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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, 2021

 

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

incorporation or organization)

 

(I.R.S. Employer

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 12, 2021, the registrant had 36,388,765 shares of common stock outstanding.

 

 

 

 
 

 

AYRO, Inc.

Quarter Ended June 30, 2021

 

Table of Contents

 

    PAGE
PART I FINANCIAL INFORMATION F-1
     
ITEM 1. Financial Statements (Unaudited) F-1
  Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 F-1
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2021 and 2020 F-2
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 F-3
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020 F-4
  Notes to the Condensed Consolidated Financial Statements (Unaudited) F-5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 14
ITEM 4. Controls and Procedures 14
     
PART II OTHER INFORMATION 15
     
ITEM 1. Legal Proceedings 15
ITEM 1A. Risk Factors 15
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Mine Safety Disclosures 15
ITEM 5. Other Information 16
ITEM 6. Exhibits 16
     
SIGNATURES 17

 

i

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   June 30,   December 31, 
   2021   2020 
ASSETS          
Current assets:          
Cash  $87,891,072   $36,537,097 
Accounts receivable, net   1,057,534    765,850 
Inventory, net   1,728,817    1,173,254 
Prepaid expenses and other current assets   1,305,899    1,608,762 
Total current assets   91,983,322    40,084,963 
           
Property and equipment, net   947,974    611,312 
Intangible assets, net   137,334    143,845 
Operating lease – right-of-use asset   1,125,368    1,098,819 
Deposits and other assets   41,289    22,491 
Total assets  $94,235,287   $41,961,430 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $2,407,248   $767,205 
Accrued expenses   1,614,102    665,068 
Contract liability   -    24,000 
Current portion long-term debt, net   -    7,548 
Current portion lease obligation – operating lease   245,801    123,139 
Total current liabilities   4,267,151    1,586,960 
           
Long-term debt, net   -    14,060 
Lease obligation - operating lease, net of current portion   933,563    1,002,794 
Total liabilities   5,200,714    2,603,814 
           
Commitments and contingencies   -     -  
           
Stockholders’ equity:          
Preferred Stock, (authorized – 20,000,000 shares)   -    - 
Convertible Preferred Stock Series H, ($0.0001 par value; authorized – 8,500 shares; issued and outstanding – 8 shares as of June 30, 2021 and December 31, 2020)   -    - 
Convertible Preferred Stock Series H-3, ($.0001 par value; authorized – 8,461 shares; issued and outstanding – 1,234 shares as of June 30, 2021 and December 31, 2020)   -    - 
Convertible Preferred Stock Series H-6, ($.0001 par value; authorized – 50,000 shares; issued and outstanding – 50 shares as of June 30, 2021 and December 31, 2020)   -    - 
Common Stock, ($0.0001 par value; authorized – 100,000,000 shares; issued and outstanding – 36,304,362 and 27,088,584 shares, as of June 30, 2021 and December 31, 2020)   3,630    2,709 
Additional paid-in capital   127,483,342    64,509,724 
Accumulated deficit   (38,452,399)   (25,154,817)
Total stockholders’ equity   89,034,573    39,357,616 
Total liabilities and stockholders’ equity  $94,235,287   $41,961,430 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-1

 

 

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

                     
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2021   2020   2021   2020 
Revenue   $522,067   $285,927   $1,310,936   $432,743 
Cost of goods sold    430,478    205,637    1,074,981    318,792 
Gross profit    91,589    80,290    235,955    113,951 
                     
Operating expenses:                     
Research and development    3,042,117    180,605    4,969,678    335,304 
Sales and marketing    668,838    239,065    1,227,242    558,519 
General and administrative    4,061,681    714,679    7,362,994    1,963,730 
Total operating expenses    7,772,636    1,134,349    13,559,914    2,857,553 
                     
Loss from operations    (7,681,047)   (1,054,059)   (13,323,959)   (2,743,602)
                     
Other income (expense):                     
Other income, net    18,419    3    28,689    20 
Interest expense    (1,121)   (123,576)   (2,312)   (229,202)
Loss on extinguishment of debt   -    (353,225)   -    (353,225)
Other income (expense), net    17,298    (476,798)   26,377    (582,407)
                     
Net loss   $(7,663,749)  $(1,530,857)  $(13,297,582)  $(3,326,009)
                     
Net loss per share, basic and diluted   $(0.22)  $(0.18)  $(0.39)  $(0.54)
                     
Basic and diluted weighted average Common Stock outstanding    35,315,044    8,291,351    33,678,834    6,131,712 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-2

 

 

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                                                                  
   Series H   Series H-3   Series H-6    AYRO Series Seed            Additional         
   Preferred Stock   Preferred Stock   Preferred Stock    Preferred Stock    Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount    Shares   Amount    Shares   Amount   Capital   (Deficit)   Total 
Balance, December 31, 2020   8   $-    1,234   $-    50   $-    -   -     27,088,584   $2,709   $64,509,724   $(25,154,817)  $39,357,616 
Stock Based Compensation                                                     1,699,423         1,699,423 
Sale of common stock, net of fees                                 -   -     8,035,835    804    58,269,025         58,269,829 
Exercise Warrants                                           13,642    1    99,999         100,000 
Exercise Options                                           74,987    7    183,418         183,425 
Net Loss                                                          (5,633,833)   (5,633,833)
Balance, March 31, 2021   8    -    1,234    -    50    -    -   -     35,213,048    3,521    124,761,589    (30,788,650)   93,976,460 
Issuance of common stock for services        -          -          -               15,000    2    42,298         42,300 
Stock Based Compensation        -                         -   -               1,638,071         1,638,071 
Exercise Options                                           394,589    39    1,041,452         1,041,491 
Restricted stock vesting                                           681,725    68    (68         0 
Net Loss                                                      (7,663,749)   (7,663,749)
Balance, June 30, 2021   8   $-    1,234   $-    50   $-    -   -     36,304,362   $3,630   $127,483,342   $(38,452,399)  $89,034,573 

  

                                                     
   Series H   Series H-3   Series H-6   AYRO Series Seed       Additional         
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   (Deficit)   Total 
Balance, December 31, 2019   -          -          -          7,360,985   $9,025,245    3,948,078   $395    $5,001,947   $(13,958,644)  $68,943 
Stock Based Compensation        -          -          -          -          -     156,459         156,459 
Net Loss                                                          (1,795,153)   (1,795,153)
Balance, March 31, 2020   -   $-    -   $-    -   $-    7,360,985   $9,025,245    3,948,078   $395   $5,158,406   $(15,753,797)  $(1,569,751)
Conversion of AYRO Preferred Stock to common stock                                 (7,360,985)   (9,025,245)   2,007,193    201    9,025,044         - 
Issuance of Series H Preferred Stock in connection with the 2020 Merger   8    -                                                      - 
Issuance of Series H-3 Preferred Stock in connection with the 2020 Merger             2,189    -                                            - 
Issuance of Series H-6 Preferred Stock in connection with the 2020 Merger                       7,883    -                                  - 
Issuance of Common Stock in connection with the 2020 Merger, net of fees                                           4,939,045    493    4,451,237         4,451,730 
Exchange of debt for common stock in connection with the 2020 Merger                                           1,030,585    103    999,897         1,000,000 
Issuance of common stock in connection with debt offering                                           553,330    56    461,957         462,013 
Sale of common stock, net of fees                                           2,200,000    220    5,064,780         5,065,000 
Exercise of warrants, net of fees                                           1,831,733    183    515,155         515,338 
Stock Based Compensation                                                     150,949         150,949 
Net Loss                                                          (1,530,856)   (1,530,856)
Balance, June 30, 2020   8   $-    2,189   $-    7,883   $-    -   $-    16,509,964   $1,651   $25,827,425   $(17,284,653)  $8,544,423 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-3

