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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended June 30, 2023
or
☐ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from ___________ to __________
Commission
file number: 001-34643
AYRO,
INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
98-0204758 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
900
E. Old Settlers Boulevard, Suite 100 |
|
|
Round
Rock, Texas |
|
78664 |
(Address
of principal executive offices) |
|
(Zip
Code) |
(512)
994-4917
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each Class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
Common
Stock, par value $0.0001 per share |
|
AYRO |
|
The
NASDAQ Stock Market LLC |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer |
☐ |
|
Accelerated
filer |
☐ |
|
|
|
|
|
Non-accelerated
filer |
☒ |
|
Smaller
reporting company |
☒ |
|
|
|
|
|
|
|
|
Emerging
growth company |
☐ |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As
of August 11, 2023, the registrant had 37,732,530 shares of common stock outstanding.
AYRO,
Inc.
Quarter
Ended June 30, 2023
Table
of Contents
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
AYRO,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 13,569,265 | | |
$ | 39,096,562 | |
Marketable securities | |
| 19,464,015 | | |
| 9,848,804 | |
Accounts receivable, net | |
| 104,155 | | |
| 510,071 | |
Inventory | |
| 3,049,972 | | |
| 970,381 | |
Prepaid expenses and other current assets | |
| 3,269,831 | | |
| 1,478,845 | |
Total current assets | |
| 39,457,238 | | |
| 51,904,663 | |
| |
| | | |
| | |
Property and equipment, net | |
| 3,201,260 | | |
| 2,192,337 | |
Operating lease – right-of-use asset | |
| 750,877 | | |
| 819,401 | |
Deposits and other assets | |
| 84,595 | | |
| 73,683 | |
Total assets | |
$ | 43,493,970 | | |
$ | 54,990,084 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
| 716,236 | | |
| 1,107,215 | |
Accrued expenses | |
| 910,114 | | |
| 964,937 | |
Current portion lease obligation – operating lease | |
| 178,013 | | |
| 165,767 | |
Total current liabilities | |
| 1,804,363 | | |
| 2,237,919 | |
Lease obligation – operating lease, net of current portion | |
| 601,349 | | |
| 693,776 | |
Total liabilities | |
| 2,405,712 | | |
| 2,931,695 | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Preferred Stock, (authorized – 20,000,000 shares) | |
| - | | |
| - | |
Convertible Preferred Stock Series H, ($0.0001 par value; authorized – 8,500 shares; issued and outstanding – 8 shares as of June 30, 2023 and December 31, 2022, respectively) | |
| - | | |
| - | |
Convertible Preferred Stock Series H-3, ($0.0001 par value; authorized – 8,461 shares; issued and outstanding – 1,234 as of June 30, 2023 and December 31, 2022, respectively) | |
| - | | |
| - | |
Convertible Preferred Stock Series H-6, ($0.0001
par value; authorized – 50,000
shares; issued and outstanding – 50
as of June 30, 2023 and December 31, 2022, respectively) | |
| - | | |
| - | |
Preferred stock, value | |
| - | | |
| - | |
Common Stock, ($0.0001 par value; authorized – 100,000,000 shares; issued and outstanding – 37,536,101 and 37,241,642 as of June 30, 2023 and December 31, 2022, respectively) | |
| 3,753 | | |
| 3,724 | |
Additional paid-in capital | |
| 133,733,091 | | |
| 133,224,249 | |
Accumulated deficit | |
| (92,648,586 | ) | |
| (81,169,584 | ) |
Total stockholders’ equity | |
| 41,088,258 | | |
| 52,058,389 | |
Total liabilities and stockholders’ equity | |
$ | 43,493,970 | | |
$ | 54,990,084 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Revenue | |
$ | 139,544 | | |
$ | 981,560 | | |
$ | 252,628 | | |
$ | 2,008,405 | |
Cost of goods sold | |
| 332,027 | | |
| 2,827,512 | | |
| 551,820 | | |
| 4,004,657 | |
Gross loss | |
| (192,483 | ) | |
| (1,845,952 | ) | |
| (299,192 | ) | |
| (1,996,252 | ) |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Research and development | |
| 2,405,398 | | |
| 1,046,797 | | |
| 4,535,388 | | |
| 1,912,204 | |
Sales and marketing | |
| 420,861 | | |
| 337,226 | | |
| 1,138,953 | | |
| 1,182,042 | |
General and administrative | |
| 3,247,731 | | |
| 2,741,700 | | |
| 6,091,047 | | |
| 5,446,627 | |
Total operating expenses | |
| 6,073,990 | | |
| 4,125,723 | | |
| 11,765,388 | | |
| 8,540,873 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (6,266,473 | ) | |
| (5,971,675 | ) | |
| (12,064,580 | ) | |
| (10,537,125 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense): | |
| | | |
| | | |
| | | |
| | |
Other income (expense), net | |
| (9,166 | ) | |
| 10,706 | | |
| 52,532 | | |
| 19,597 | |
Interest income | |
| 117,278 | | |
| - | | |
| 261,638 | | |
| - | |
Unrealized gain (loss) on marketable securities | |
| 146,935 | | |
| (13,479 | ) | |
| 198,215 | | |
| (35,580 | ) |
Realized gain on marketable securities | |
| 8,193 | | |
| - | | |
| 73,193 | | |
| - | |
Other income (expense), net | |
| 263,240 | | |
| (2,773 | ) | |
| 585,578 | | |
| (15,983 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (6,003,233 | ) | |
$ | (5,974,448 | ) | |
$ | (11,479,002 | ) | |
$ | (10,553,108 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss per share, basic and diluted | |
$ | (0.16 | ) | |
$ | (0.16 | ) | |
$ | (0.31 | ) | |
$ | (0.29 | ) |
Net loss per share, basic | |
$ | (0.16 | ) | |
$ | (0.16 | ) | |
$ | (0.31 | ) | |
$ | (0.29 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted weighted average Common Stock outstanding | |
| 37,476,845 | | |
| 36,982,436 | | |
| 37,398,555 | | |
| 36,945,240 | |
Basic weighted average Common Stock outstanding | |
| 37,476,845 | | |
| 36,982,436 | | |
| 37,398,555 | | |
| 36,945,240 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
(Deficit) | | |
Total | |
| |
Three and Six Months Ended June 30, 2023 | |
| |
Series H | | |
Series H-3 | | |
Series H-6 | | |
| | |
| | |
| | |
| | |
| |
| |
Preferred | | |
Preferred | | |
Preferred | | |
| | |
| | |
Additional | | |
| | |
| |
| |
Stock | | |
Stock | | |
Stock | | |
Common Stock | | |
Paid-in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
(Deficit) | | |
Total | |
Balance, January 1, 2023 | |
| 8 | | |
$ | - | | |
| 1,234 | | |
$ | - | | |
| 50 | | |
$ | - | | |
| 37,241,642 | | |
$ | 3,724 | | |
$ | 133,224,249 | | |
$ | (81,169,584 | ) | |
$ | 52,058,389 | |
Stock Based Compensation | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 20,116 | | |
| - | | |
| 20,116 | |
Vesting of Restricted Stock | |
| - | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 110,562 | | |
| 11 | | |
| 246,614 | | |
| - | | |
| 246,625 | |
Net Loss | |
| - | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| (5,475,769 | ) | |
| (5,475,769 | ) |
Balance, March 31, 2023 | |
| 8 | | |
| - | | |
| 1,234 | | |
| - | | |
| 50 | | |
| - | | |
| 37,352,204 | | |
| 3,735 | | |
| 133,490,979 | | |
| (86,645,353 | ) | |
| 46,849,361 | |
Stock Based Compensation | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 11,417 | | |
| - | | |
| 11,417 | |
Vesting of Restricted Stock | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 183,897 | | |
| 18 | | |
| 230,695 | | |
| - | | |
| 230,713 | |
Net Loss | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| (6,003,233 | ) | |
| (6,003,233 | ) |
Balance, June 30, 2023 | |
| 8 | | |
| - | | |
| 1,234 | | |
| - | | |
| 50 | | |
| - | | |
| 37,536,101 | | |
$ | 3,753 | | |
$ | 133,733,091 | | |
$ | (92,648,586 | ) | |
$ | 41,088,258 | |
| |
Three and Six Months Ended June 30, 2022 | |
| |
Series H | | |
Series H-3 | | |
Series H-6 | | |
| | |
| | |
| | |
| | |
| |
| |
Preferred | | |
Preferred | | |
Preferred | | |
| | |
| | |
Additional | | |
| | |
| |
| |
Stock | | |
Stock | | |
Stock | | |
Common Stock | | |
Paid-in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
(Deficit) | | |
Total | |
Balance, January 1, 2022 | |
| 8 | | |
$ | - | | |
| 1,234 | | |
$ | - | | |
| 50 | | |
$ | - | | |
| 36,866,956 | | |
$ | 3,687 | | |
$ | 131,654,776 | | |
$ | (58,234,231 | ) | |
$ | 73,424,232 | |
Balance | |
| 8 | | |
$ | - | | |
| 1,234 | | |
$ | - | | |
| 50 | | |
$ | - | | |
| 36,866,956 | | |
$ | 3,687 | | |
$ | 131,654,776 | | |
$ | (58,234,231 | ) | |
$ | 73,424,232 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock Based Compensation | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 288,110 | | |
| - | | |
| 288,110 | |
Vesting of Restricted Stock | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 43,000 | | |
| 4 | | |
| 329,377 | | |
| - | | |
| 329,381 | |
Net Loss | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| (4,578,660 | ) | |
| (4,578,660 | ) |
Balance, March 31, 2022 | |
| 8 | | |
| - | | |
| 1,234 | | |
| - | | |
| 50 | | |
| - | | |
| 36,909,956 | | |
| 3,691 | | |
| 132,272,263 | | |
| (62,812,891 | ) | |
| 69,463,063 | |
Balance, value | |
| 8 | | |
| - | | |
| 1,234 | | |
| - | | |
| 50 | | |
| - | | |
| 36,909,956 | | |
| 3,691 | | |
| 132,272,263 | | |
| (62,812,891 | ) | |
| 69,463,063 | |
Stock Based Compensation | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 303,553 | | |
| - | | |
| 303,553 | |
Vesting of Restricted Stock | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 110,562 | | |
| 11 | | |
| (11 | ) | |
| - | | |
| - | |
Vesting of Restricted Stock | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| 110,562 | | |
| 11 | | |
| (11 | ) | |
| - | | |
| - | |
Net Loss | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| - | | |
| | | |
| (5,974,448 | ) | |
| (5,974,448 | ) |
Balance, June 30, 2022 | |
| 8 | | |
$ | - | | |
| 1,234 | | |
$ | - | | |
| 50 | | |
$ | - | | |
| 37,020,518 | | |
$ | 3,702 | | |
$ | 132,575,805 | | |
$ | (68,787,339 | ) | |
$ | 63,792,168 | |
Balance, value | |
| 8 | | |
$ | - | | |
| 1,234 | | |
$ | - | | |
| 50 | | |
$ | - | | |
| 37,020,518 | | |
$ | 3,702 | | |
$ | 132,575,805 | | |
$ | (68,787,339 | ) | |
$ | 63,792,168 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
| 1 | | |
| 2 | |
| |
Six Months Ended | |
| |
June 30, | |
| |
2023 | | |
2022 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
| $
(11,479,002 | ) | |
$ | (10,553,108 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 452,848 | | |
| 257,791 | |
Loss on disposal of fixed asset | |
| 11,666 | | |
| - | |
Stock-based compensation | |
| 508,869 | | |
| 591,663 | |
Amortization of right-of-use asset | |
| 81,524 | | |
| 118,092 | |
Bad debt expense | |
| 292,010 | | |
| 2,069 | |
Unrealized (gain) loss on marketable securities | |
| (198,215 | ) | |
| 35,580 | |
Realized (gain) on marketable securities | |
| (73,193 | ) | |
| - | |
Impairment of inventory and prepaid | |
| - | | |
| 1,938,386 | |
Change in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 113,906 | | |
| (955,609 | ) |
Inventory | |
| (2,079,590 | ) | |
| 325,282 | |
Prepaid expenses and other current assets | |
| (1,790,987 | ) | |
| (785,762 | ) |
Accounts payable | |
| (405,979 | ) | |
| 164,809 | |
Accrued expenses | |
| (234,155 | ) | |
| (838,304 | ) |
Lease obligations - operating leases | |
| (93,181 | ) | |
| (132,403 | ) |
Net cash used in operating activities | |
| (14,893,479 | ) | |
| (9,831,514 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase of property and equipment | |
| (1,271,311 | ) | |
| (414,197 | ) |
Purchase of intangible assets | |
| (18,703 | ) | |
| (17,500 | ) |
Net cash used in investing activities | |
| (10,633,818 | ) | |
| (18,438,183 | ) |
| |
| | | |
| | |
Net change in cash | |
| (25,527,297 | ) | |
| (28,269,697 | ) |
| |
| | | |
| | |
Cash, beginning of period | |
| 39,096,562 | | |
| 69,160,466 | |
| |
| | | |
| | |
Cash, end of period | |
$ | 13,569,265 | | |
$ | 40,890,769 | |
| |
| | | |
| | |
Supplemental disclosure of cash and non-cash transactions: | |
| | | |
| | |
Accrued Fixed Assets | |
$ | 194,335 | | |
$ | - | |
Restricted Stock issued, previously accrued | |
$ | - | | |
$ | 329,381 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS
AYRO,
Inc. (“AYRO” or the “Company”), a Delaware corporation formerly known as DropCar, Inc. (“DropCar”),
a corporation headquartered outside Austin, Texas, is the merger successor discussed below of AYRO Operating Company, Inc. (“AYRO
Operating”), which was formed under the laws of the State of Texas on May 17, 2016 as Austin PRT Vehicle, Inc. and subsequently
changed its name to Austin EV, Inc. under an Amended and Restated Certificate of Formation filed with the State of Texas on March 9,
2017. On July 24, 2019, the Company changed its name to AYRO, Inc. and converted its corporate domicile to Delaware. The Company was
founded on the basis of promoting resource sustainability. The Company, and its wholly owned subsidiaries, are principally engaged in
manufacturing and sales of environmentally conscious, minimal-footprint electric vehicles. The all-electric vehicles are typically sold
both directly to customers and to dealers in the United States.
