact, sustainable electric vehicles for closed campus mobility, urban and community transport, local on-demand and last mile delivery, and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers including universities, business and medical campuses, last mile delivery services and food service providers. We are currently designing our next generation three-wheeled vehicle to support the above-listed markets.
Products
AYRO vehicles provide the end user an environmentally friendly alternative to internal combustion engine vehicles (cars powered by gasoline or diesel oil), for light duty uses, including low-speed logistics, maintenance and cargo services, at a lower total cost. The majority of our sales are comprised of sales of our four-wheeled vehicle to Club Car, a division of Ingersoll Rand, Inc. ("Club Car"), 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.
Manufacturing Agreement with Cenntro
In 2017, AYRO Operating partnered with
Under our Manufacturing License Agreement with Cenntro (the "MLA"), in order for
us to maintain our exclusive territorial rights pursuant to the MLA, for the
first three years after the effective date of
4
Cenntro will determine the minimum sale requirements for the years thereafter. Should any event of default occur, the other party may terminate the MLA by providing written notice to the defaulting party, who will have 90 days from the effective date of the notice to cure the default. Unless waived by the party providing notice, a failure to cure the default(s) within the 90-day time frame will result in the automatic termination of the MLA. Events of default under the MLA include a failure to make a required payment when due, the insolvency or bankruptcy of either party, the subjection of either party's property to any levy, seizure, general assignment for the benefit of creditors, and a failure to make available or deliver the products in the time and manner provided for in the MLA. We are dependent on the MLA, and in the event of its termination our manufacturing operations and customer deliveries would be materially impacted.
Master Procurement Agreement with Club Car
In
Manufacturing Services Agreement with Karma
On
On
Supply Agreement with Gallery Carts
During 2020, we entered into a supply agreement with Gallery Carts, a leading
provider of food and beverage kiosks, carts, and mobile storefront solutions.
Joint development efforts have led to the launch of the parties' first
all-electric configurable mobile hospitality vehicle for "on-the-go" venues
across
5
The configurable Powered Vendor Box, in the rear of the vehicle, features
long-life lithium batteries that power the preconfigured hot/cold beverage and
food equipment and is directly integrated with the Club Car 411. The canopy
doors, as well as the full vehicle, can be customized with end-user logos and
graphics to enhance the brand experience. Gallery, with 40 years of experience
delivering custom food kiosk solutions, has expanded into mobile electric
vehicles as customers increasingly want food, beverages and merchandise
delivered to where they are gathering. For example, a recent study conducted by
Gallery Carts, a premier distributor of Club Car 411 low-speed electric vehicles manufactured by AYRO, has a diverse clientele throughout mobile food, beverage and merchandise distribution markets, for key customer applications such as university, corporate and government campuses, major league and amateur-level stadiums and arenas, resorts, airports and event centers. In addition to finding innovative and safe ways to deliver food and beverages to their patrons, reducing and ultimately eliminating their carbon footprint is a top priority for many of these customers.
Recent Developments
On
In connection with the
On
Pursuant to the Securities Purchase Agreement dated
6
Factors Affecting Results of Operations
Master Procurement Agreement
In
COVID-19 Pandemic
Our business, results of operations and financial condition have been adversely
impacted by the recent coronavirus outbreak both in
Components of Results of Operations
Revenue
We derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts and service fees. In the past we also derived rental revenue from vehicle revenue sharing agreements with our tourist destination fleet operators, or Destination Fleet Operators ("DFOs"), and, to a lesser extent, shipping, parts and service fees. Provided that all other revenue recognition criteria have been met, we typically recognize revenue upon shipment, as title and risk of loss are transferred to customers and channel partners at that time. Products are typically shipped to dealers or directly to end customers, or in some cases to our international distributors. These international distributors assist with import regulations, currency conversions and local language. Our vehicle product sales revenues vary from period to period based on, among other things, the customer orders received and our ability to produce and deliver the ordered products. Customers often specify requested delivery dates that coincide with their need for our vehicles.
Because these customers may use our products in connection with a variety of projects of different sizes and durations, a customer's orders for one reporting period generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers.
Cost of Goods Sold
Cost of goods sold primarily consists of costs of materials and personnel costs associated with manufacturing operations, and an accrual for post-sale warranty claims. Personnel costs consist of wages and associated taxes and benefits. Cost of goods sold also includes freight and changes to our warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollar, as product revenue increases.
Operating Expenses
Our operating expenses consist of general and administrative, sales and marketing and research and development 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.
7
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.
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. Other expense consists primarily of interest expense.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to
8 Results of Operations
Three months ended
The following table sets forth our results of operations for each of the periods
set forth below:
For the three months ended March 31,
2021 2020 Change
Revenue $ 788,869 $ 146,816 $ 642,053
Cost of goods sold 644,503 113,155 531,348
Gross profit 144,366 33,661 110,705
Operating expenses:
Research and development 1,927,561 154,699 1,772,862
Sales and marketing 558,404 319,454 238,950
General and administrative 3,301,309 1,249,052 2,052,257
Total operating expenses 5,787,274 1,723,205 4,064,069
Loss from operations (5,642,908 ) (1,689,544 ) (3,953,364 )
Other income and expense:
Other income, net 9,926 16 9,910
Interest expense (851 ) (105,625 ) 104,774
Net loss $ (5,633,833 ) $ (1,795,153 ) $ (3,838,680 )
Revenue
Revenue was
Cost of goods sold and gross profit
Cost of goods sold increased by
Gross margin percentage was 18.3% for the three months ended
Research and development expense
Research and development ("R&D") expense was
9 Sales and marketing expense
Sales and marketing expense was
General and administrative expenses
The majority of our operating losses from continuing operations resulted from
general and administrative expenses. General and administrative expenses consist
primarily of costs associated with our overall operations and with being a
public company. These costs include personnel, legal and financial professional
services, insurance, investor relations, and compliance related fees. General
and administrative expense was
Depreciation decreased by
Non-GAAP Financial Measure
We present Adjusted EBITDA because we consider it to be an important
supplemental measure of our operating performance, and we believe it may be used
by certain investors as a measure of our operating performance. Adjusted EBITDA
is defined as income (loss) from operations before interest income and expense,
income taxes, depreciation, amortization of intangible assets, amortization of
discount on debt, impairment of long-lived assets, stock-based compensation
expense and certain non-recurring expenses. Adjusted EBITDA is not a measurement
of financial performance under generally accepted accounting principles in
Because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other companies, as well as providing us with an important tool for financial and operational decision making and for evaluating our own core business operating results over different periods of time.
Adjusted EBITDA may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items.
10
Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as an alternative to operating income or as an indication of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider Adjusted EBITDA to be a substitute for, or superior to, the information provided by GAAP financial results.
Below is a reconciliation of Adjusted EBITDA to net loss to common stockholders
for the three months ended
Three Months Ended
March 31,
2021 2020
Net Loss $ (5,633,833 ) $ (1,795,153 )
Depreciation and Amortization 124,198 114,275Stock-based compensation expense 1,699,423 156,458 Amortization of Discount on Debt
- 63,744
Interest expense 851 28,436
Adjusted EBITDA $ (3,809,361 ) $ (1,432,240 ) Liquidity and Capital Resources
As of
Our sources of cash since inception have been predominantly from the sale of equity and debt.
On
On
Pursuant to the Securities Purchase Agreement dated
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.
11
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
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