 

 

AYRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

           
   Six Months Ended 
   June 30, 
   2021   2020 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(13,297,582)   $(3,326,009)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   253,675    228,464 
Stock-based compensation   3,337,494    307,408 
Amortization of debt discount   -    169,739 
Loss on extinguishment of debt   -    353,225 
Amortization of right-of-use asset   93,891    49,738 
Provision for bad debt expense   63,333    5,794 
Change in operating assets and liabilities:          
Accounts receivable   (355,016)   (247,708)
Inventory   (603,336)   59,889 
Prepaid expenses and other current assets   302,859    (110,848)
Deposits   (18,797)   26,265 
Accounts payable   1,640,043    58,468 
Accrued expenses   991,334    (325,966)
Contract liability   (24,000)   63,904 
Lease obligations - operating leases   (67,009)   (30,286)
Net cash used in operating activities   (7,683,111)   (2,717,923)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (482,541)   (243,928)
Purchase of intangible assets   (53,512)   (8,520)
Proceeds from merger with ABC Merger Sub, Inc.   -    3,060,740 
Net cash provided by (used in) investing activities   (536,053)   2,808,292 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance debt   -    1,318,000 
Repayments of debt   (21,608)   (1,103,401)
Proceeds from exercise of warrants   100,000    515,338 
Proceeds from exercise of stock options   1,224,918    - 
Proceeds from issuance of common stock, net of fees and expenses   58,269,829    6,455,992 
Net cash provided by financing activities   59,573,139    7,185,929 
           
Net change in cash   51,353,975    7,276,298 
           
Cash, beginning of period   36,537,097    641,822 
           
Cash, end of period  $87,891,072   $7,918,120 
           
Supplemental disclosure of cash and non-cash transactions:          
Cash paid for interest  $1,971   $58,366 
Cash paid for taxes  $-   $- 
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets  $120,440   $1,210,680 
Conversion of debt to Common Stock  $-   $1,000,000 
Conversion of Preferred Stock to Common Stock  $-   $9,025,245 
Discount on debt from issuance of Common Stock and warrants  $-   $462,013 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-4

 

 

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., 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 Articles 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 and to dealers in the United States.

 

Merger

 

On May 28, 2020, pursuant to the previously announced Agreement and Plan of Merger, dated December 19, 2019 (the “Merger Agreement”), by and among AYRO, Inc., a Delaware corporation previously known as DropCar, Inc., ABC Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and AYRO Operating Company (“AYRO Operating”), a Delaware corporation previously known as AYRO, Inc., Merger Sub was merged with and into AYRO Operating, with AYRO Operating continuing after the merger as the surviving entity and a wholly owned subsidiary of the Company (the “Merger”). At the effective time of the Merger, without any action on the part of any stockholder, each issued and outstanding share of AYRO Operating’s common stock, par value $0.001 per share (“AYRO Operating Common Stock”), including shares underlying AYRO Operating’s outstanding equity awards and warrants, was converted into the right to receive 1.3634 pre-split and pre-stock dividend shares (the “Exchange Ratio”) of the Company’s common stock, par value $0.0001 per share (“Company Common Stock”). Immediately following the effective time of the Merger, the Company effected a 1-for-10 reverse stock split of the issued and outstanding Company Common Stock (the “Reverse Stock Split”), and immediately following the Reverse Stock Split, the Company issued a stock dividend of one share of Company Common Stock for each outstanding share of Common Stock to all holders of record immediately following the effective time of the Reverse Stock Split (the “Stock Dividend”). The net result of the Reverse Stock Split and the Stock Dividend was a 1-for-5 reverse stock split. As part of the Merger, the Company received cash of $3.06 million in consideration for 2,337,663 shares of common stock. Upon completion of the Merger and the transactions contemplated in the Merger Agreement and assuming the exercise in full of all pre-funded warrants issued pursuant thereto, (i) the former AYRO Operating equity holders (including the investors in a bridge financing and private placements that closed prior to closing of the Merger) owned approximately 79% of the outstanding equity of the Company; (ii) former DropCar stockholders owned approximately 18% of the outstanding equity of the Company; and (iii) a financial advisor to DropCar and AYRO owned approximately 3% of the outstanding equity of the Company.

 

The Merger was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes because substantially all of DropCar, Inc.’s operations were disposed of as part of the consummation of the Merger and therefore no goodwill or other intangible assets were recorded by the Company as a result of the Merger. AYRO Operating was treated as the accounting acquirer as its stockholders controlled the Company after the Merger, even though DropCar, Inc. was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in our consolidated financial statements are those of AYRO Operating as if AYRO Operating had always been the reporting company.

 

F-5

 

 

On December 19, 2019, DropCar entered into an asset purchase agreement (the “Asset Purchase Agreement”) with DC Partners Acquisition, LLC (“DC Partners”), Spencer Richardson and David Newman, pursuant to which DropCar agreed to sell substantially all of the assets associated with its business of providing vehicle support, fleet logistics and concierge services for both consumers and the automotive industry to an entity controlled by Messrs. Richardson and Newman, the Company’s Chief Executive Officer and Chief Business Development Officer at the time, respectively. The aggregate purchase price for the purchased assets consisted of the cancellation of certain liabilities pursuant to those certain employment agreements by and between DropCar and each of Messrs. Richardson and Newman, plus the assumption of certain liabilities relating to, or arising out of, workers’ compensation claims that occurred prior to the closing date of the Asset Purchase Agreement.

 

On May 28, 2020, the parties to the Asset Purchase Agreement entered into Amendment No. 1 to the Asset Purchase Agreement (the “Asset Purchase Agreement Amendment”), which Asset Purchase Agreement Amendment (i) provides for the inclusion of up to $30,000 in refunds associated with certain insurance premiums as assets being purchased by DC Partners, (ii) amends the covenant associated with the funding of the DropCar business, such that DropCar provided the DropCar business with additional funding of $175,000 at the closing of the transactions contemplated by the Asset Purchase Agreement and (iii) provides for a current employee of the Company being transferred to DC Partners to provide transition services to the Company for a period of three months after the closing of the transactions contemplated by the Asset Purchase Agreement. The Asset Purchase Agreement closed on May 28, 2020, immediately following the consummation of the Merger.

 

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 $7,663,749 and $13,297,582 for the three and six months ended June 30, 2021, respectively, and negative cash flows from operations of $7,683,111 for the six months ended June 30, 2021. At June 30, 2021, the Company had cash balances totaling $87,891,072. In addition, overall working capital increased by $49,218,168 during the six months ended June 30, 2021. Management believes that the existing cash at June 30, 2021 will be sufficient to fund operations for at least the next twelve months following the issuance of these unaudited condensed consolidated financial statements.