Strategic
Review
Following
the hiring of the Company’s current Chief Executive Officer in the third quarter of 2021, AYRO initiated a strategic review of
its product development strategy, as AYRO focused on creating value within the electric vehicle, last-mile delivery, smart payload and
enabling infrastructure markets. In connection with the strategic review by the Company, AYRO cancelled development of its planned next-generation
three-wheeled high-speed vehicle.
For
the past several years, AYRO’s primary supplier has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates
a large electric vehicle factory in the automotive district in Hangzhou, China. As a result of rising shipping costs, quality issues
with certain components and persistent delays, the Company ceased production of the AYRO 411x from Cenntro in September 2022 in order
to focus its resources on the development and launch of the new 411 fleet vehicle model year 2023 refresh (the “Vanish”).
In
December of 2021 the Company began research and development on the Vanish, including updates on its supply chain evolution, offshoring/onshoring
mix, manufacturing strategy, and annual model year refresh program.
NOTE
2. LIQUIDITY AND OTHER UNCERTAINTIES
Liquidity
and Other Uncertainties
The
unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles
in the United States (“GAAP”), which contemplates continuation of the Company as a going concern. The Company is subject
to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and products, the
difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, competition from larger
companies, other technology companies and other technologies. The Company has a limited operating history and the sales and income potential
of its business and market are unproven. The Company incurred net losses of $11,479,002 for the six months ended June 30, 2023, and negative
cash flows from operations of $14,893,479 for the six months ended June 30, 2023. On June 30, 2023, the Company had cash balances totaling
$13,569,265 and marketable securities of $19,464,015. In addition, overall working capital decreased by $12,013,869 during the six months
ended June 30, 2023. Management believes that the existing cash as of June 30, 2023, will be sufficient to fund operations for at least
the next twelve months following the issuance of these unaudited condensed consolidated financial statements. Additionally, on August 7, 2023, the Company entered into a Securities Purchase Agreement to which it agreed to sell
to certain existing investors (the “Investors”) an aggregate of 22,000 shares of the Company’s newly designated Series
H-7 convertible preferred stock with a stated value of $1,000 per share (“Series H-7 Preferred Stock”). The Company raised
approximately $22 million from the sale, which closed on August 10, 2023.
The
Company may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials, including lithium-ion
battery cells, semiconductors, and integrated circuits. Any such increase or supply interruption could materially and negatively impact
the business, prospects, financial condition, and operating results. Currently, the Company is experiencing supply chain shortages, including
with respect to lithium-ion battery cells, integrated circuits, vehicle control chips, and displays. Certain production-ready components
may be delayed in shipment to Company facilities which has and may continue to cause delays in validation and testing for these components,
which would in turn create a delay in the availability of saleable vehicles.
The
Company uses various raw materials, including aluminum, steel, carbon fiber, non-ferrous metals (such as copper), and cobalt. The prices
for these raw materials fluctuate depending on market conditions, and global demand and could adversely affect business and operating
results. For instance, the Company is exposed to multiple risks relating to price fluctuations for lithium-ion cells. These risks include:
|
● |
the
inability or unwillingness of current battery manufacturers to build or operate battery cell
manufacturing plants to supply the numbers of lithium-ion cells required to support the growth
of the electric vehicle industry as demand for such cells increases;
|
|
● |
disruption
in the supply of cells due to quality issues or recalls by the battery cell manufacturers;
and
|
|
● |
an
increase in the cost of raw materials, such as cobalt, used in lithium-ion cells. |
Any
disruption in the supply of lithium-ion battery cells, semiconductors, or integrated circuits could temporarily disrupt production of
the Company’s vehicles until a different supplier is fully qualified. Moreover, battery cell manufacturers may refuse to supply
electric vehicle manufacturers if they determine that the vehicles are not sufficiently safe. Furthermore, fluctuations or shortages
in petroleum and other economic conditions may cause the Company to experience significant increases in freight charges and raw material
costs. Substantial increases in the prices for our raw materials would increase operating costs and could reduce our margins if the increased
costs cannot be recouped through increased electric vehicle prices. There can be no assurance that the Company will be able to recoup
the increasing costs of raw materials by increasing vehicle prices.
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.
On
October 3, 2022, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market
(“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the 30 consecutive
business day period between August 19, 2022 and September 30, 2022, the Company did not meet the minimum bid price of $1.00 per
share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid
Price Requirement”). The letter also indicated that the Company will be provided with a compliance period of 180 calendar
days, or until April 3, 2023 (the “Initial Compliance Period”), in which to regain compliance pursuant to Nasdaq Listing
Rule 5810(c)(3)(A).
On
April 4, 2023, the Company received a letter from Nasdaq notifying the Company that the Company has been granted an additional 180-day
period, or until October 2, 2023, to regain compliance with the Minimum Bid Price Requirement. The new compliance period is an extension
of the Initial Compliance Period provided for in Nasdaq’s deficiency notice to the Company dated October 3, 2022. Nasdaq’s
determination was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other
applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and
the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse
stock split, if necessary.
Management’s
plan to regain compliance with the Minimum Bid Price Requirement is to seek stockholder approval for, and to file, an amendment to
the Company’s amended and restated certificate of incorporation (“Certificate of Incorporation”) to effect a
reverse stock split of the Company’s common stock at a ratio of 1-for-2 to 1-for-10 with the exact ratio within such range to be determined by the Company’s board of directors at its discretion
(the “Reverse Stock Split Amendment”). On August 8, 2023, the Company filed a preliminary proxy statement in connection
with a special meeting of the Company’s stockholders to be held on September 14, 2023 for the purpose of approving, among
other things, the Reverse Stock Split Amendment.
If
compliance with the Minimum Bid Price Requirement cannot be demonstrated by October 2, 2023, Nasdaq will provide written notification
that the Company’s common stock could be delisted. In such an event, Nasdaq rules permit the Company to appeal any delisting determination
to a Nasdaq Hearings Panel. Accordingly, there can be no assurance that the Company will be able to regain compliance with the Nasdaq
listing rules or maintain its listing on Nasdaq.
NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
unaudited condensed consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiary in
conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conformity with
the instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission
(“SEC”).
The
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated
financial statements reflect all adjustments consisting of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of such statements. The results of operations for the three and six months ended June 30, 2023,
are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the
fiscal year ended December 31, 2022, which are included in the Company’s Annual Report on Form 10-K, filed with the SEC on
March 23, 2023, as amended on May 1, 2023.
Use
of Estimates
The
preparation of the unaudited condensed 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 unaudited consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.
The
Company’s most significant estimates include marketable securities, revenue recognition, and the measurement of stock-based compensation
expenses. Actual results could differ from these estimates.
Marketable
Securities
Marketable
securities include investment in fixed income bonds and U.S. Treasury securities that are considered to be highly liquid and easily tradeable.
The marketable securities are considered trading securities and are measured at fair value and are accounted for in accordance with ASC
320. The marketable securities are valued using inputs observable in active markets for identical securities and are therefore classified
as Level 1 within the Company’s fair value hierarchy. The Company held $19,464,015 and $9,848,804 in marketable securities as of
June 30, 2023 and December 31, 2022, respectively.
Revenue
Recognition
The
Company recognizes 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 the Company satisfies a performance obligation.
Nature
of goods and services
The
following is a description of the Company’s products and services from which the Company generates revenue, as well as the nature,
timing of satisfaction of performance obligations, and significant payment terms for each:
Product
revenue
Product
revenue from customer contracts is recognized on the sale of each electric vehicle as vehicles are shipped to customers. The majority
of the Company’s vehicle sales orders generally have only one performance obligation: sale and delivery of complete vehicles. Ownership
and risk of loss transfers to the customer based on FOB shipping point and freight charges are the responsibility of the customer. Revenue
is typically recognized at the point control transfers or in accordance with payment terms customary to the business. The Company provides
product warranties to assure that the product assembly complies with agreed upon specifications. The Company’s product warranty
is similar in all material respects to the product warranties provided by the Company’s suppliers, therefore minimizing the warranty
liability to the standard labor rates associated with the defective part replacement. Customers do not have the option to purchase a
warranty separately; as such, warranty is not accounted for as a separate performance obligation. The Company’s policy is to exclude
taxes collected from a customer from the transaction price of automotive contracts.
Shipping
revenue
Amounts
billed to customers related to shipping and handling are classified as shipping revenue. The Company has elected to recognize the cost
for freight and shipping when control over vehicles has transferred to the customer as an operating expense. The Company has reported
shipping expenses of $20,768 and $145,496 for the three months ended June 30, 2023, and 2022 and $41,334 and $256,045 for the six months
ended June 30, 2023 and 2022 respectively, included in General and Administrative Expenses.
Services
and other revenue
Services
and other revenue consist of non-warranty after-sales vehicle services. Revenue is typically recognized at a point in time when services
and replacement parts are provided.
Miscellaneous
income
Miscellaneous
income consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer
receivable balance. This revenue is earned when a customer’s receivable balance becomes delinquent, and its collection is reasonably
assured and is calculated using a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. The
Company recognizes all employee and non-employee share-based compensation as an expense in the financial statements on a straight-line
basis over the requisite service period, based on the terms of the awards. Equity-classified awards principally related to stock options,
restricted stock awards (“RSAs”) and equity-based compensation, are measured at the grant date fair value of the award. The
Company determines grant date fair value of stock option awards using the Black-Scholes option-pricing model. The fair value of RSAs
is determined using the closing price of the Company’s common stock on the grant date. For service based vesting grants, expense
is recognized ratably over the requisite service period based on the number of options or shares. For value-based vesting grants, expense
is recognized via straight line expense over the expected period per grant as determined by outside valuation experts. Stock-based compensation
is reversed for forfeitures in the period of forfeiture.
The
Company estimates the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model.
Key inputs and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected
term, the risk-free interest rate over the expected term, the expected annual dividend yield and the expected stock price volatility.