 

Since early 2020, when the World Health Organization declared the spread of the transmissible and pathogenic coronavirus a global pandemic, there have been business slowdowns and decreased demand for AYRO products. The outbreak of such a communicable disease has resulted in a widespread health crisis which has adversely affected general commercial activity and the economies and financial markets of many countries, including the United States. As the outbreak of the disease has continued through 2020 and into 2021, the measures taken by the governments of countries affected has adversely affected the Company’s business, financial condition, and results of operations. The pandemic had an adverse impact on AYRO’s sales and the demand for AYRO products in 2020 and in the first and second quarters of 2021, resulting in sales that were less than expected in the first half of 2021. AYRO expects the pandemic to continue to have an adverse impact on sales and demand for products throughout the remainder of 2021.

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of 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”).

 

F-6

 

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AYRO Operating and DropCar Operating Company, Inc. 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, 2021, 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, 2020, which are included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 31, 2021, as amended on April 30, 2021.

 

Use of Estimates

 

The preparation of the accompanying 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 accompanying unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.

 

The Company’s most significant estimates include allowance for doubtful accounts, valuation of inventory reserve, valuation of deferred tax asset allowance, and the measurement of stock-based compensation expenses. Actual results could differ from these estimates.

 

Reclassification

 

Certain reclassifications have been made to the prior period financial statements to conform to the current period financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.

 

Revenue Recognition

 

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 identical 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 $59,229 and $16,640 for the three months ended June 30, 2021 and 2020 and $109,855 and $30,790 for the six months June 30, 2021 and 2020, respectively, included in SG&A.

 

Subscription revenue

 

Subscription revenue from revenue sharing with Destination Fleet Operators (“DFO”) and other vehicle rental agreements is recorded in the month the vehicles in the Company’s fleet is rented. The Company established its rental fleet in late March 2019 which is recorded in the property and equipment section of the accompanying unaudited condensed consolidated balance sheets. For the rental fleet, the Company retains title and ownership to the vehicles and places them in DFO’s in resort communities that typically rent golf cars for use in those communities. In August 2020, the Company phased-out the production of its 311 line which were the vehicles used in the rental offering as it is working to develop a new line of vehicles. The change in production did not represent a strategic shift that will have a major effect on the Company’s operations or financial results.

 

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.

 

Warrants and Preferred Shares

 

The accounting treatment of warrants and preferred share series issued is determined pursuant to the guidance provided by ASC 470, Debt, ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, as applicable. Each feature of a freestanding financial instruments including, without limitation, any rights relating to subsequent dilutive issuances, dividend issuances, equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions, dividends and exercise are assessed with determinations made regarding the proper classification in the Company’s financial statements.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). The Company recognizes all 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. Stock-based compensation is reversed for forfeitures in the period of forfeiture.

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Unit (“ASU”) 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the guidance in ASC 718 to include share-based payments for goods and services to non-employees and generally aligns it with the guidance for share-based payments to employees. In accordance with ASU 2018-07, these stock options and warrants issued as compensation for services provided to 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.

 

F-7

 

 

Basic and Diluted Loss Per Share

 

Basic and diluted net loss per share is determined by dividing net loss by the weighted average ordinary shares outstanding during the period. For all periods presented with a net loss, the shares underlying the ordinary share options and warrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate both basic and diluted loss per share are the same for periods with a net loss. “Penny warrants” were included in the calculation of outstanding shares for purposes of basic earnings per share.

 

On May 28, 2020, pursuant to the previously announced Merger Agreement, dated December 19, 2019, the Company issued prefunded common stock warrants to purchase 1,193,391 shares of the Company’s common stock to certain investors (“Penny Warrants”). All Penny Warrants were fully exercised by December 31, 2020.

 

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be anti-dilutive:

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2021   2020   2021   2020 
Options to purchase common stock   1,448,193    1,060,254    1,448,193    1,060,254 
Restricted Stock Unvested   520,167    -    520,167    - 
Series H-1, H-3, H-4, H-5, I, J, pre-merger AYRO Merger common stock purchase warrants and post-merger AYRO warrants issued   7,346,447    4,006,205    7,346,447    4,006,205 
Series H, H-3, H-6, and pre-merger AYRO Seed Preferred Stock   2,475    278,862    2,475    278,862 
Totals   9,317,282    5,345,321    9,317,282    5,345,321 

 

NOTE 4. REVENUES

 

Disaggregation of Revenue

 

Revenue by type was as follows:

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2021   2020   2021   2020 
Revenue type                    
Product revenue  $506,369   $263,465   $1,216,568   $393,091 
Shipping revenue   15,698    22,462    57,681    37,867 
Subscription revenue   -    -    -    1,785 
Service income   -    -    36,687    - 
   $522,067   $285,927   $1,310,936   $432,743 

 

F-8

 

 

Contract Liabilities

 

The Company recognizes a contract liability when a consideration is received, or if the Company has the unconditional right to receive consideration, in advance of satisfying the performance obligation. A contract liability is the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration, or an amount of consideration is due from the customer.

 

The table below details the activity in the Company’s contract liabilities as of June 30, 2021 and December 31, 2020. The balance at the end of each period is reported as contract liability in the Company’s unaudited condensed consolidated balance sheet.

 

   Six Months Ended June 30,   Year Ended December 31, 
   2021   2020 
Balance, beginning of period  $24,000   $- 
Additions   -    183,319 
Transfer to revenue   (24,000)   (159,319)
Balance, end of period  $-   $24,000 

 

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, 2021 and December 31, 2020, warranty reserves were recorded within accrued expenses of $61,592 and $43,278, respectively.

 

NOTE 5. ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net, consists of amounts due from invoiced customers and product deliveries and were as follows:

 

   2021   2020 
   June 30,   December 31, 
   2021   2020 
Trade receivables  $1,194,696   $839,679 
Less: Allowance for doubtful accounts   (137,162)   (73,829)
 Accounts receivable, net  $1,057,534   $765,850 

 

NOTE 6. INVENTORY, NET

 

Inventory consisted of the following:

 

   2021   2020 
   June 30,   December 31, 
   2021   2020 
Raw materials  $1,177,314   $634,085 
Work-in-progress   -    - 
Finished goods   551,503    539,169 
 Inventory  $1,728,817   $1,173,254 

 

F-9

 

 

Depreciation expense for fleet inventory for the three months ended June 30, 2021 and 2020 was $23,886 and $0, and for the six months ended June 30, 2021 and 2020, $47,772 and $0, respectively. Management has determined that no reserve for inventory obsolescence was required as of June 30, 2021 and December 31, 2020.

 

NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

   2021   2020 
   June 30,   December 31, 
   2021   2020 
Prepaid final assembly services  $409,740   $520,000 
Prepayments for inventory   766,429    976,512 
Prepaid other   129,730    112,250 
 Prepaid Expenses And Other Current Assets  $1,305,899   $1,608,762 

 

NOTE 8. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

   2021   2020 
   June 30,   December 31, 
   2021   2020 
Computer and equipment  $841,270   $815,704 
Furniture and fixtures   170,357    127,401 
Lease improvements   242,024    221,802 
Prototypes   300,376    300,376 
Computer software   455,875    62,077 
 Property and equipment   2,009,902    1,527,360 
Less: Accumulated depreciation   (1,061,928)   (916,048)
Property and equipment, net   $947,974   $611,312 

 

Depreciation expense for the three months ended June 30, 2021 and 2020 was $74,752 and $85,554, and for the six months ended June 30, 2021 and 2020 was $145,880 and $171,612, respectively.

 

NOTE 9. INTANGIBLE ASSETS, NET

 

Intangible assets consisted of the following:

 

   June 30, 2021 
               Weighted- 
           Net   Average 
   Gross   Accumulated   Carrying   Amortization 
   Amount   Amortization   Amount   Period 
Supply chain development  $404,622   $(341,548)  $63,074    0.62 yrs. 
Patents and trademarks   114,573    (40,313)   74,260    2.59 yrs. 
   $519,195   $(381,861)  $137,334      

 

   December 31, 2020 
               Weighted- 
           Net   Average 
   Gross   Accumulated   Carrying   Amortization 
   Amount   Amortization   Amount   Period 
Supply chain development  $395,248   $(291,937)  $103,311    1.05 yrs. 
Patents   70,435    (29,901)   40,534    2.45 yrs. 
   $465,683   $(321,838)  $143,845      

 

F-10

 

 

Amortization expense for the three months ended June 30, 2021 and 2020, was $30,839 and $28,635 and for the six months ended June 30, 2021 and 2020, was $60,023 and $56,852, respectively. The definite lived intangible assets have no residual value at the end of their useful lives.

 

NOTE 10. STOCKHOLDERS’ EQUITY

 

Common Stock

 

In April 2020, the Company issued 553,330 shares of common stock in connection with the issuance of the 2020 $600,000 Bridge Note.

 

On June 17, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the Company sold, in a registered public offering by the Company directly to the investors an aggregate of 2,200,000 shares of common stock, par value $0.0001 per share, at an offering price of $2.50 per share for gross proceeds of $5,500,000 before offering expenses of $435,000.

 

On July 6, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the Company sold, in a registered public offering by the Company directly to the investors an aggregate of 3,157,895 shares of common stock, par value $0.0001 per share, at an offering price of $4.75 per share for gross proceeds of $15,000,000 before offering expenses of $1,249,200.

 

On July 21, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the Company sold, in a registered public offering by the Company directly to the investors an aggregate of 1,850,000 shares of common stock, par value $0.0001 per share, at an offering price of $5.00 per share for gross proceeds of $9,250,000 before offering expenses of $740,000. Each purchaser also had the right to purchase, on or before October 19, 2020, additional shares of common stock (the “Additional Shares”) equal to the full amount of 75% of the common stock it purchased at the initial closing, or an aggregate of 1,387,500 shares, at an offering price of $5.00 per share. On October 16, 2020, the Company entered into an addendum to the Agreement (the “Addendum”), which extended the deadline for each purchaser to exercise the right to purchase the Additional Shares by one year, to October 19, 2021. As of December 31, 2020, investors had elected to purchase 420,000 of the Additional Shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $5.00 per share, for gross proceeds of approximately $2,100,000 before offering expenses of $168,000.

 

During July 2020, the Company issued 225,590 shares of common stock from the conversion of 7,833 shares of Series H-6 Preferred Stock.

 

On November 22, 2020, the Company entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which such stockholders agreed to purchase an aggregate of 1,650,164 shares of AYRO common stock, par value $0.0001 per share, at an offering price of $6.06 per share, for gross proceeds of approximately $10,000,000 before the deduction of fees and offering expenses of $847,619.

 

During the year ended December 31, 2020, the Company issued 5,074,645 shares of common stock from the exercise of 5,092,806 warrants and received net cash proceeds of $3,926,818.

 

During the year ended December 31, 2020, the Company issued 1,030,585 shares of common stock from the conversion of the 2019 $1,000,000 Convertible Bridge.

 

During the year ended December 31, 2020, the Company issued 2,337,663 shares of common stock from the closing of the Merger in consideration for $3,060,740 of cash and equity of Merger Sub.

 

During the year ended December 31, 2020, the Company issued 1,573,218 shares of common stock, par value $0.0001 per share, for proceeds of $2,000,000 net of offering fees and expenses of $609,010, pursuant to Stock Purchase Agreements entered into on December 19, 2019, as a component of the Merger Agreement and contingent upon closing of the Merger.

 

F-11

 

 

During the year ended December 31, 2020, the Company issued 1,037,496 shares of common stock to advisors in connection with the Merger.

 

In December 2020, based on its contract, the Company agreed to issue 15,000 shares of common stock to COR Prominence LLC, the Company’s investor relations firm. The shares were immediately vested and were issued in April 2021. An expense of $42,300 was recorded for the year ended December 31, 2020.

 

During the year ended December 31, 2020, the Company issued 2,007,193 shares of the common stock from the conversion of 7,360,985 shares of AYRO Seed Preferred Stock.

 

During the year ended December 31, 2020, the Company issued 6,817 shares of common stock from the exercise of stock options and received cash proceeds of $16,669.

 

During the year ended December 31, 2020, the Company issued 795 shares of common stock from the conversion of 955 shares of H-3 Preferred Stock.

 

On January 25, 2021, AYRO entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which AYRO agreed to issue and sell in a registered direct offering (the “January 2021 Offering”) an aggregate of 3,333,334 shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $6.00 per share, for gross proceeds of $20,000,004 before the deduction of fees and offering expenses of $1,648,608.

 

On February 11, 2021, AYRO entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which AYRO agreed to issue and sell in a registered direct offering (the “February 2021 Offering”) an aggregate of 4,400,001 shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $9.50 per share, for gross proceeds of $41,800,008 before the deduction of fees and offering expenses of $3,394,054. Each purchaser was also granted an option to purchase, on or before February 16, 2022, additional shares of common stock equal to the full amount of 75% of the common stock it purchased at the initial closing, or an aggregate of 3,300,001 shares, at an exercise price of $11.50 per share.

 

On March 17, 2021, in connection with that certain Agreement and Plan of Merger dated December 19, 2019, whereby certain former stockholders of AYRO Operating entered into lock-up agreements (collectively, the “May Lock-Up Agreements”) pursuant to which they agreed to certain restrictions on the transfer or sale of shares of the Company’s common stock for the one-year period following the Merger, AYRO modified the May Lock-Up Agreements to allow each stockholder party to a May Lock-Up Agreement to (i) sell up to 5% of such stockholder’s holdings in the Company’s common stock on any trading day (with such 5% limitation to be measured as of the date of each sale) and (ii) allow for unlimited sales of the Company’s common stock for any sales made at $10.00 per share or greater. As of May 28, 2021, all of the May Lock-up Agreements were expired.

 

Pursuant to the Securities Purchase Agreement dated July 21, 2020, during the six months ended June 30, 2021 investors purchased 302,500 of the Additional Shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $5.00 per share, for gross proceeds of $1,512,500.

 

During February 2021, the Company issued 13,642 shares of common stock from the exercise of warrants and received cash proceeds of $100,000.

 

During the six months ended June 30, 2021, the Company issued 469,576 shares of common stock from the exercise of stock options and received cash proceeds of $1,224,917.

 

During the six months ended June 30, 2021, the Company issued 681,725 shares of common stock upon the vesting of restricted stock.

 

F-12

 

 

Restricted Stock

 

During the year ended December 31, 2020, the Company issued 1,087,618 shares of restricted common stock valued based on the stock price at the date of issuance with a weighted average price of $5.27 per share, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, See Note 11. Of which 15,115 shares were vested during the year ended December 31, 2020. 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. During the six month ended June 30, 2021, 681,724 additional shares vested. The Company recognized stock-based compensation expense during the three and six months ended June 30, 2021 of $1,407,012 and $2,836,541, respectively.