The expected volatility is based on a combination of the historical and implied volatility of the Company’s publicly traded, near-the-money
stock options, and the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the
U.S. Treasury yield curve in effect at the time of grant and, since the Company does not currently pay or plan to pay a dividend on its
common stock, the expected dividend yield was zero.
Stock
options and warrants issued as compensation for services provided to the Company 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 is the same for periods with a net loss.
The
following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they
would be anti-dilutive:
The
following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they
would be anti-dilutive:
SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Options to purchase common stock | |
| 732,422 | | |
| 788,546 | | |
| 732,422 | | |
| 788,546 | |
Restricted stock unvested | |
| 1,120,502 | | |
| 781,686 | | |
| 1,120,502 | | |
| 781,686 | |
Restricted stock vested - unissued | |
| 6,269 | | |
| - | | |
| 6,269 | | |
| - | |
Warrants outstanding | |
| 5,969,595 | | |
| 6,106,023 | | |
| 5,969,595 | | |
| 6,106,023 | |
Preferred stock outstanding | |
| 2,475 | | |
| 2,475 | | |
| 2,475 | | |
| 2,475 | |
Total | |
| 7,831,263 | | |
| 7,678,730 | | |
| 7,831,263 | | |
| 7,678,730 | |
NOTE
4. REVENUES
Disaggregation
of Revenue
Revenue
by type was as follows:
SCHEDULE OF DISAGGREGATION OF REVENUE
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Revenue type | |
| | | |
| | | |
| | | |
| | |
Product revenue | |
$ | 127,106 | | |
$ | 918,808 | | |
$ | 247,388 | | |
$ | 1,838,150 | |
Shipping revenue | |
| 12,438 | | |
| 22,752 | | |
| (4,150 | ) | |
| 130,255 | |
Miscellaneous income | |
| - | | |
| 40,000 | | |
| 9,390 | | |
| 40,000 | |
Total Revenue | |
$ | 139,544 | | |
$ | 981,560 | | |
$ | 252,628 | | |
$ | 2,008,405 | |
Warranty
Reserve
The
Company records a reserve for warranty repairs upon the initial delivery of vehicles to its dealer network. The Company provides a product
warranty on each vehicle including powertrain, battery pack and electronics package. Such warranty matches the product warranty provided
by its supply chain for warranty parts for all unaltered vehicles and is not considered a separate performance obligation. The supply
chain warranty does not cover warranty-based labor needed to replace a part under warranty. Warranty reserves include management’s
best estimate of the projected cost of labor to repair/replace all items under warranty. The Company reserves a percentage of all dealer-based
sales to cover an industry-standard warranty fund to support dealer labor warranty repairs. Such percentage is recorded as a component
of cost of revenues in the statement of operations. As of June 30, 2023, and December 31, 2022, warranty reserves were recorded within
accrued expenses of $395,071 and $410,017, respectively.
NOTE
5. ACCOUNTS RECEIVABLE, NET
Accounts
receivable, net, consists of amounts due from invoiced customers and product deliveries and were as follows:
SCHEDULE OF ACCOUNTS RECEIVABLE
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Trade receivables | |
$ | 104,155 | | |
$ | 512,420 | |
Less: Allowance for doubtful accounts | |
| - | | |
| (2,349 | ) |
Accounts receivable, net | |
$ | 104,155 | | |
$ | 510,071 | |
The
Company reduced allowance for doubtful accounts by $2,349
for the three and six months ended June 30, 2023, and recorded $292,010
of bad debt expense due to direct write off balances due from Club Car, LLC (“Club Car”) for the six months ended June 30, 2023. The Company recorded $2,069 of bad debt expense for the three and six months ending June 30, 2022.
NOTE
6. INVENTORY
Inventory
consisted of the following:
SCHEDULE OF INVENTORY
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Raw materials | |
$ | 2,481,859 | | |
$ | 330,931 | |
Work-in-progress | |
| - | | |
| - | |
Finished goods | |
| 568,113 | | |
| 639,450 | |
Total | |
$ | 3,049,972 | | |
$ | 970,381 | |
For
the three months ended June 30, 2023 and 2022, depreciation for fleet inventory was $0 and $23,883, and for the six months ended June
30, 2023 and 2022, was $0 and $47,775 respectively.
NOTE
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Prepayments for inventory | |
$ | 2,603,057 | | |
$ | 1,174,466 | |
Prepayments for insurance | |
| 274,724 | | |
| 118,434 | |
Prepayments on advances on design | |
| 101,815 | | |
| 75,000 | |
Prepayments on software | |
| 190,333 | | |
| 103,851 | |
Prepaid other | |
| 99,902 | | |
| 7,094 | |
Total Prepaid Expenses and Other Current Assets | |
$ | 3,269,831 | | |
$ | 1,478,845 | |
NOTE
8. PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Computer and equipment | |
$ | 3,211,535 | | |
$ | 1,970,001 | |
Furniture and fixtures | |
| 395,705 | | |
| 323,789 | |
Lease improvements | |
| 1,093,481 | | |
| 952,952 | |
Computer software | |
| 455,875 | | |
| 455,875 | |
Property and equipment, gross | |
| 5,156,596 | | |
| 3,702,617 | |
Less: Accumulated depreciation | |
| (1,955,336 | ) | |
| (1,510,280 | ) |
Property and equipment, net | |
$ | 3,201,260 | | |
$ | 2,192,337 | |
Depreciation
expense for the three months ended June 30, 2023 and 2022 was $254,160
and $98,913, and for
the six months ended June 30, 2023 and 2022 was $444,966
and $183,405,
respectively. The company recorded a loss on disposal for fixed assets of $11,666 for the three and six months ending June 30,
2023.
NOTE
9. ACCRUED EXPENSES
SCHEDULE
OF ACCRUED EXPENSES
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Accrued professional and consulting fees | |
$ | 122,964 | | |
$ | 410,711 | |
Accrued payroll | |
| 392,079 | | |
| 6,000 | |
Accrued warranty reserve | |
| 395,071 | | |
| 410,017 | |
Accrued expenses other | |
| - | | |
| 138,209 | |
Total accrued expenses | |
$ | 910,114 | | |
$ | 964,937 | |
NOTE
10. STOCKHOLDERS’ EQUITY
Restricted
Stock
On February 1, 2023, pursuant to the AYRO, Inc. 2020 Long-Term Incentive
Plan, the Company granted 760,668 shares of restricted stock to non-executive directors at a value of $0.75 per share. During the six months ended June 30, 2023
183,897 were vested and an equal number of shares of common stock were issued.
On
February 1, 2022, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company issued 442,249 shares of restricted stock to
non-executive directors at a value of $1.29 per share. As of December 31, 2022, 110,562 shares of common stock remained unissued; these
shares were issued during the six months ended June 30, 2023.
On
February 24, 2021, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company issued 172,000 shares of restricted stock to
non-executive directors at a value of $7.66 per share. As of December 31, 2021, 43,000 shares of common stock remained unissued; these
shares were issued during the six months ended June 30, 2022.
Series
H Convertible Preferred Stock
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H Preferred Stock outstanding as of June 30, 2023 | |
| 8 | |
Multiplied by the stated value | |
$ | 154 | |
Equals the gross stated value | |
$ | 1,232 | |
Divided by the conversion price | |
$ | 184.8 | |
Equals the convertible shares of Company Common Stock | |
| 7 | |
Multiplied by the fair market value of Company Common Stock as of June 30, 2023 | |
$ | 0.68 | |
Equals the payment | |
$ | 5 | |
Series
H-3 Convertible Preferred Stock
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H-3 Preferred Stock outstanding as of June 30, 2023 | |
| 1,234 | |
Multiplied by the stated value | |
$ | 138 | |
Equals the gross stated value | |
$ | 170,292 | |
Divided by the conversion price | |
$ | 165.6 | |
Equals the convertible shares of Company Common Stock | |
| 1,028 | |
Multiplied by the fair market value of Company Common Stock as of June 30, 2023 | |
$ | 0.68 | |
Equals the payment | |
$ | 699 | |
Series
H-6 Convertible Preferred Stock
SCHEDULE OF PAYMENT OF PREFERRED STOCK
| |
| | |
Number of Series H-6 Preferred Stock outstanding as of June 30, 2023 | |
| 50 | |
Number of Series H Preferred Stock outstanding as of June 30, 2023 | |
| 50 | |
Multiplied by the stated value | |
$ | 72 | |
Equals the gross stated value | |
$ | 3,600 | |
Divided by the conversion price | |
$ | 2.5 | |
Equals the convertible shares of Company Common Stock | |
| 1,440 | |
Multiplied by the fair market value of Company Common Stock as of June 30, 2023 | |
$ | 0.68 | |
Equals the payment | |
$ | 979 | |
Warrants
A
summary of the Company’s warrants to purchase common stock activity is as follows:
SCHEDULE OF WARRANT ACTIVITY
| |
| | |
| | |
Weighted Average | |
| |
Shares Underlying | | |
Weighted Average | | |
Remaining Contractual Term | |
| |
Warrants | | |
Exercise Price | | |
(in years) | |
Outstanding at December 31, 2022 | |
| 6,106,023 | | |
$ | 7.30 | | |
| 1.32 | |
Granted | |
| - | | |
| - | | |
| | |
Exercised | |
| - | | |
| - | | |
| | |
Expired | |
| (136,428 | ) | |
| 9.60 | | |
| | |
Outstanding at June 30, 2023 | |
| 5,969,595 | | |
$ | 7.25 | | |
| 0.84 | |
NOTE
11. STOCK-BASED COMPENSATION
AYRO
2020 Long Term Incentive Plan
The
Company has reserved a total of 4,089,650 shares of its common stock pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, including
shares of restricted stock that have been issued. The Company has 443,732 stock options, restricted stock and warrants remaining under
this plan as of June 30, 2023.
Stock-based
compensation, including restricted stock awards and stock options is included in the unaudited condensed consolidated statement of operations
as follows:
SCHEDULE OF STOCK-BASED COMPENSATION
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Research and development | |
$ | 5,034 | | |
$ | (6,904 | ) | |
$ | 11,798 | | |
$ | 9,800 | |
Sales and marketing | |
| (435 | ) | |
| 870 | | |
| 5,489 | | |
| 13,815 | |
General and administrative | |
| 237,532 | | |
| 309,587 | | |
| 491,582 | | |
| 568,048 | |
Total | |
$ | 242,131 | | |
$ | 303,553 | | |
$ | 508,869 | | |
$ | 591,663 | |
Options
The
following table reflects a summary of stock option activity:
SUMMARY
OF STOCK-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY
| |
| | |
Weighted Average | | |
Contractual Life | |
| |
Number of Shares | | |
Exercise Price | | |
(Years) | |
Outstanding at December 31, 2022 | |
| 777,922 | | |
$ | 6.15 | | |
| 7.56 | |
Forfeitures | |
| (45,500 | ) | |
| 0.97 | | |
| | |
Outstanding at June 30, 2023 | |
| 732,422 | | |
$ | 6.47 | | |
| 7.10 | |
Of
the outstanding options, 654,937 were vested and exercisable as of June 30, 2023. At June 30, 2023 the aggregate intrinsic value of stock
options vested and exercisable was $0.
The
Company recognized $11,417 and $(6,298) of stock option expense for the three months ended June 30, 2023 and 2022, and $31,533 and $26,078
for the six months ended June 30, 2023 and June 30, 2022, respectively. Total compensation cost related to non-vested stock option awards
not yet recognized as of June 30, 2023 was $69,823 and will be recognized on a straight-line
basis through the end of the vesting periods through April 2025. The amount of future stock option compensation expense could be affected
by any future option grants or by any forfeitures.