 

Preferred Stock

 

Upon closing of the Merger, the Company assumed the Series H, H-3 and H-6 preferred stock of DropCar, Inc., which respective conversion prices have been adjusted to reflect the May 2020 one-for-five reverse split.

 

Series H Convertible Preferred Stock

 

Under the terms of the Series H Certificate of Designation, each share of the Company’s Series H Convertible Preferred Stock (the “Series H Preferred Stock”) has a stated value of $154 and is convertible into shares of the Company’s Common Stock, equal to the stated value divided by the conversion price of $184.80 per share (subject to adjustment in the event of stock splits or dividends). The Company is prohibited from effecting the conversion of the Series H Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own more than 9.99%, in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon such conversion. In the event of liquidation, the holders of the Series H Preferred Stock are entitled, pari passu with the holders of common stock, to receive a payment in the amount the holder would receive if such holder converted the Series H Preferred Stock into common stock immediately prior to the date of such payment.

 

As of June 30, 2021, such payment would be calculated as follows:

 

Number of Series H Preferred Stock outstanding as of June 30, 2021   8 
Multiplied by the stated value  $154.00 
Equals the gross stated value  $1,232 
Divided by the conversion price  $184.80 
Equals the convertible shares of Company Common Stock   7 
Multiplied by the fair market value of Company Common Stock as of June 30, 2021  $4.88 
Equals the payment  $34 

 

Series H-3 Convertible Preferred Stock

 

Pursuant to the Series H-3 Certificate of Designation (as defined below), the holders of the Company’s Series H-3 Convertible Preferred Stock (the “Series H-3 Preferred Stock”) are entitled to elect up to two members of a seven-member Board, subject to certain step downs; pursuant to the Series H-3 securities purchase agreement, the Company agreed to effectuate the appointment of the designees specified by the Series H-3 investors as directors of the Company.

 

Under the terms of the Series H-3 Certificate of Designation, each share of the Series H-3 Preferred Stock has a stated value of $138 and is convertible into shares of common stock, equal to the stated value divided by the conversion price of $165.60 per share (subject to adjustment in the event of stock splits and dividends). The Company is prohibited from effecting the conversion of the Series H-3 Preferred Stock to the extent that, as a result of such conversion, the holder or any of its affiliates would beneficially own more than 9.99%, in the aggregate, of the issued and outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series H-3 Preferred Stock.

 

F-13

 

 

In the event of liquidation, the holders of the Series H-3 Preferred Stock are entitled, pari passu with the holders of common stock, to receive a payment in the amount the holder would receive if such holder converted the Series H-3 Preferred Stock into common stock immediately prior to the date of such payment.

 

As of June 30, 2021, such payment would be calculated as follows:

 

Number of Series H-3 Preferred Stock outstanding as of June 30, 2021   1,234 
Multiplied by the stated value  $138 
Equals the gross stated value  $170,292 
Divided by the conversion price  $165.60 
Equals the convertible shares of Company Common Stock   1,028 
Multiplied by the fair market value of Company Common Stock as of June 30, 2021  $4.88 
Equals the payment  $5,017 

 

Series H-6 Convertible Preferred Stock

 

On February 5, 2020, the Company filed the Certificate of Designations, Preferences and Rights of the Series H-6 Preferred Stock (the “Series H-6 Certificate of Designation”) with the Secretary of State of the State of Delaware, establishing and designating the rights, powers and preferences of the Series H-6 Preferred Stock. The Company designated up to 50,000 shares of Series H-6 Preferred Stock and each share has a stated value of $72.00 (the “H-6 Stated Value”). Each share of Series H-6 Preferred Stock is convertible at any time at the option of the holder thereof, into a number of shares of common stock of the Company determined by dividing the H-6 Stated Value by the initial conversion price of $3.60 per share, which was then further reduced to $2.50 under the anti-dilution adjustment provision, subject to a 9.99% blocker provision. The Series H-6 Preferred Stock has the same dividend rights as the common stock, except as provided for in the Series H-6 Certificate of Designation or as otherwise required by law.

 

The Series H-6 Preferred Stock also has the same voting rights as the common stock, except that in no event shall a holder of Series H-6 Preferred Stock be permitted to exercise a greater number of votes than such holder would have been entitled to cast if the Series H-6 Preferred Stock had immediately been converted into shares of common stock at a conversion price equal to $3.60. In addition, a holder (together with its affiliates) may not be permitted to vote Series H-6 Preferred Stock held by such holder to the extent that such holder would beneficially own more than 9.99% of our common stock. In the event of any liquidation or dissolution, the Series H-6 Preferred Stock ranks senior to the common stock in the distribution of assets, to the extent legally available for distribution.

 

The holders of Series H-6 Preferred Stock are entitled to certain anti-dilution adjustments if the Company issues shares of its common stock at a lower price per share than the applicable conversion price of the Series H-6 Preferred Stock. If any such dilutive issuance occurs prior to the conversion of the Series H-6 Preferred Stock, the conversion price will be adjusted downward to a price that cannot be less than 20% of the exercise price of $3.60.

 

In the event of liquidation, the holders of the Series H-6 Preferred Stock are entitled, pari passu with the holders of common stock, to receive a payment in the amount the holder would receive if such holder converted the Series H-6 Preferred Stock into common stock immediately prior to the date of such payment.

 

As of June 30, 2021, such payment would be calculated as follows:

 

Number of Series H-6 Preferred Stock outstanding as of June 30, 2021   50 
Multiplied by the stated value  $72.00 
Equals the gross stated value  $3,600 
Divided by the conversion price  $2.50 
Equals the convertible shares of Company Common Stock   1,440 
Multiplied by the fair market value of Company Common Stock as of June 30, 2021  $4.88 
Equals the payment  $7,027 

 

F-14

 

 

Warrants

 

AYRO Seed Warrants

 

Prior to the Merger, the Company issued 461,647 warrants (the “AYRO Seed Warrants”) with an exercise price $7.33. The AYRO Seed Warrants terminate five years from the grant date. During February 2021, AYRO Seed Warrants were exercised for proceeds of $100,000 and the Company issued 13,642 shares of its Common Stock. As of June 30, 2021, there were 448,005 AYRO Seed Warrants outstanding. The Company recorded warrant expense of $0 and $36,760 related to the AYRO Seed Warrants for the six months ended June 30, 2021 and 2020, respectively.

 

Series I, J, H, H-1, H-3, H-4 and H-5 warrants transferred to AYRO common stock pursuant to the Merger.

 

Series I Warrants

 

As a result of the Merger, 14,636 Series I Warrants transferred to AYRO and have an exercise price of $69.00 per share. If at any time (i) the volume weighted average price (“VWAP”) of the Common Stock exceeds $138.00 for not less than the mandatory exercise measuring period; (ii) the daily average number of shares of Common Stock traded during the mandatory exercise measuring period equals or exceeds 25,000; and (iii) no equity conditions failure has occurred as of such date, then the Company shall have the right to require the holder to exercise all or any portion of the Series I Warrants. During the six months ended June 30, 2021, all 14,636 Series I Warrants expired.

 

Series H-3 Warrants

 

As a result of the Merger, 2,800 Series H-3 Warrants transferred to AYRO and have an exercise price of $165.60 per share, subject to adjustments (the “Series H-3 Warrants”). Subject to certain ownership limitations, the Series H-3 Warrants are immediately exercisable from the issuance date and will be exercisable for a period of five (5) years from the issuance date. As of June 30, 2021, there were 2,800 Series H-3 Warrants outstanding.