Restricted
Stock
SCHEDULE OF RESTRICTED STOCK ACTIVITY
| |
| | |
Weighted | |
| |
Number of | | |
Average Grant | |
| |
Shares | | |
Price | |
Outstanding at December 31, 2022 | |
| 660,562 | | |
$ | 1.91 | |
Granted | |
| 760,668 | | |
| 0.75 | |
Vested | |
| (300,728 | ) | |
| 0.95 | |
Outstanding at June 30, 2023 | |
| 1,120,502 | | |
$ | 1.38 | |
On
February 1, 2023, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company granted 760,668
shares of restricted stock to non-executive directors at a value of $0.75
per share. There are 6,269
vested and unissued shares of restricted stock awards as of June 30, 2023. As of June 30, 2023 570,502 shares of restricted stock remain unvested and unissued.
The
Company recognized compensation expense related to all restricted stock during the three months ended June 30, 2023, and 2022 of $230,713
and $309,850 and for the six months ended June 30, 2023 and 2022 $477,335 and $565,585, respectively. Total compensation cost related
to non-vested restricted stock not yet recognized as of June 30, 2023, was $428,473.
NOTE
12. CONCENTRATIONS AND CREDIT RISK
Revenues
One
customer accounted for approximately 46%
of the Company’s revenues for the three months ended June 30, 2023 and another customer accounted for 35%. Club Car accounted
for approximately 89%
and another customer 10%
of the Company’s revenues for the three months ended June 30, 2022. Three customers accounted for approximately 42%,
25%, and 20%
of the Company’s revenues for the six months ended June 30, 2023, respectively. Club Car accounted for approximately 95%
of the Company’s revenues for the six months ended June 30, 2022. We do not expect Club Car to remain a customer going
forward.
Accounts
Receivable
As
of June 30, 2023, two customers accounted for 61% and 39%, respectively, of the Company’s net accounts receivable. As of December
31, 2022, Club Car accounted for 100% of the Company’s net accounts receivable.
Purchasing
The
Company places orders with various suppliers. No suppliers accounted for more than 10% of the Company’s raw materials
purchased for the three months ended June 30, 2023. During the six months ended June 30, 2023, two suppliers accounted for more than
10% of the Company’s raw materials, one supplier accounted for 15%
the other 13%.
During the six months ended June 30, 2022, two suppliers accounted for accounted for more than 10% of the Company’s raw
materials. One supplier accounted for 61%
and the other 13%.
The Company’s purchases of raw materials from one supplier was approximately 43%
and 9%
of its total purchases of raw materials for the three months ended June 30, 2022.
NOTE
13. COMMITMENTS AND CONTINGENCIES
Manufacturing
Agreements
On
July 28, 2022, the Company partnered with Linamar Corporation (“Linamar”) a Canadian manufacturer, in a manufacturing agreement
(the “Linamar MLA”) to provide certain sub assembly and assembly parts, including the cabin frame and skate for the Vanish
(collectively, the “Products”). During the term of the Linamar MLA, Linamar has the exclusive right to supply the Products
to the Company, subject to certain exceptions. The Linamar MLA has an initial term of three years and will automatically renew for successive
two-year terms unless either party has given at least 12 months’ written notice of nonrenewal. Either party may terminate the Linamar
MLA at any time upon 12 months’ written notice, and in the event of a change in control of the Company prior to the end of the
initial term, the Company may terminate upon written notice within three days of completion of such change in control.
In
the event the Company terminates the Linamar MLA prior to its expiration, whether following a change in control or otherwise, the Company
must purchase any remaining raw material inventory, finished goods inventory and work in progress and any unamortized capital equipment
used in production and testing of the Products and pay a termination fee of $750,000, subject to certain adjustments. The Company is
dependent on the Linamar MLA, and in the event of its termination the Company’s manufacturing operations and customer deliveries
would be materially impacted.
Supply
Chain Agreements
In
2017, the Company executed a supply chain contract with Cenntro, which has historically been the Company’s primary supplier. Cenntro
was previously a significant stockholder in AYRO Operating. Cenntro owns the design of the AYRO 411 Fleet vehicles and has granted the
Company an exclusive license to purchase the AYRO 411 Fleet vehicles for sale in North America. The Company purchased 100% of its vehicle
chassis, cabs and wheels for AYRO 411 Fleet Vehicles through this supply chain relationship with Cenntro. The Company must sell a minimum
number of units in order to maintain its exclusive supply chain contract.
As
of December 31, 2021, the net balance between prepaid expenses and accrued expenses with Cenntro was a prepaid balance of $602,016.
As of December 31, 2022, the balance was zero.
Impairments of prepaid expenses led to a write-down, netted with the balance in accrued expenses. The remainder of the balance was
expensed through cost of goods sold for $621,097.
Additionally, all inventory associated with Cenntro’s lithium-ion line NCM line was written off to cost of goods sold for
$1,317,289.
The
Company has canceled all purchase orders and future builds with Cenntro and currently intends to only order replacement parts from Cenntro
in the future.
Litigation
The
Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business,
that it believes are incidental to the operation of its business. While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations,
financial positions or cash flows.
On
March 23, 2018, DropCar was made aware of an audit being conducted by the New York State Department of Labor (“DOL”) regarding
a claim filed by an employee. The DOL is investigating whether DropCar properly paid overtime for which DropCar has raised several defenses.
In addition, the DOL is conducting its audit to determine whether the Company owes spread of hours pay (non-exempt worker whose workday
is longer than ten hours must receive an extra hour of pay at the basic minimum hourly rate). Management believes the case has no merit.
DropCar
was audited by the New York State Department of Taxation and Finance (“DOTF”) for its sales tax paid over the period of 2017
– 2020. The DOTF believes DropCar owes additional sales tax plus interest. Management is investigating the details this audit.
As of December 31, 2021, the Company has accrued $476,280 in expense for such additional sales tax and interest and paid as of December
31, 2022.
NOTE 14. SUBSEQUENT EVENTS
On June
15, 2023, a certain lease agreement commenced for the purpose of expanding AYRO operations into Florida. The agreement called for the leased
premises to provide general systems and equipment to be available in working order. The said premises ultimately failed to meet the working
order provision, and all parties agreed to terminate the said lease. Thus, the lease for the Florida expansion premises was terminated
on July 28, 2023, amicably, by all parties. Remaining obligations for this lease are de minimis.
On August
7, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with the Investors,
pursuant to which it agreed to sell to the Investors (i) an aggregate of 22,000
shares of Series H-7 Preferred Stock, initially convertible into up to 22,000,000
shares of the Company’s common stock at a conversion price of $1.00
per share, and (ii) warrants to acquire up to an aggregate of 22,000,000
shares of common stock at an exercise price of $1.00
per share (the “Warrants, and such transactions collectively, the “Private Placement”).
The
closing of the Private Placement occurred on August 10, 2023. The aggregate gross proceeds from the Private Placement were approximately $22 million. The Company expects to use the net
proceeds from the Private Placement for general corporate purposes.
The
Purchase Agreement contains certain representations and warranties, covenants, and indemnities customary for similar transactions. The
representations, warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the
Purchase Agreement and may be subject to limitations agreed upon by the contracting parties.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 “Cautionary Note Regarding Forward-Looking Statements.”
References
in this management’s discussion and analysis to “we,” “us,” “our,” “the Company,”
“our Company,” or “AYRO” refer to AYRO, Inc. and its subsidiaries.
Cautionary
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking
terms such as “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,”
“expects,” “forecasts,” “guides,” “intends,” “is confident that,” “may,”
“plans,” “seeks,” “projects,” “targets,” “would” and “will” or
the negative of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, but
are not limited to, future financial and operating results, the company’s plans, objectives, expectations and intentions, statements
concerning the strategic review of our product development strategy, the development and launch of the AYRO Vanish (the “Vanish”) and other statements that
are not historical facts. We have based these forward-looking statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking
statements speak only as of the date of this Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could
cause actual results to differ materially from our historical experience and our present expectations, or projections described under
the sections in this Form 10-Q and our other reports filed with the SEC titled “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
A
summary of the principal risk factors that make investing in our securities risky and might cause our actual results to differ materially
from those projected in these forward-looking statements is set forth below. If any of the following risks occur, our business, financial
condition, results of operations, cash flows, cash available for distribution, ability to service our debt obligations and prospects
could be materially and adversely affected.
● |
we
may be acquired by a third party; |
|
|
● |
we
have a history of losses and have never been profitable, and we expect to incur additional losses in the future and may never be
profitable; |
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|
● |
our
failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a delisting of our common stock; |
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● |
a
significant portion of our revenues has historically been derived from Club Car pursuant to the MPA. Following our termination of
the MPA, our sales could decrease significantly, and we will need to identify new strategic channel partners to support the sales
of our vehicles; |
|
|
● |
holders of our Series H-7 convertible preferred stock with a stated value
of $1,000 per share (“Series H-7 Preferred Stock”) are entitled to certain payments that may be paid in cash or in shares
of common stock depending on the circumstances, if we make these payments in cash, we may be required to expend a substantial portion
of our cash resources, and if we make these payments in common stock, it may result in substantial dilution to the holders of our common
stock; |
|
|
● |
the certificate of designations for the Series H-7 Preferred Stock and
the warrants issued concurrently therewith contain anti-dilution provisions that may result in the reduction of the conversion price of
the Series H-7 Preferred Stock or the exercise price of such warrants in the future. These features may increase the number of shares
of common stock being issuable upon conversion of the Series H-7 Preferred Stock or upon the exercise of the warrants; |
|
|
● |
under the Purchase Agreement (as defined below) we are subject to certain
restrictive covenants that may make it difficult to procure additional financing; |
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● |
if we do not receive approval from our stockholders, we will be unable
to pay amounts due to the holders of the Series H-7 Preferred Shares in shares of common stock and we will be required to pay such amounts
in cash, which may force us to divert cash from other uses; |
● |
we
rely on a single third-party supplier and manufacturer located in Canada for certain sub-assembly and assembly parts for the Vanish
and any disruption in the operations of this third-party supplier could adversely affect our business and results of operations; |
|
|
● |
if
we lose our exclusive license to manufacture the AYRO 411x model in North America, Cenntro could sell identical or similar products
through other companies or directly to our customers; |
|
|
● |
we
may be unable to replace lost manufacturing capacity on a timely and cost-effective basis, which could adversely impact our operations
and ability to meet delivery timelines; |
|
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● |
we
may experience delays in the development and introduction of new products; |
|
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● |
the
market for our products is developing and may not develop as expected; |
|
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● |
we
are currently evaluating our product development strategy, which may result in significant changes and have a material impact on
our business, results of operations and financial condition; |
|
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● |
our
business is subject to general economic and market conditions, including trade wars and tariffs; |
|
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● |
if
disruptions in our transportation network continue to occur or our shipping costs continue to increase, we may be unable to sell
or timely deliver our products, and our gross margin could decrease; |
|
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● |
our
limited operating history makes evaluating our business and future prospects difficult and may increase the risk of any investment
in our securities; |
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● |
if
we are unable to effectively implement or manage our growth strategy, our operating results and financial condition could be materially
and adversely affected; |
|
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● |
developments
in alternative technologies or improvements in the internal combustion engine may have a materially adverse effect on the demand
for our electric vehicles; |
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● |
the
markets in which we operate are highly competitive, and we may not be successful in competing in these industries; |
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● |
our
future growth depends on customers’ willingness to adopt electric vehicles; |
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● |
we
may experience lower-than-anticipated market acceptance of our current models and the vehicles in development; |
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● |
if
we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and
our reputation may be damaged; |
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● |
if
we fail to include key feature sets relative to the target markets for our electric vehicles, our business will be harmed; |
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● |
unanticipated
changes in industry standards could render our vehicles incompatible with such standards and adversely affect our business; |
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● |
our
future success depends on our ability to identify additional market opportunities and develop and successfully introduce new and
enhanced products that address such markets and meet the needs of customers in such markets; |
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● |
unforeseen
or recurring operational problems at our facilities, or a catastrophic loss of our manufacturing facilities, may cause significant
lost or delayed production and adversely affect our results of operations; |
● |
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; |
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● |
if
our vehicles fail to perform as expected due to defects, our ability to develop, market and sell our electric vehicles could be seriously
harmed; |
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we
depend on key personnel to operate our business, and the loss of one or more members of our management team, or our failure to attract,
integrate and retain other highly qualified personnel in the future, could harm our business; |
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● |
transitioning
from an offshoring to an onshoring business model carries risk; |
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● |
we
currently have limited electric vehicles marketing and sales experience, and if we are unable to establish sales and marketing capabilities
or enter into dealer agreements to market and sell our vehicles, we may be unable to generate any revenue; |
|
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● |
failure
to maintain the strength and value of our brand could have a material adverse effect on our business, financial condition, and results
of operations; |
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● |
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; |
|
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● |
an
unexpected change in failure rates of our products could have a material adverse impact on our business, financial condition, and
operating results; |
● |
increases
in costs, disruption of supply or shortage of raw materials, in particular lithium-ion battery cells, chipsets and displays, could
harm our business; |
|
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● |
customer
financing and insuring our vehicles may prove difficult because retail lenders are unfamiliar with our vehicles and our vehicles
have a limited loss history determining residual values within the insurance industry; |
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● |
our
electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been
observed to catch fire or vent smoke and flames; |
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● |
our
business may be adversely affected by labor and union activities; |
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● |
we
rely on our dealers for the service of our vehicles and have limited experience servicing our vehicles, and if we are unable to address
the service requirements of our future customers, our business will be materially and adversely affected; |
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● |
if
we fail to deliver vehicles and accessories to market as scheduled, our business will be harmed; |
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● |
failure
in our information technology and storage systems could significantly disrupt the operation of our business; |
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● |
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; |
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● |
our
long-term capital requirements are subject to numerous risks; |
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● |
we
may invest in or acquire other businesses, and our business may suffer if we are unable to successfully integrate acquired businesses
into our company or otherwise manage the growth associated with multiple acquisitions; |
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● |
increased
safety, emissions, fuel economy or other regulations may result in higher costs, cash expenditures, and/or sales restrictions; |
|
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● |
our
vehicles are subject to multi-jurisdictional motor vehicle standards; |
● |
we
may fail to comply with evolving environmental and safety laws and regulations; |
|
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● |
changes
in regulations could render our vehicles incompatible with federal, state, or local regulations, or use cases; |
|
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● |
unusual
or significant litigation, governmental investigations or adverse publicity arising out of alleged defects in our vehicles, or otherwise,
may derail our business; |
|
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● |
we
are required to comply with state-specific regulations regarding the sale of vehicles by a manufacturer; |
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● |
we
have identified a material weakness in our internal control over financial reporting, and if we are unable to remediate the material
weakness, or if we experience additional material weaknesses in the future, our business may be harmed; |
|
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● |
if
we are unable to adequately protect our proprietary designs and intellectual property rights, our competitive position could be harmed; |
|
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● |
we
may need to obtain rights to intellectual property from third parties in the future, and if we fail to obtain licenses or fail to
comply with our obligations in existing agreements under which we have licensed intellectual property and other rights from third
parties, we could lose our ability to manufacture our vehicles; |
|
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● |
many
of our proprietary designs are in digital form, and a breach of our computer systems could result in these designs being stolen; |
|
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● |
our
proprietary designs are susceptible to reverse engineering by our competitors; |
|
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● |
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; |
|
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● |
legal
proceedings or third-party claims of intellectual property infringement and other challenges may require us to spend substantial
time and money and could harm our business; |
|
|
● |
we
are generally obligated to indemnify our sales channel partners, customers, suppliers and contractors for certain expenses and liabilities
resulting from intellectual property infringement claims regarding our products, which could force us to incur substantial costs; |
|
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● |
we
are subject to exposure from changes in the exchange rates of local currencies; |
|
|
● |
we
are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing
requirements and subject us to liability if we are not in compliance with applicable laws. |
For
a more detailed discussion of these and other factors that may affect our business and that could cause our actual results to differ
materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part II, Item
1A of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K as filed with the SEC on March 23, 2023 and amended on
May 1, 2023 (“Form 10-K”). Any one or more of these uncertainties, risks and other influences could materially affect our
results of operations and whether forward-looking statements made by us ultimately prove to be accurate. We undertake no obligation to
publicly update or revise any forward-looking statements, whether from new information, future events or otherwise, except as required
by law.
Overview
We
design and manufacture compact, sustainable electric vehicles for closed campus mobility, low speed urban and community transport, local
on-demand and last mile delivery and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers,
including universities, business and medical campuses, last mile delivery services and food service providers. We are currently updating
our next model year (model year 2023) vehicle lineup in support of the aforementioned markets.
Strategic
Review
Following
the hiring of our current Chief Executive Officer in the third quarter of 2021, we initiated a strategic review of our product development
strategy, as we focus on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets.
In connection with our strategic review, we cancelled development of our planned next-generation three-wheeled high-speed vehicle.
For
the past several years, our primary supplier has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large
electric vehicle factory in the automotive district in Hangzhou, China. As a result of rising shipping costs, quality issues with certain
components and persistent delays, we ceased production of the AYRO 411x from Cenntro in September 2022 in order to focus our resources
on the development and launch of the new 411 fleet vehicle model year 2023 refresh, the Vanish. We began design and development of the
Vanish in December 2021, including updates to our supply chain, the offshoring/onshoring mix, our manufacturing strategy and our annual
model year refresh program. We unveiled the first Vanish prototype in the fourth quarter of 2022. Pre-production of the Vanish was completed
in December 2022.
Club
Car MPA Termination
The
majority of our sales have historically been comprised of sales to Club Car LLC (“Club Car”) pursuant to a master procurement
agreement (the “MPA”) entered into by and among AYRO Operating Company, Inc., our subsidiary (“AYRO Operating”),
and Club Car on March 5, 2019. The MPA grants Club Car the exclusive right to sell our 411 and 411x vehicles (the “AYRO 411 Fleet”)
in North America, provided that Club Car orders at least 500 vehicles per year. Club Car did not meet this volume threshold for 2020,
2021 or 2022. Pursuant to the MPA, AYRO Operating 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 delivery of an acquisition
notice to Club Car. AYRO Operating also agreed to collaborate with Club Car on new products similar to the AYRO 411 Fleet and improvements
to existing products and granted Club Car a right of first refusal to purchase similar commercial utility vehicles which AYRO Operating
may develop during the term of the MPA.
On
April 4, 2023, AYRO Operating delivered notice of termination of the MPA to Club Car, and we intend to replace Club Car with new business
partners for selling our products beginning with the Vanish. We do not expect Club Car to remain a customer going forward. In connection
with the termination of the MPA and the forthcoming introduction of the Vanish, we are reevaluating our channel strategy with an eye
towards distributing our next-generation platform and payloads in a manner that maximizes visibility, moderates channel costs, and creates
value. The loss of Club Car as a customer could have a material adverse effect on our sales, financial condition, and results of operations.
Nasdaq
Minimum Bid Price Requirement
As
previously reported, on October 3, 2022, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”)
indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period between August 19, 2022
and September 30, 2022, we did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital
Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The letter also indicated that the
Company would be provided with a compliance period of 180 calendar days, or until April 3, 2023 (the “Initial Compliance Period”),
in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).
On
April 4, 2023, we received a letter from Nasdaq notifying us that we had been granted an additional 180-day period, or until October
2, 2023, to regain compliance with the Minimum Bid Price Requirement. The new compliance period is an extension of the Initial Compliance
Period provided for in Nasdaq’s deficiency notice to the Company dated October 3, 2022. Nasdaq’s determination was based
on our meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial
listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and our written notice of our intention
to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
Management’s
plan to regain compliance with the Minimum Bid Price Requirement is to seek stockholder approval for, and to file, an amendment to our
amended and restated certificate of incorporation (“Certificate of Incorporation”) to effect a reverse stock split of our
common stock at a ratio of 1-for-2 to 1-for-10, including shares held by us as treasury shares, with the exact ratio within such range
to be determined by our board of directors at its discretion (the “Reverse Stock Split Amendment”). On August 8, 2023, we
filed a preliminary proxy statement in connection with a special meeting of our stockholders to be held on September 14, 2023 (the “Special
Meeting”) for the purpose of approving, among other things, the Reverse Stock Split Amendment.
If
compliance with the Minimum Bid Price Requirement cannot be demonstrated by October 2, 2023, Nasdaq will provide written notification
that our common stock could be delisted. In such an event, Nasdaq rules permit us to appeal any delisting determination to a Nasdaq Hearings
Panel. There can be no assurance that we will be able to regain compliance with the Nasdaq listing rules or maintain its listing on Nasdaq.
Products
Our
vehicles provide the end user an environmentally friendly alternative to internal combustion engine vehicles (cars powered by gasoline
or diesel oil), for light duty uses, including low-speed logistics, maintenance services, cargo services, and personal/group transport
in a quiet, zero emissions vehicle with a lower total cost of ownership.
Manufacturing
Agreement with Cenntro
In
2017, AYRO Operating partnered with Cenntro in a supply chain agreement to provide sub-assembly manufacturing services. Cenntro owns
the design of the AYRO Club Car 411 and 411x (“AYRO 411 Fleet”) vehicles and has granted us an exclusive license to purchase
the AYRO 411 Fleet vehicles for sale in North America.
Under
our Manufacturing License Agreement with Cenntro (the “Cenntro MLA”), in order for us to maintain our exclusive territorial
rights pursuant to the Cenntro MLA, we must meet certain minimum purchase requirements.
We
imported semi-knocked-down vehicle kits from Cenntro for the AYRO 411x models comprising our model year 2022 lineup. The vehicle kits
were received through shipping containers at the assembly facility of Karma Automotive LLC (“Karma”), our previous manufacturing
partner in southern California, as well as at our customization, service and integration facility in Round Rock, Texas. The vehicles
were then assembled with tailored customization requirements per order.
On
May 31, 2022, we received a letter from Cenntro purporting to terminate all agreements and contracts between the Company and Cenntro.
Although we do not believe Cenntro’s termination of the Cenntro MLA is valid, we have determined to cease production of the AYRO
411x and focus our resources on the development and launch of the Vanish. We have canceled all purchase orders and future builds with
Cenntro and currently intend to only order replacement parts for vehicles from Cenntro in the future. Cenntro inventory remaining on
hand as of June 30, 2023, was valued at $109,238. We expect to lose our exclusive license under the Cenntro MLA, in which case Cenntro
could sell identical or similar products through other companies or directly to our customers, which could have a material adverse effect
on our results of operations and financial condition.
We
intend for the new Vanish to utilize assemblies and products that will largely eliminate our dependency on Chinese imports and optimize
the supply chain to rely primarily upon North American and European sources. Final assembly of the Vanish will occur in our Round Rock,
Texas facilities.
Manufacturing
Agreement with Linamar
On
July 28, 2022, we partnered with Linamar Corporation (“Linamar”), a Canadian manufacturer, in a manufacturing agreement (the
“Linamar MLA”) to provide certain sub assembly and assembly parts, including the cabin frame and skate for the Vanish (collectively,
the “Products”). During the term of the Linamar MLA, Linamar has the exclusive right to supply the Products to the Company,
subject to certain exceptions. The Linamar MLA has an initial term of three years and will automatically renew for successive two-year
terms unless either party has given at least 12 months’ written notice of nonrenewal. Either party may terminate the Linamar MLA
at any time upon 12 months’ written notice, and in the event of a change in control of the Company prior to the end of the initial
term, we may terminate upon written notice within three days of completion of such change in control.
In
the event we terminate the Linamar MLA prior to its expiration, whether following a change in control or otherwise, we must purchase
any remaining raw material inventory, finished goods inventory, work in progress and any unamortized capital equipment used in production
and testing of the Products and pay a termination fee of $750,000, subject to certain adjustments. We are dependent on the Linamar MLA,
and in the event of its termination our manufacturing operations and customer deliveries would be materially impacted.
Under
the Linamar MLA, we must commit to certain minimum purchases, to be determined by AYRO on a quarterly basis.
We
import the Products from Linamar in Canada, and we manufacture and assemble the Vanish at our customization, service, and integration
facility in Round Rock, Texas. Over 98% of the vehicle assemblies, components, and products are from North American and European sources.
Supply
Agreement with Gallery Carts
During
2020, we entered into a supply agreement with Gallery Carts (“Gallery”), a leading provider of food and beverage kiosks,
carts, and mobile storefront solutions. Joint development efforts have led to the launch of the parties’ first all-electric configurable
mobile hospitality vehicle for “on-the-go” venues across the United States. This innovative solution permits food, beverage,
and merchandising operators to bring goods directly to consumers.
The
configurable Powered Vendor Box, in the rear of the vehicle, features long-life lithium batteries that power the preconfigured hot/cold
beverage and food equipment and is directly integrated with the AYRO 411x and will be directly integrated with the Vanish. 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 electric mobile delivery vehicles, as customers increasingly
want food, beverages and merchandise delivered to where they are gathering. For example, a recent study conducted by Technomic found
that a large majority of students, 77%, desired alternative mobile and to-go food options on campuses.
Gallery,
a premier distributor of AYRO vehicles, 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.
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 dealer network, we directed
our business development resources towards supporting Club Car’s enterprise and fleet sales function as Club Car proceeds in its
new product introduction initiatives. Substantially all of our sales have historically been to Club Car pursuant to the MPA. On April
4, 2023, we delivered notice of termination of the MPA to Club Car, and we intend to replace Club Car with new business partners for
selling our products beginning with the Vanish. We do not expect Club Car to remain a customer going forward.
Tariffs
Countervailing
tariffs on certain goods from China continued to have an adverse impact on raw material costs throughout 2021 and 2022.
Supply
Chain
Beginning
in the second quarter of 2021, we offered a configuration of our 411x powered by lithium-ion battery technology. Additionally, our powered
food box offerings are currently powered by lithium-ion battery technology. Our business depends on the continued supply of battery cells
and other parts for our vehicles. During 2021 and 2022, we at times experienced supply chain shortages of both lithium-ion battery cells
and other critical components used to produce our vehicles, which has slowed our planned production of vehicles. In addition, we could
be impacted by shortages of other products or raw materials, including silicon chips that we or our suppliers use in the production of
our vehicles or parts sourced for our vehicles.
We
intend for the Vanish to utilize assemblies and products that will eliminate our dependency on Chinese imports and optimize the supply
chain to North American and European sources.
Components
of Results of Operations
Revenue
We
derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts, and service fees. In the
past we also derived rental revenue from vehicle revenue sharing agreements with tourist destination fleet operators, and, to a lesser
extent, shipping, parts, and service fees. Provided that all other revenue recognition criteria have been met, we typically recognize
revenue upon shipment, as title and risk of loss are transferred to customers and channel partners at that time. Products are typically
shipped to dealers or directly to end customers, or in some cases to our international distributors. These international distributors
assist with import regulations, currency conversions and local language. Our vehicle product sales revenues vary from period to period
based on, among other things, the customer orders received and our ability to produce and deliver the ordered products. Customers often
specify requested delivery dates that coincide with their need for our vehicles.
Because
these customers may use our products in connection with a variety of projects of different sizes and durations, a customer’s orders
for one reporting period generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily
correlate amongst customers.
Cost
of Goods Sold
Cost
of goods sold primarily consists of costs of materials and personnel costs associated with manufacturing operations, and an accrual for
post-sale warranty claims. Personnel costs consist of wages and associated taxes and benefits. Cost of goods sold also includes freight
and changes to our warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect the cost of
revenue to increase in absolute dollars as product revenue increases.
Operating
Expenses
Our
operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related
costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating
expenses also include allocated overhead costs for facilities and utility costs.
Stock-based
compensation
We
account for stock-based compensation expense in accordance with Accounting Standards Codification (“ASC”) 718, Compensation—Stock
Compensation, which requires the measurement and recognition of compensation expense for share-based awards based on the estimated
fair value on the date of grant.
The
fair value of each stock option granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model
and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide
service in exchange for the award. The fair value of the options granted to non-employees is measured and expensed as the options vest.
Restricted
stock grants are stock awards that entitle the holder to receive shares of our common stock as the award vests over time. The fair value
of each restricted stock grant is based on the fair market value price of common stock on the date of grant, and it is measured and expensed
as the restricted stock vests.
We
estimate the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. Key inputs
and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected term, the
risk-free interest rate over the expected term, the expected annual dividend yield, and the expected stock price volatility. The expected
volatility is based on a combination of the historical and implied volatility of our publicly traded, near-the-money stock options, and
the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the U.S. Treasury yield
curve in effect at the time of grant and, since we do not currently pay or plan to pay a dividend on its common stock, the expected dividend
yield was zero.
Research
and Development Expense
Research
and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated
with assets acquired for research and development, amortization of product development costs, product strategic advisory fees, third-party
engineering and contractor support costs and allocated overhead. We expect our research and development expenses to increase in absolute
dollars as we continue to invest in new and existing products.
Sales
and Marketing Expense
Sales
and marketing expenses consist primarily of employee compensation and related expenses, sales commissions, marketing programs, travel
and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications,
and brand-building activities. We expect sales and marketing expenses to increase in absolute dollars as we expand our sales force, expand
our product lines, increase marketing resources, and further develop potential sales channels.
General
and Administrative Expense
General
and administrative expenses consist primarily of employee compensation and related expenses for administrative functions including finance,
legal, human resources and fees for third-party professional services, and allocated overhead. We expect our general and administrative
expense to increase in absolute dollars as we continue to invest in growing our business.
Other
(Expense) Income
Other
(expense) income consists of income received or expenses incurred for activities outside of our core business. Other expense consists
primarily of interest expense and unrealized gain/loss on marketable securities.
Provision
for Income Taxes
Provision
for income taxes consists of estimated income taxes due to 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.
Results
of Operations
Three
months ended June 30, 2023 compared to three months ended June 30, 2022
The
following table sets forth our results of operations for each of the periods set forth below:
|
|
For
the Three Months Ended June 30, |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
Revenue |
|
$ |
139,544 |
|
|
$ |
981,560 |
|
|
$ |
(842,016 |
) |
Cost
of goods sold |
|
|
332,027 |
|
|
|
2,827,512 |
|
|
|
(2,495,485 |
) |
Gross
loss |
|
|
(192,483 |
) |
|
|
(1,845,952 |
) |
|
|
1,653,469 |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
2,405,398 |
|
|
|
1,046,797 |
|
|
|
1,358,601 |
|
Sales
and marketing |
|
|
420,861 |
|
|
|
337,226 |
|
|
|
83,635 |
|
General
and administrative |
|
|
3,247,731 |
|
|
|
2,741,700 |
|
|
|
506,031 |
|
Total
operating expenses |
|
|
6,073,990 |
|
|
|
4,125,723 |
|
|
|
1,948,267 |
|
Loss
from operations |
|
|
(6,266,473 |
) |
|
|
(5,971,675 |
) |
|
|
(294,798 |
) |
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net |
|
|
(9,166 |
) |
|
|
10,706 |
|
|
|
(19,872 |
) |
Interest
income |
|
|
117,278 |
|
|
|
- |
|
|
|
117,278 |
|
Unrealized
gain (loss) on marketable securities |
|
|
146,935 |
|
|
|
(13,479 |
) |
|
|
160,414 |
|
Realized
gain on marketable securities |
|
|
8,193 |
|
|
|
- |
|
|
|
8,193 |
|
Net
loss |
|
$ |
(6,003,233 |
) |
|
$ |
(5,974,448 |
) |
|
$ |
(28,785 |
) |
Revenue
Revenue
was $0.14 million for the three months ended June 30, 2023, as compared to $0.98 million for the same period in 2022, a decrease of 85.8%,
or $0.84 million. The decrease in revenue was the result of a reduction in sales to Club Car as we wind down our relationship with Club
Car.
Cost
of goods sold and gross loss
Cost
of goods decreased by $2.5 million, or 88.3% for the three months ended June 30, 2023, as compared to the same period in 2022,
corresponding with the decrease in vehicle sales and a $1.32 million write-off of NCM inventory and $0.62 million of Cenntro prepaid
and accrued balances that were expensed in the same period in 2022.
Research
and development expense
Research
and development (“R&D”) expense was $2.41 million for the three months ended June 30, 2023, as compared to $1.05 million
for the same period in 2022, an increase of $1.36 million, or 129.8%. The increase was primarily due to pre-production and low-rate initial
production costs for the AYRO Vanish. We had an increase in R&D contracting for professional service and design costs of $0.41 million,
an increase in design and testing material of $0.54 million, and an increase in salaries and related expenses of $0.37 million.
Sales
and marketing expense
Sales
and marketing expense was $0.42 million for the three months ended June 30, 2023, as compared to $0.34 million for the same period
in 2022, an increase of $0.08 million, or 24.8%, as we increased our focus on marketing-related initiatives surrounding the AYRO Vanish. Contracting for professional marketing services increased by $0.07
million.
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 $3.25 million for the three months ended June 30, 2023, compared to
$2.74 million for the same period in 2022, an increase of $0.51 million, or 18.5% primarily due to contracting and professional services for overall repositioning of engineering,
design, and manufacturing partnerships. Salaries and related expenses decreased by $0.09 million, primarily due to reducing headcount.
Fulfillment expense and rent expense decreased by $0.05 million and $0.04 million, respectively. Depreciation and stock-based compensation
increased by $0.06 million and decreased by $0.07 million, respectively.
Other
income and expense
We
recorded a $0.01 million decrease of net other income from disposing a fixed asset, a $0.17 million increase in interest income on cash
accounts, an increase in unrealized gains of $0.16 million on marketable securities, and an increase in realized gains of $0.01 million
on marketable securities.
Six
months ended June 30, 2023 compared to six months ended June 30, 2022
The
following table sets forth our results of operations for each of the periods set forth below:
| |
For the Six Months Ended June 30, | |
| |
2023 | | |
2022 | | |
Change | |
Revenue | |
$ | 252,628 | | |
$ | 2,008,405 | | |
$ | (1,755,777 | ) |
Cost of goods sold | |
| 551,820 | | |
| 4,004,657 | | |
| (3,452,837 | ) |
Gross loss | |
| (299,192 | ) | |
| (1,996,252 | ) | |
| 1,697,060 | |
Operating expenses: | |
| | | |
| | | |
| | |
Research and development | |
| 4,535,388 | | |
| 1,912,204 | | |
| 2,623,184 | |
Sales and marketing | |
| 1,138,953 | | |
| 1,182,042 | | |
| (43,089 | ) |
General and administrative | |
| 6,091,047 | | |
| 5,446,627 | | |
| 644,420 | |
Total operating expenses | |
| 11,765,388 | | |
| 8,540,873 | | |
| 3,224,515 | |
Loss from operations | |
| (12,064,580 | ) | |
| (10,537,125 | ) | |
| (1,527,455 | ) |
Other income (expense): | |
| | | |
| | | |
| | |
Other income (expense), net | |
| 52,532 | | |
| 19,597 | | |
| 32,935 | |
Interest income | |
| 261,638 | | |
| - | | |
| 261,638 | |
Unrealized gain (loss) on marketable securities | |
| 198,215 | | |
| (35,580 | ) | |
| 233,795 | |
Realized loss on marketable securities | |
| 73,193 | | |
| - | | |
| 73,193 | |
Net loss | |
$ | (11,479,002 | ) | |
$ | (10,553,108 | ) | |
$ | (925,894 | ) |
Revenue
Revenue
was $0.25 million for the six months ended June 30, 2023, as compared to $2.01 million for the same period in 2022, a decrease of 87.4%,
or $1.76 million. The decrease in revenue was the result of a reduction in sales to Club Car as we wind down our relationship with Club
Car.
Cost
of goods sold and gross profit
Cost
of goods decreased by $3.45 million, or 86.2% for the six months ended June 30, 2023, as compared to the same period in 2022,
corresponding with the decrease in vehicle sales and a $1.32 million write-off of NCM inventory and $0.62 million of Cenntro prepaid
and accrued balances that were expensed in the same period in 2022.
Research
and development expense
Research
and development (“R&D”) expense was $4.54 million for the six months ended June 30, 2023, as compared to $1.91 million
for the same period in 2022, an increase of $2.62 million, or 137.2%. The increase was primarily due to pre-production and low-rate initial
production costs for the AYRO Vanish. We had an increase in R&D contracting for professional service and design costs of $1.5 million,
an increase in design and testing material of $0.66 million, and an increase in salaries and related expenses of $0.4 million.
Sales
and marketing expense
Sales
and marketing expense was $1.14 million for the six months ended June 30, 2023, as compared to $1.18 million for the same period in 2022,
an decrease of $0.04 million, or 3.6%, as we restructured our sales and marketing staff and marketing-related initiatives surrounding
the AYRO Vanish. Salaries and related expenses decreased by $0.48 million due to the reduction of our sales and marketing resources.
Bad debt increased by $0.29 million due to winding down our relationship with Club Car. Contracting for professional marketing services
increased by $0.16 million.
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 $6.09 million for the six months ended June 30, 2023, compared to $5.45 million for the same period in 2022, an increase of $0.64
million, or 11.8% primarily due to an overall repositioning of engineering, design, and manufacturing partnerships. Salaries and related
expenses increased by $0.21 million, primarily due to expanding headcount. Fulfillment expense and rent expense decreased by $0.21 million
and $0.13 million, respectively. Depreciation and stock-based compensation
increased by $0.1 million and decreased by $0.08 million, respectively.
Other
income and expense
We
recorded a $0.5 million increase of net other income from an insurance settlement on damaged vehicles in transit and loss on
disposal of a fixed asset of $0.01 million, a $0.26 million increase in interest income on cash accounts, an increase in realized gains of $0.07
million on marketable securities and an increase in unrealized gains of $0.24 million on marketable securities.
Liquidity
and Capital Resources
As
of June 30, 2023, we had $13.57 million in cash, $19.46 million in marketable securities and working capital of $37.65 million. As of
December 31, 2022, we had $39.1 million in cash, $9.85 million in marketable securities and working capital of $49.67 million. The decrease
in cash and working capital was primarily a result of our operating loss. Our sources of cash since inception have been predominately
from the sale of equity and debt.
Our
business is capital-intensive, and future capital requirements will depend on many factors, including our growth rate, the timing and
extent of spending to support development efforts, the results of our strategic review, the expansion of our sales and marketing teams,
the timing of new product introductions and the continuing market acceptance of our products and services. We are working to control
expenses and deploy our capital in the most efficient manner.
We
are evaluating other options for the strategic deployment of capital beyond our ongoing strategic initiatives, including potentially
entering other segments of the electric vehicle market. We anticipate being opportunistic with our capital, and we intend to explore
potential partnerships and acquisitions that could be synergistic with our competitive stance in the market.
We
are subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and
products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, and competition
from larger companies, other technology companies and other technologies. Based on the foregoing, management believes that the existing
cash at June 30, 2023, will be sufficient to fund operations for at least the next twelve months following the date of this report.
As
discussed above, in connection with our strategic review we canceled development of our planned next-generation three-wheeled vehicle.
In December of 2022 we completed pre-production on the new 411 fleet vehicle model refresh, the Vanish.
Summary
of Cash Flows
The
following table summarizes our cash flows:
| |
For the Six Months Ended June 30, | |
| |
2023 | | |
2022 | |
Cash Flows: | |
| | | |
| | |
Net cash used in operating activities | |
$ | (14,893,479 | ) | |
$ | (9,831,514 | ) |
Net cash used in investing activities | |
$ | (10,633,818 | ) | |
$ | (18,438,183 | ) |
Net cash provided by financing activities | |
$ | - | | |
$ | - | |
Operating
Activities
During
the six months ended June 30, 2023, we used $14.89 million in cash in operating activities, an increase in use of $5.06 million
compared to the cash used in operating activities of $9.83 million during the same period in 2022. The increase in cash used in
operating activities was primarily a result of raw materials purchased and $1.51 million of prepayments for inventory and
manufacturing services, payments of accrued expenses, and an increase in our operating loss as we continue to build our core
business.
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 six months ended June 30, 2023, we used cash of $10.63 million from investing activities as compared to $18.44 million of cash used
in investing activities during 2022, a decrease of $7.8 million. The net decrease was primarily due to our investment in marketable
securities of $9.3 million for the six months ended June 30, 2023 compared to $18 million for the six months ended June 30, 2022.
Financing
Activities
During
the six months ended June 30, 2023, and 2022, we had no financing activities of note.
Critical
Accounting 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
critical accounting estimates have not changed materially from those previously reported in our Form 10-K.
Recent
Developments
August
2023 Private Placement
On
August 7, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing investors
(the “Investors”), pursuant to which we agreed to sell to the Investors (i) an aggregate of 22,000 shares of our newly-designated
Series H-7 Preferred Stock, initially convertible into up to 22,000,000 shares of our common stock at a conversion price of $1.00 per
share (the “Preferred Shares”), and (ii) warrants to acquire up to an aggregate of 22,000,000 shares of common stock at an
exercise price of $1.00 per share (the “Investor Warrants,” and such transactions collectively, the “Private Placement”).
The
Private Placement is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”),
pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act
and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. Each of the Investors
has represented to us that it is an accredited investor within the meaning of Rule 501(a) of Regulation D and that it is acquiring the
securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof.
The Preferred Shares and Investor Warrants were offered without any general solicitation by us or our representatives.
The
Private Placement closed on August 10, 2023. The aggregate gross proceeds from the Private Placement were approximately $22 million.
We expect to use the net proceeds from the Private Placement for general corporate purposes.
The
Purchase Agreement contains certain representations and warranties, covenants and indemnities customary for similar transactions. The
representations, warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the
Purchase Agreement and may be subject to limitations agreed upon by the contracting parties.
In
connection with the Private Placement, pursuant to an Engagement Letter, dated August 7, 2023, between the Company and Palladium Capital
Group, LLC (the “Placement Agent”), we agreed to pay the Placement Agent (i) a cash fee equal to 6% of the gross proceeds
from any sale of securities in the Private Placement and (ii) warrants (“Placement Agent Warrants,” and together with the
Investor Warrants, the “Warrants”) to purchase shares of common stock equal to 2% of the number of shares of common stock
that the Preferred Shares are initially convertible into, with an exercise price of $1.00 per share and a five-year term.
Series
H-7 Preferred Stock
The
terms of the Preferred Shares are as set forth in the certificate of designations filed with the Secretary of State of the State of Delaware
prior to the closing of the Private Placement (the “Certificate of Designations”). The Preferred Shares are convertible into
shares of common stock (the “Conversion Shares”) at the election of the holder at any time at an initial conversion price
( “Conversion Price”) of $1.00. The Conversion Price is subject to customary adjustments for stock dividends, stock splits,
reclassifications and the like, and subject to price-based adjustment in the event of any issuances of common stock, or securities convertible,
exercisable or exchangeable for common stock, at a price below the then-applicable Conversion Price (subject to certain exceptions).
We are required to redeem the Preferred Shares in twelve equal monthly installments, commencing on a date between February 7, 2024 and
August 7, 2025, at the election of each Investor. The amortization payments due upon such redemption are payable, at our election, in
cash at 105% of the Installment Redemption Amount (as defined in the Certificate of Designations), or subject to certain limitations,
in shares of common stock valued at the lower of (i) the Conversion Price then in effect and (ii) the greater of (A) 80% of the average
of the three lowest closing prices of the common stock during the thirty trading day period immediately prior to the date the amortization
payment is due or (B) the lower of $0.144 and 20% of the Minimum Price (as defined in Rule 5635 of the Rules of the Nasdaq Stock Market)
on the date of receipt of Nasdaq Stockholder Approval (as defined below), which amortization payments are subject to certain adjustments
as set forth in the Certificate of Designations.
The
holders of the Preferred Shares are entitled to dividends of 8% per annum, compounded monthly, which are payable in cash or shares of
common stock at our option, in accordance with the terms of the Certificate of Designations. Upon the occurrence and during the continuance
of a Triggering Event (as defined in the Certificate of Designations), the Preferred Shares will accrue dividends at the rate of 15%
per annum. Upon conversion or redemption, the holders of the Preferred Shares are also entitled to receive a dividend make-whole payment
assuming for calculation purposes that the stated value remained outstanding through and including the twelve (12) month anniversary
of the first installment date as elected by an Investor. Except as required by applicable law, the holders of Preferred Shares are entitled
to vote with holders of the common stock on as as-converted basis, with the number of votes to which each holder of Preferred Shares
is entitled to be calculated assuming conversion at the Minimum Price (as defined in Rule 5635 of the Rules of the Nasdaq Stock Market)
applicable immediately before the execution and delivery of the Purchase Agreement.
Notwithstanding
the foregoing, our ability to settle conversions and make amortization and dividend make-whole payments using shares of common stock
is subject to certain limitations set forth in the Certificate of Designations, including a limit on the number of shares that may be
issued until the time, if any, that our stockholders have approved the issuance of more than 19.9% of our outstanding shares of common
stock in accordance with Nasdaq listing standards (the “Nasdaq Stockholder Approval”). We have agreed to seek stockholder
approval of these matters at a meeting to be held no later than November 5, 2023. We intend to obtain the Nasdaq Stockholder Approval
at the Special Meeting. Our directors and officers holding approximately 1,484,458 shares of common stock, representing approximately
3.9% of our issued and outstanding Common Stock, have executed an agreement to vote their shares in favor of the Nasdaq Stockholder Approval.
The Certificate of Designations also contains a certain beneficial ownership limitation after giving effect to the issuance of shares
of common stock issuable upon conversion of, or as part of any amortization or dividend make-whole payment under, the Certificate of
Designations or Warrants. Such amount may be lowered with the consent of the holder and the Company.
The
Certificate of Designations includes certain Triggering Events (as defined in the Certificate of Designations), including, among other
things, the suspension from trading or the failure of the common stock to be trading or listed (as applicable) on an eligible market
for a period of five (5) consecutive trading days and our failure to pay any amounts due to the holders of the Preferred Shares when
due. In connection with a Triggering Event, each holder of Preferred Shares will be able to require us to redeem in cash any or all of
the holder’s Preferred Shares at a premium set forth in the Certificate of Designations.
We
are subject to certain affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, investment
transactions, the repayment of indebtedness, the payment of cash in respect of dividends (other than dividends pursuant to the Certificate
of Designations), distributions or redemptions, the transfer of assets, and certain minimum cash requirements and establishment of a
segregated deposit account for the proceeds of the offering, among other matters.
There
is no established public trading market for the Preferred Shares and we do not intend to list the Preferred Shares on any national securities
exchange or nationally recognized trading system.
Warrants
The
Warrants are exercisable for shares of common stock (the “Warrant Shares”) immediately at an exercise price of $1.00 per
share (the “Exercise Price”) and expire five years from the date of issuance. The Exercise Price is subject to customary
adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full
ratchet” basis, in the event of any issuances of common stock, or securities convertible, exercisable or exchangeable for common
stock, at a price below the then-applicable Exercise Price (subject to certain exceptions). There is no established public trading market
for the Warrants and we do not intend to list the Warrants on any national securities exchange or nationally recognized trading system.
Registration
Rights
The
Preferred Shares, the Conversion Shares, the Warrants and the Warrant Shares have not been registered under the Securities Act. In connection
with the Purchase Agreement, on August 7, 2023, the Company and the Investors entered into a Registration Rights Agreement (the “Registration
Rights Agreement”), pursuant to which we are required to file a resale registration statement (the “Registration Statement”)
with the SEC to register for resale 150% of the Conversion Shares and the Warrant Shares promptly following the closing date, but in
no event later than 30 calendar days after the closing date, and to have such Registration Statement declared effective by the Effectiveness
Date (as defined in the Registration Rights Agreement). We will be obligated to pay certain liquidated damages to the Investors if we
fail to file the Registration Statement when required, fails to file or cause the Registration Statement to be declared effective by
the SEC when required, or fails to maintain the effectiveness of the Registration Statement pursuant to the terms of the Registration
Rights Agreement.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Under
the supervision and with the participation of management, including our principal executive and principal financial officers, we evaluated
the effectiveness of our disclosure controls and procedures as of June 30, 2023. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means
controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate
to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based
on the evaluation of our disclosure controls and procedures as of June 30, 2023, our Chief Executive Officer and Chief Financial Officer
concluded that, as of such date, our disclosure controls and procedures were ineffective due to the material weakness in internal control
over financial reporting discussed below.