 

Exercise of Series H-4 Warrants and Issuance of Series J Warrants

 

Series H-4 Warrants

 

As a result of the Merger, 37,453 Series H-4 Warrants transferred to AYRO and have an exercise price of $15.60. The Series H-4 Warrants contain an anti-dilution price protection, and the warrants cannot be less than $15.60 per share. As of June 30, 2021, there were 37,453 Series H-4 Warrants outstanding.

 

As a result of the Merger, 52,023 Series J Warrants transferred to AYRO. The terms of the Series J Warrants are substantially identical to the terms of the Series H-4 Warrants except that (i) the exercise price is equal to $30.00 per share, (ii) the Series J Warrants may be exercised at all times beginning on the 6-month anniversary of the issuance date on a cash basis and also on a cashless basis, (iii) the Series J Warrants do not contain any provisions for anti-dilution adjustment and (iv) the Company has the right to require the Holders to exercise all or any portion of the Series J Warrants still unexercised for a cash exercise if the volume-weighted average price (VWAP) (as defined in the Series J Warrant) for the Company’s common stock equals or exceeds $45.00 for not less than ten consecutive trading days.

 

If at any time (i) the VWAP of the Common Stock exceeds $9.00 for not less than the mandatory exercise measuring period; (ii) the daily average number of shares of Common Stock traded during the mandatory exercise measuring period equals or exceeds 25,000; and (iii) no equity conditions failure has occurred as of such date, then the Company shall have the right to require the holder to exercise all or any portion of the Series J Warrants still unexercised for a cash exercise. As of June 30, 2021, there were 52,023 Series J Warrants outstanding.

 

F-15

 

 

Series H-5 Warrants

 

As a result of the Merger, 296,389 Series H-5 Warrants were transferred to AYRO and have an exercise price of $2.50 per share. Subject to certain ownership limitations, the H-5 Warrants became exercisable beginning six months from the issuance date and will be exercisable for a period of five years from the initial issuance date.

 

The H-5 Warrants are entitled to certain anti-dilution adjustments if the Company issues shares of its common stock at a lower price per share than the applicable exercise price (subject to a floor of $0.792 per share). An anti-dilution adjustment was triggered resulting in an adjusted exercise price per share from $3.96 to $2.50, resulting in an issuance of an additional 173,091 warrants that are exercisable at $2.50 per share. As of June 30, 2021, there were 348,476 Series H-5 Warrants outstanding.

 

The Company considers the change in exercise price due to the anti-dilution trigger related to the Series H-5 Warrants to be of an equity nature, as the issuance allowed the warrant holders to exercise warrants in exchange for common stock, which represents an equity for equity exchange. Therefore, the change in the fair value before and after the effect of the anti-dilution triggering event and the fair value of the Series H-5 warrants will be treated as a deemed dividend in the amount of $432,727. Cash received upon exercise in excess of par value is accounted for through additional paid in capital. The Company valued the deemed dividend as the difference between: (a) the modified fair value of the Series H-5 Warrants in the amount of $967,143 and (b) the fair value of the original award prior to the modification of $534,416.

 

The warrants were valued using the Black-Scholes option pricing model on the date of the modification and issuance using the following assumptions: (a) fair value of common stock of $2.77 per share, (b) expected volatility of 89.96%, (c) dividend yield of 0%, (d) risk-free interest rate of 0.24%, and (e) expected life of 5 years. The Series H-5 Warrants were exercisable beginning June 6, 2020.

 

The Series H-1, H-3, H-4, J and H-5 Warrants expire through the years 2022-2024.

 

Other AYRO Warrants

 

On June 19, 2020, the Company agreed to issue finder warrants (the “June Finder Warrants”) to purchase 27,273 shares of the Company’s common stock at an exercise price of $2.75 per share to a finder or its designees, and the Company agreed to issue warrants to Palladium (the “June Placement Agent Warrants”) to purchase 126,000 shares of the Company’s common stock at an exercise price of $2.875 per share. The June Finder Warrants and June Placement Agent Warrants terminate after a period of 5 years on June 19, 2020. As of December 31, 2020, 126,000 of the June Placement Agent Warrants had been exercised. As of June 30, 2021, the 27,273 June Finder Warrants were outstanding.

 

On July 8, 2020, the Company agreed to issue finder warrants (the “July 8 Finder Warrants”) to purchase 71,770 shares of the Company’s common stock at an exercise price of $5.225 per share to a finder or its designees, and the Company agreed to issue warrants to Palladium (the “July 8 Placement Agent Warrants”) to purchase 147,368 shares of the Company’s common stock at an exercise price of $5.4625 per share.

 

The July 8 Finder Warrants and July 8 Placement Agent Warrants terminate after a period of 5 years on July 8, 2020. As of June 30, 2021, there were 71,770 July 8 Finder Warrants and 147,368 July 8 Placement Agent Warrants were outstanding.

 

On July 22, 2020, the Company agreed to issue warrants to Palladium (the “July 22 Placement Agent Warrants”) to purchase 129,500 shares of the Company’s common stock at an exercise price of $5.750 per share. The July 22 Placement Agent Warrants terminate after a period of 5 years on July 22, 2020. As of June 30, 2021, there were 129,500 July 22 Placement Agent Warrants outstanding.

 

F-16

 

 

On September 25, 2020, the Company issued a warrant (the “September Warrant”) to purchase 31,348 shares of the Company’s common stock at an exercise price of $3.19 per share to a vendor for facilitating a manufacturing agreement. The September Warrant is immediately exercisable and expires on September 25, 2025. The September Warrant was classified as equity and the estimated fair value of $2.13 per share was computed as of September 25, 2020, using the Black-Scholes model. The Company recorded $66,845 as stock-based compensation expense during the fourth quarter in 2020 for the total fair value of the September Warrant. As of June 30, 2021, there were 31,348 September Warrants outstanding.

 

The following assumptions were used to determine the fair value of the September Warrants:

 

   As of
September 25, 2020
 
Dividend   -%
Risk Free Rate   0.30%
Exercise Price  $2.90 
Strike Price  $3.19 
Term   5.00 
Volatility   102%

 

On November 22, 2020, the Company entered into a Securities Purchase Agreement with new and current stockholders of the Company, pursuant to which such stockholders agreed to purchase shares of AYRO’s Common Stock, Series A Warrants and Series B Warrants to purchase AYRO’s Common Stock for an aggregate purchase price of $9,999,997. Each purchaser additionally purchased and received Series A Warrants and Series B Warrants equal to 75% and 50% of the purchased shares, for a total of 1,237,624 Series A Warrants and 825,084 Series B Warrants. The Series A Warrants were immediately exercisable, in whole or in part at a strike price of $8.09 and expired on May 24, 2021. The Series B Warrants are immediately exercisable, in whole or in part, at a strike price of $8.90, and terminate five years from the date issuance on November 24, 2025. As of June 30, 2021, there were no Series A Warrants and 825,084 Series B Warrants outstanding.

 

On November 22, 2020, the Company agreed to issue finder warrants (the “November Finder Warrants”) to purchase 56,256 shares of the Company’s common stock at an exercise price of $6.6660 per share to a finder or its designees, and the Company agreed to issue warrants to Palladium (the “November Placement Agent Warrants”) to purchase 57,756 shares of the Company’s common stock at an exercise price of $6.9690 per share.