In
its assessment of the effectiveness of internal control over financial reporting as of December 31, 2022, management identified a material
weakness related to segregation of duties. Specifically, due to limited resources and headcount, we did not have multiple people in the
accounting function for full segregation of duties.
Plan
for Remediation of Material Weakness
We
have engaged a third party to conduct a full assessment of our controls and procedures. In the fourth quarter of 2022 we completed our
full assessment and are now in the process of testing those controls.
Changes
in Internal Control over Financial Reporting
Except
as described above under “Plan for Remediation of Material Weakness,” there has been no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
There
have been no changes to the legal proceedings disclosed in our Form 10-K.
ITEM
1A. RISK FACTORS
Except
as set forth below, there have been no material changes to the risk factors as identified in our Form 10-K.
Our
failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a delisting of our common stock.
As
previously reported, on October 3, 2022, we received a letter from Nasdaq indicating that, based upon the closing bid price of the Company’s
common stock for the 30 consecutive business day period between August 19, 2022 and September 30, 2022, we did not meet the minimum bid
price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). In order
to regain compliance with Nasdaq’s minimum bid price requirement, our common stock was required to maintain a minimum closing bid
price of $1.00 for at least ten consecutive business days during the Initial Compliance Period. We did not regain compliance during the
Initial Compliance Period. On April 4, 2023, we received a letter from Nasdaq notifying us that we had been granted an additional 180-day
period, or until October 2, 2023, to regain compliance with the Minimum Bid Price Requirement. The new compliance period is an extension
of the Initial Compliance Period provided for in Nasdaq’s deficiency notice to the Company dated October 3, 2022. Nasdaq’s
determination was based on the Company meeting the continued listing requirement for market value of publicly held shares and all other
applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and
our written notice of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if
necessary.
To
resolve the noncompliance, we may consider available options including a reverse stock split, which may not result in a permanent increase
in the market price of our common stock, which is dependent on many factors, including general economic, market and industry conditions
and other factors detailed from time to time in the reports we file with the SEC. It is not uncommon for the market price of a company’s
shares to decline in the period following a reverse stock split.
If
compliance with the Minimum Bid Price Requirement cannot be demonstrated by October 2, 2023, Nasdaq will provide written notification
that our common stock could be delisted. In such an event, Nasdaq rules permit the Company to appeal any delisting determination to a
Nasdaq Hearings Panel. However, there can be no assurance that we will be able to regain compliance with the Nasdaq listing rules or
maintain its listing on Nasdaq.
Although
we expect to take actions intended to restore our compliance with the listing requirements, we can provide no assurance that any action
taken by us would be successful, or that any such action would stabilize the market price or improve the liquidity of our common stock.
Should a delisting occur, an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations
as to the value of our common stock, and our ability to raise future capital through the sale of our common stock could be severely limited.
A
significant portion of our revenues has historically been derived from Club Car pursuant to the MPA. Following the termination of the
MPA, we will need to identify new strategic channel partners to support the sales of our vehicles.
The
majority of our sales have historically been comprised of sales to Club Car pursuant to the MPA, with revenues from Club Car constituting
approximately 100% of our revenues in 2022 and 79% of our revenues in 2021. On April 4, 2023, we delivered notice of termination of the
MPA to Club Car, and we do not expect them to remain a customer going forward. The loss of Club Car as a customer could have a material
adverse effect on our sales, financial condition, and results of operations.
Following
the termination of the MPA, we will need to identify new strategic channel partners to support the sales of our vehicles. It may take
time to identify and add these partners and to train new personnel to market and support our vehicles. We may be unable to identify suitable
partners, or such partners may not successfully market and sell our vehicles and may not devote sufficient time and resources to enable
our vehicles to develop, achieve or sustain market acceptance. Failure to enter into arrangements with and retain a sufficient number
of high-quality strategic channel partners could increase our marketing costs, adversely impact buying and inventory patterns, payment
terms or other contractual terms, sell-through or delivery of our vehicles or curtail our routes-to-market, and could have a material
adverse effect on our prospects, business, financial condition or results of operations.
Holders
of our Series H-7 Preferred Stock are entitled to certain payments under the Certificate of Designations that may be paid in cash or
in shares of common stock depending on the circumstances. If we make these payments in cash, we may be required to expend a substantial
portion of our cash resources. If we make these payments in common stock, it may result in substantial dilution to the holders of our
common stock.
Under
the Certificate of Designations, we are required to redeem the Series H-7 Preferred Shares in monthly installments, commencing on a date
between February 7, 2024 and August 7, 2025. Holders of the Series H-7 Preferred Shares are also entitled to receive dividends, payable
in arrears monthly, and dividends payable on installment dates shall be paid as part of the applicable installment amount. Installment
amounts are payable, at the company’s election, in shares of common stock or, subject to certain limitations, in cash. Installment
amounts paid in cash must be paid in the amount of 105% of the applicable payment amount due. For any installment amounts paid in shares
of common stock, the number of shares of common stock shall be calculated by dividing the applicable payment amount due by the “installment
conversion price.” The installment conversion price shall be equal to the lower of (i) the Conversion Price (as defined in the
Certificate of Designations) in effect as of the applicable payment date and (ii) the greater of (A) 80% of the average of the three
lowest closing prices of our common stock during the thirty trading day period immediately prior to the date the payment is due or (B)
the lower of (x) $0.144 and (y) 20% of the “Minimum Price” (as defined in Rule 5635 of the Rules of the Nasdaq Stock Market)
on the date of the Nasdaq Stockholder Approval (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations
or other similar events) or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Stock Market.
Our
ability to make payments due to the holders of the Preferred Shares using shares of common stock is subject to certain limitations set
forth in the Certificate of Designations, including a limit on the number of shares that may be issued until our receipt of the Nasdaq
Stockholder Approval. If we are unable to make installment payments in shares of common stock, we may be forced to make such payments
in cash. If we do not have sufficient cash resources to make these payments, we may need to raise additional equity or debt capital,
and we cannot provide any assurance that we will be successful in doing so. If are unable to raise sufficient capital to meet our payment
obligations, we may need to delay, reduce or eliminate certain of our operations, sell some or all of our assets or merge with another
entity.
Our
ability to make payments due to the holders of the Series H-7 Preferred Shares using cash is also limited by the amount of cash we have
on hand at the time such payments are due, as well as certain provisions of the Delaware General Corporation Law. Further, we intend
to make the installment payments due to holders of Series H-7 Preferred Stock in the form of common stock to the extent allowed under
the Certificate of Designations and applicable law in order to preserve our cash resources. The issuance of shares of common stock to
the holders of our Series H-7 Preferred Stock will increase the number of shares of common stock outstanding and could result in substantial
dilution to the existing holders of our common stock.
The
Certificate of Designations and the Warrants contain anti-dilution provisions that may result in the reduction of the conversion price
of the Preferred Shares or the exercise price of the Warrants in the future. These features may increase the number of shares of common
stock being issuable upon conversion of the Preferred Shares or upon the exercise of the warrants.
The
Certificate of Designations and the Warrants contain anti-dilution provisions, which provisions require the lowering of the applicable
conversion price or exercise, as then in effect, to the purchase price of equity or equity-linked securities issued in any subsequent
offerings. If in the future, while any shares of the Series H-7 Preferred Shares or Warrants are outstanding, we issue securities for
a consideration per share of common stock (the “New Issuance Price”) that is less than the Conversion Price of the Series
H-7 Preferred Shares or the Exercise Price of the Warrants, as then in effect, we will be required, subject to certain limitations and
adjustments as provided in the Certificate of Designations or the Warrants, to reduce the Conversion Price or the Exercise Price to be
equal to the New Issuance Price, which will result in a greater number of shares of common stock being issuable upon conversion of the
Preferred Shares and the exercise of the Warrants, which in turn will increase the dilutive effect of such conversions or exercises on
existing holders of our common stock. It is possible that we will not have a sufficient number of shares available to satisfy the conversion
of the Preferred Shares or the exercise of the Warrants if we enter into a future transaction that reduces the applicable Conversion
Price or Exercise Price. If we do not have a sufficient number of available shares for any Preferred Share conversions or Warrant exercises,
we may need to seek stockholder approval to increase the number of authorized shares of our common stock, which may not be possible and
will be time consuming and expensive. The potential for such additional issuances may depress the price of our common stock regardless
of our business performance and may make it difficult for us to raise additional equity capital while any of the Preferred Shares or
Warrants are outstanding.
Under
the Purchase Agreement we are subject to certain restrictive covenants that may make it difficult to procure additional financing.
The
Purchase Agreement contains the following restrictive covenants: (i) until Preferred Shares are no longer outstanding, we agreed not
to enter into any variable rate transactions; (ii) we agreed to offer to the Investors, until the later of (x) the date on which no Preferred
Shares no longer outstanding and (y) the maturity date of the Preferred Shares, the opportunity to participate in any subsequent securities
offerings by us; and (iii) we agreed to use our reasonable best efforts to hold a stockholder meeting, at which we would solicit our
stockholders’ affirmative vote for approval of our issuance of the maximum Conversion Shares upon conversion of the Preferred Shares
and the maximum Warrant Shares upon exercise of the Warrants, each in accordance with the applicable law and rules and regulations of
Nasdaq, no later than November 5, 2023. If we require additional funding while these restrictive covenants remain in effect, we may be
unable to effect a financing transaction while remaining in compliance with the terms of the Purchase Agreement, or we may be forced
to seek a waiver from the investors party to the Purchase Agreement.
If
we do not receive approval from our stockholders, we will be unable to pay amounts due to the holders of the Series H-7 Preferred Shares
in shares of common stock and we will be required to pay such amounts in cash, which may force us to divert cash from other uses.
Under
the Purchase Agreement, we are required to hold a meeting of our stockholders to seek approval under Rule 5635(d) of the Nasdaq
Stock Market for the sale, issuance or potential issuance by us of our common stock (or securities convertible into or exercisable for
our common stock) in excess of 7,554,727 shares, which is 19.99% of the shares of common stock outstanding immediately prior to the execution
of the Purchase Agreement. Our directors and officers, who held approximately 3.9% of our issued and outstanding common stock as of the
date of the Purchase Agreement, are party to a voting agreement pursuant to which, among other things, each such stockholder agreed,
solely in their capacity as a stockholder, to vote all of their shares of common stock in favor of the approval. If an insufficient number
of our remaining stockholders vote in favor of the proposal we will be unable to issue shares of common stock in order to pay amounts
due under the Certificate of Designations to holders of the Series H-7 Preferred Shares in shares of common stock. If we are unable to
pay such amounts when due in shares of common stock, we will have to satisfy our payment obligations by means of cash payments. If we
do not have sufficient cash resources to make these payments, we may need to delay, reduce or eliminate certain of our operations, sell
some or all of our assets or merge with another entity.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
The following exhibits are filed as part of , or incorporated by reference into, this Quarterly Report on Form 10-Q
3.1 |
Amended
and Restated Certificate of Incorporation, effective May 28, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020) |
|
|
3.2 |
Certificate
of Amendment to Amended and Restated Certificate of Incorporation, effective May 28, 2020 (incorporated by reference to Exhibit 3.3
to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020) |
|
|
3.3 |
Amended
and Restated Bylaws, effective May 28, 2020 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on May 29, 2020) |
|
|
3.4 |
First
Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on July 8, 2020) |
|
|
3.5 |
Second
Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K filed with the Securities and Exchange Commission on October 19, 2021) |
|
|
3.6 |
Form
of Certificate of Designations of Series H-7 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2023) |
|
|
4.1 |
Form
of Warrant (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on August 8, 2023) |
|
|
10.1 |
Form
of Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 8, 2023) |
|
|
10.2 |
Form
of Registration Rights Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on August 8, 2023) |
** |
Filed
herewith. |
|
|
*** |
Furnished
herewith |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.