 

The November Finder Warrants and November Placement Agent Warrants terminate after a period of 5 years on November 22, 2025. As of June 30, 2021, there were 56,256 November Finder Warrants and 57,756 November Placement Agent Warrants were outstanding.

 

On January 25, 2021, AYRO entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which AYRO agreed to issue and sell in a registered direct offering (the “January 2021 Offering”) an aggregate of 3,333,334 shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $6.00 per share, for gross proceeds of approximately $20.0 million before the deduction of fees and offering expenses.

 

Each purchaser was also granted a warrant to purchase, between July 26, 2021 and July 26, 2023, additional shares of common stock equal to the full amount of the common stock it purchased at the initial closing, or an aggregate of 3,333,334 shares at an exercise price of $6.93 per share.

 

On January 25, 2021, the Company agreed to issue warrants to Palladium, the placement agent for the January 2021 offering to purchase 233,334 shares of the Company’s common stock at an exercise price of $6.93 per share. The warrants are exercisable six months following issuance and terminate on July 23, 2023.

 

F-17

 

 

On February 11, 2021, the Company agreed to issue warrants to Spartan Capital Securities, LLC and its affiliates (the “February Finder Warrants”) to purchase 15,574 shares of the Company’s common stock at an exercise price of $10.925 per share and to purchase 35,885 shares of the Company’s common stock at an exercise price of $10.45 per share to a finder or its designees. In addition, the Company agreed to issue warrants to Palladium (the “February Placement Agent Warrants”) to purchase 255,584 shares of the Company’s common stock at an exercise price of $10.925 per share. The February Finder Warrants and February Placement Agent Warrants terminate after a period of 5 years on February 26, 2026. As of June 30, 2021, there were 51,459 February Finder Warrants and 255,584 February Placement Agent Warrants were outstanding.

 

A summary of the Company’s warrants to purchase common stock activity is as follows:

 

   Shares Underlying Warrants  

Weighted Average

Exercise

Price

  

Weighted Average Remaining Contractual Term (in

years)

 
Outstanding at December 31, 2020   3,501,014   $8.03    2.87 
Granted   3,873,711   $7.24      
Exercised   (13,642)  $7.33      
Expired   (1,252,260)  $8.80      
Outstanding at June 30, 2021   6,108,823   $7.37    2.82 

 

NOTE 11. STOCK-BASED COMPENSATION

 

AYRO 2020 Long Term Incentive Plan

 

On May 28, 2020, the Company’s shareholders approved the AYRO, Inc. 2020 Long Term Incentive Plan for future grants of incentive stock options, nonqualified stock, stock appreciation rights, restricted stock, restricted stock units, performance and other awards. 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 1,874,037 stock options, restricted stock and warrants remaining under this plan as of June 30, 2021.

 

AYRO 2017 Long Term Incentive Plan

 

Prior to the Merger, the Company granted stock options and warrants pursuant to the 2017 Long Term Incentive Plan effective January 1, 2017. As of June 30, 2021, the 2017 Long Term Incentive Plan remains active, but no additional awards may be granted.

 

DropCar Amended and Restated 2014 Equity Incentive Plan

 

The DropCar Amended and Restated 2014 Equity Incentive Plan was amended in 2018 to increase the number of shares of Company common stock available for issuance. Pursuant to the 2014 Equity Incentive Plan (the “2014 Plan”), 141,326 shares of common stock were reserved for issuance and there are options to purchase 61,440 shares outstanding as of June 30, 2021. As of June 30, 2021, there were zero shares available for grant under the 2014 Plan.

 

F-18

 

 

Stock-based compensation, including restricted stock awards, stock options and warrants is included in the unaudited condensed consolidated statement of operations as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
Research and development  $20,708   $15,873   $44,194   $31,745 
Sales and marketing   60,633    38,120    124,082    72,705 
General and administrative   1,556,730    96,956    3,169,218    202,958 
Total  $1,638,071   $150,949   $3,337,494   $307,408 

 

Options

 

The following table reflects the stock option activity:

 

   Number of Shares   Weighted Average Exercise Price   Contractual Life (Years) 
Outstanding at December 31, 2020   1,920,269   $4.40    8.66 
Exercised   (469,576)   (2.25)     
Forfeitures   (2,500)   (2.52)     
Outstanding at June 30, 2021   1,448,193   $4.98    8.46 

 

Of the outstanding options, 575,600 were vested and exercisable as of June 30, 2021. At June 30, 2021 the aggregate intrinsic value of stock options vested and exercisable was $1,534,567.

 

The Company recognized $231,059 and $136,244 of stock option expense for the three months ended June 30, 2021 and June 30, 2020, and $500,953 and $270,647 for the six months ended June 30, 2021 and June 30, 2020, respectively. Total compensation cost related to non-vested stock option awards not yet recognized as of June 30, 2021 was $1,472,752 and will be recognized on a straight-line basis through the end of the vesting periods through October 2023. The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.

 

Determining the appropriate fair value of the stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and the expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

 

The Company uses the following inputs when valuing stock-based awards.

 

   Six Months Ended June 30, 
   2021   2020 
Expected life (years)   N/A    5.0 
Risk-free interest rate   N/A    0.70%
Expected volatility   N/A    4.40%
Total grant date fair value  $ N/A   $3.84 

 

The expected life of the employee stock options was estimated using the “simplified method,” as the Company has no historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock option grants. No employee stock options were awarded in the six months ended June 30, 2021.

 

F-19

 

 

The simplified method is based on the average of the vesting tranches and the contractual life of each grant. The expected life of awards that vest immediately use the contractual maturity since they are vested when issued. For stock price volatility, the Company uses public company compatibles and historical private placement data as a basis for its expected volatility to calculate the fair value of option grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option at the grant-date.

 

Restricted Stock

 

The following table reflects the restricted stock activity:

 

 

Number of

Shares

  

Weighted

Average

Grant Price

 
Outstanding at December 31, 2020   1,072,503   $5.30 
Granted   172,000    7.66 
Vested   (681,724)   4.85 
Forfeitures   (42,612)   3.17 
Outstanding at June 30, 2021   520,167   $6.84 

 

In September 2020, the Company issued 436,368 shares of restricted stock to non-executive directors, of which 15,115 immediately vested and the remainder to vest in December 2020, which was subsequently modified to vest in full in May 2021. During May 2021, of the remaining outstanding restricted stock 378,641 vested and 42,612 were forfeited. The Company recognized compensation expense during the three and six months ended June 30, 2021 of $198,763 and $699,528, respectively.

 

In December 2020, based on objectives achieved, the Company issued 651,250 shares of restricted stock to Rodney C. Keller, Jr. (“the “Keller Restricted Stock”) that vest according to the following vesting schedule: one-third will vest on May 28, 2021, one-third will vest on December 4, 2021 and one-third will vest on December 4, 2022. Compensation expense recognized for the Keller Restricted Stock for the three and six months ended June 30, 2021 was $732,472 and $1,478,247, respectively. Total compensation cost related to non-vested restricted stock not yet recognized as of June 30, 2021 was $2,648,371 and will be recognized on a straight-line basis through the end of the vesting periods through December 4, 2022.

 

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. The shares vest 50% at June 30, 2021, 25% at September 30, 2021 and 25% at December 31, 2021. The Company recognized compensation expense during the three and six months ended June 30, 2021 of $475,771 and $658,760. Total compensation cost related to non-vested restricted stock not yet recognized as of June 30, 2021 was $658,760 and will be recognized on a straight-line basis through the end of the vesting periods through December 31, 2021.

 

Other Share-Based Payments

 

The Company granted stock warrants pursuant to the 2017 Long Term Incentive Plan (“LTIP”) effective January 1, 2017. The Company measured consultant stock-based awards at grant-date fair value and recognizes contractor consulting expense for contractor warrants on a straight-line method basis over the vesting period of the award. Grants to consultants are expensed at the earlier of (i) the date at which a commitment for performance by the service provider to earn the equity instrument is reached and (ii) the date at which the service provider’s performance is complete.

 

The Company recognized $0 and $14,704 of warrant expense related to consulting services for the three months ended June 30, 2021 and 2020, and $0 and $36,760 for the six months ended June 30, 2021 and 2020, respectively.

 

F-20

 

 

NOTE 12. CONCENTRATIONS AND CREDIT RISK

 

Revenues

 

In March 2019, the Company entered into a five-year Master Procurement Agreement, or the MPA, with Club Car for the sale of AYRO’s four-wheeled vehicle. The MPA grants Club Car the exclusive right to sell AYRO’s four-wheeled vehicle in North America, provided that Club Car orders at least 500 vehicles per year. Although Club Car did not meet the volume threshold for 2020, we currently do not intend to sell our four-wheeled vehicles other than exclusively through Club Car. The MPA has an initial term of five (5) years commencing January 1, 2019 and may be renewed by Club Car for successive one-year periods upon 60 days’ prior written notice. For the six months ended June 30, 2021 and 2020, two customers accounted for the Company’s revenues, one for 59% and 81% and the second for 40% and 17%, respectively, and one for 39% and 76% and the second for 65% and 25% for the three months ended June 30, 2021 and 2020, respectively.

 

Accounts Receivable

 

As of June 30, 2021 and December 31, 2020, two customers accounted for more than 10% of the Company’s accounts receivable. One customer accounted for approximately 45% and 74% as of June 30, 2021 and December 31, 2020, respectively. A second customer accounted for approximately 44% and 11% as of June 30, 2021 and December 31, 2020, respectively.

 

Purchasing

 

The Company places orders with various suppliers. During the six months ended June 30, 2021 and 2020, two suppliers provided more than 10% of the Company’s raw materials purchases. During the six months ended June 30, 2021, one supplier, Cenntro, accounted for approximately 45% and another supplier accounted for approximately 12%. The Company’s purchases of raw materials from one supplier accounted for approximately 57%, another supplier accounted for approximately 25% for the six months ended June 30, 2020. The Company’s purchases for raw materials were approximately 63% and 8% for the three months ended June 30, 2021, and approximately 28% and 12% for the three months ended June 30, 2020. Any disruption in the operation of this supplier, Cenntro could adversely affect the Company’s operations.

 

Manufacturing

 

Cenntro Automotive Group (“Cenntro”), a related party in 2020, owns the design of the AYRO 411 model and has granted the Company an exclusive license to manufacture the AYRO 411 model for sale in North America. The Company’s business is dependent on such license, and if it fails to comply with its obligations to maintain that license, the Company’s business will be substantially harmed. Under the Manufacturing License Agreement, dated April 27, 2017, between Cenntro and the Company, the Company is granted an exclusive license to manufacture and sell AYRO 411 in the United States, and the Company is required to purchase the minimum volume of product units from Cenntro, among other obligations.

 

NOTE 13. RELATED PARTY TRANSACTIONS

 

Supply Chain Agreements

 

In 2017, the Company executed a supply chain contract with Cenntro, the Company’s primary supplier, a manufacturer located in the People’s Republic of China. Prior to the Merger, Cenntro was a significant shareholder in AYRO Operating. Through the partnership, Cenntro acquired 19% of AYRO Operating’s common stock. 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. Currently, the Company purchases 100% of its vehicle chassis, cabs and wheels 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 upon availability of the next-generation AYRO 411, the 411x. As of June 30, 2021 and December 31, 2020, the amounts outstanding to Cenntro as a component of accounts payable were $16,635 and $44,594, respectively. See Note 12 for concentration amounts.

 

F-21

 

 

Under a memo of understanding signed between the Company and Cenntro on March 22, 2020, the Company agreed to purchase 300 units within the following twelve months of signing the memo of understanding, and 500 and 800 in each of the following respective twelve-month periods. On July 9, 2020, in exchange for certain percentage discounts for raw materials, the Company made a $1.2 million prepayment for inventory. During the six months ended June 30, 2021, the Company made an additional deposit of $100,000, as prepayment for additional inventory for 2021. As of June 30, 2021 and December 31, 2020, the prepayment deposits were $711,634 and $976,512, respectively.

 

Other

 

The Company had received short-term expense advances from its founders. As of June 30, 2021 and December 31, 2020, the amounts outstanding were $15,000 for each year and recorded as a component of accounts payable on the accompanying unaudited condensed consolidated balance sheets.

 

NOTE 14. COMMITMENTS AND CONTINGENCIES

 

Lease Agreements

 

In 2019 the Company entered into a new lease agreement for office and manufacturing space. The lease commencement date was January 16, 2020. Prior to the commencement date of the new lease agreement, the Company leased other office and manufacturing space on a short-term basis. The Company determined if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of identified asset for a period of time. The contact provides the right to substantially all the economic benefits from the use of the identified asset and the right to direct use of the identified asset, as such, the contract is, or contains, a lease. In connection with the adoption of ASC 842, Leases, the Company has elected to treat the lease and non-lease components as a single component.

 

During March 2021, the Company subleased additional office space to support the Company’s expansion plan. The term is for 16 months with a total lease obligation of $131,408. In connection with the adoption of ASC 842, Leases, the Company has elected to treat the lease and non-lease components as a single component.

 

Leases were classified as an operating lease at inception. An operating lease results in the recognition of a Right-of-Use (“ROU”) assets and lease liability on the balance sheet. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Because the lease does not provide an explicit or implicit rate of return, the Company determines incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis.

 

The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments for the asset under similar term, which is 10.41%. Lease expense for the lease is recognized on a straight-line basis over the lease term.

 

The Company’s leases do not contain any residual value guarantees or material restrictive covenants. Leases with a lease term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. The remaining terms for the Company’s leases as of June 30, 2021 are 5.75 and 1.00 years, respectively. The Company currently has no finance leases.

 

During the six months ended June 30, 2021 and 2020, cash paid for amounts included in the measurement of lease liabilities- operating cash flows from operating lease was $67,009 and $30,286, respectively.

 

F-22

 

 

The components of lease expense consist of the following:

 

     2021     2020     2021     2020 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2021   2020   2021   2020 
Operating lease expense  $127,463   $61,196   $196,258   $107,064 
Short-term lease expense   1,956    8,026    5,489    54,854 
Total lease cost  $129,419   $69,222   $201,747   $161,918 

 

Balance sheet information related to leases consists of the following:

 

   June 30, 2021   December 31, 2020 
Assets          
Operating lease – right-of-use asset, net  $1,125,368   $1,098,819 
Total lease assets  $1,125,368   $1,098,819 
           
Liabilities          
Current liabilities: