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 September 30, 2021

☐	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 November 12, 2021, the registrant had 36,866,956 shares of common stock outstanding.

AYRO, Inc.

Quarter Ended September 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 September 30, 2021 and December 31, 2020	F-1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020	F-2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020	F-3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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	2
ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	15
ITEM 4.	Controls and Procedures	15

PART II	OTHER INFORMATION	16

ITEM 1.	Legal Proceedings	16
ITEM 1A.	Risk Factors	16
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
ITEM 3.	Defaults Upon Senior Securities	17
ITEM 4.	Mine Safety Disclosures	17
ITEM 5.	Other Information	17
ITEM 6.	Exhibits	18

SIGNATURES		19

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30,			December 31,
	2021			2020
ASSETS
Current assets:
Cash	$	77,099,134		$	36,537,097
Accounts receivable, net		740,224			765,850
Inventory, net		2,670,282			1,173,254
Prepaid expenses and other current assets		2,450,225			1,608,762
Total current assets		82,959,865			40,084,963

Property and equipment, net		903,076			611,312
Intangible assets, net		109,110			143,845
Operating lease – right-of-use asset		1,069,883			1,098,819
Deposits and other assets		41,289			22,491
Total assets	$	85,083,223		$	41,961,430

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,187,625		$	767,205
Accrued expenses		4,439,997			665,068
Contract liability		-			24,000
Current portion long-term debt, net		-			7,548
Current portion lease obligation – operating lease		231,867			123,139
Total current liabilities		5,589,489			1,586,960

Long-term debt, net		-			14,060
Lease obligation - operating lease, net of current portion		897,032			1,002,794
Total liabilities		6,756,521			2,603,814

Commitments and contingencies		-

Stockholders’ equity:
Preferred Stock, value		-			-
Preferred Stock, (authorized – 20,000,000 shares)		-			-
Convertible Preferred Stock Series H, ($0.0001 par value; authorized – 8,500 shares; issued and outstanding – 8 shares as of September 30, 2021 and December 31, 2020)		-			-
Convertible Preferred Stock Series H-3, ($.0001 par value; authorized – 8,461 shares; issued and outstanding – 1,234 shares as of September 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 September 30, 2021 and December 31, 2020)		-			-
Common Stock, ($0.0001 par value; authorized – 100,000,000 shares; issued and outstanding – 36,432,789 and 27,088,584 shares, as of September 30, 2021 and December 31, 2020)		3,643			2,709
Additional paid-in capital		128,777,533			64,509,724
Accumulated deficit		(50,454,474	)		(25,154,817	)
Total stockholders’ equity		78,326,702			39,357,616
Total liabilities and stockholders’ equity	$	85,083,223		$	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 September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Revenue	$	559,370		$	388,654		$	1,870,306		$	821,398
Cost of goods sold		955,466			326,671			2,030,447			645,463
Gross profit (loss)		(396,096	)		61,983			(160,141	)		175,935

Operating expenses:
Research and development		4,165,732			664,145			9,135,410			999,449
Sales and marketing		646,713			304,880			1,873,955			863,400
General and administrative		6,805,788			1,482,018			14,168,782			3,445,749
Total operating expenses		11,618,233			2,451,043			25,178,147			5,308,598

Loss from operations		(12,014,329	)		(2,389,060	)		(25,338,288	)		(5,132,663	)

Other income (expense):
Other income, net		12,254			17,503			40,943			17,523
Interest expense		-			(95,469	)		(2,312	)		(324,670	)
Loss on extinguishment of debt		-			(213,700	)		-			(566,925	)
Other income (expense), net		12,254			(291,666	)		38,631			(874,072	)

Net loss	$	(12,002,075	)	$	(2,680,726	)	$	(25,299,657	)	$	(6,006,735	)

Deemed dividend on modification of Series H-5 warrants		-			(432,727	)		-			(432,727	)

Net loss Attributable to Common Stockholders	$	(12,002,075	)	$	(3,113,453	)	$	(25,299,657	)	$	(6,439,462	)

Net loss per share, basic and diluted	$	(0.33	)	$	(0.13	)	$	(0.73	)	$	(0.54	)

Basic and diluted weighted average Common Stock outstanding		36,312,478			23,599,967			34,615,858			11,896,906

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 Preferred Stock				Series H-3 Preferred Stock				Series H-6 Preferred Stock					Common Stock				Additional Paid-in			Accumulated
	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
Issuance of common stock for services
Issuance of common stock for services, shares
Conversion of AYRO Preferred Stock to common stock
Conversion of AYRO Preferred Stock to common stock, shares
Issuance of Series H Preferred Stock in connection with the 2020 Merger
Issuance of Series H Preferred Stock in connection with the 2020 Merger, shares
Issuance of Series H-3 Preferred Stock in connection with the 2020 Merger
Issuance of Series H-3 Preferred Stock in connection with the 2020 Merger, shares
Issuance of Series H-6 Preferred Stock in connection with the 2020 Merger
Issuance of Series H-6 Preferred Stock in connection with the 2020 Merger, shares
Issuance of Common Stock in connection with the 2020 Merger, net of fees
Issuance of Common Stock in connection with the 2020 Merger, net of fees, shares
Exchange of debt for common stock in connection with the 2020 Merger
Exchange of debt for common stock in connection with the 2020 Merger, shares
Issuance of common stock in connection with debt offering
Issuance of common stock in connection with debt offering, shares
Exercise of warrants, net of fees
Exercise of warrants, net of fees, shares
Conversion of Series H-6 Preferred Stock
Conversion of Series H-6 Preferred Stock, shares
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 of Warrants													-		13,642		1		99,999						100,000
Exercise of Options															74,987		7		183,418						183,425
Restricted stock vesting
Restricted stock vesting, shares
Deemed Dividend on modification of H-5 warrants
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 of 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
Stock Based Compensation																			1,012,121						1,012,121
Exercise of Options															85,428		9		282,074						282,083
Restricted stock vesting															42,999		4		(4	)					0
Net Loss				-				-				-	-									(12,002,075	)		(12,002,075	)
Balance, September 30, 2021		8	$	-		1,234	$	-		50	$	-	-		36,432,789	$	3,643	$	128,777,533		$	(50,454,474	)	$	78,326,702


	Series H Preferred Stock				Series H-3 Preferred Stock				Series H-6 Preferred Stock					AYRO Series Seed Preferred Stock						Common Stock				Additional 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		8.00	$	-		2,189.00	$	-		7,883.00		$	-		-		$	-			16,509,964	$	1,651	$	25,827,425		$	(17,284,653	)	$	8,544,423
Sale of common stock, net of fees																					5,007,895		500		22,260,302						22,260,802
Exercise of warrants, net of fees																					2,539,769		254		2,467,936						2,468,190
Conversion of Series H-6 Preferred Stock		-								(7,833.00	)										225,590		23		(23	)					-
Stock Based Compensation																									119,853						119,853
Vested Restricted Stock																					15,115		2		47,915						47,917
Deemed Dividend on modification of H-5 warrants																									432,727			(432,727	)		-
Net Loss				-				-					-					-										(2,680,726	)		(2,680,726	)
Balance, September 30, 2020		8	$	-		2,189	$	-		50		$	-		-		$	-			24,298,333	$	2,430	$	51,156,135		$	(20,398,106	)	$	30,760,459

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)


	Nine Months Ended
	September 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(25,299,657	)	$	(6,006,735	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		384,157			343,932
Stock-based compensation		6,997,986			475,175
Amortization of debt discount		-			236,398
Loss on extinguishment of debt		-			566,925
Amortization of right-of-use asset		149,376			80,447
Provision for bad debt expense		92,176			10,131
Change in operating assets and liabilities:
Accounts receivable		(66,550	)		(353,015	)
Inventory		(1,568,687	)		(406,239	)
Prepaid expenses and other current assets		(841,465	)		(1,697,474	)
Deposits		(18,797	)		26,265
Accounts payable		420,420			285,184
Accrued expenses		1,168,858			(168,840	)
Contract liability		(24,000	)		122,514
Lease obligations - operating leases		(117,474	)		(57,163	)
Net cash used in operating activities		(18,723,657	)		(6,542,495	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(512,298	)		(581,137	)
Purchase of intangible assets		(57,227	)		(11,730	)
Proceeds from merger with ABC Merger Sub, Inc.		-			3,060,740
Net cash used in and provided by investing activities		(569,525	)		2,467,873

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance debt		-			1,318,000
Repayments of debt		(21,609	)		(1,742,884	)
Proceeds from exercise of warrants		100,000			2,983,527
Proceeds from exercise of stock options		1,506,999			-
Proceeds from issuance of common stock, net of fees and expenses		58,269,829			28,790,995
Net cash provided by financing activities		59,855,219			31,349,638

Net change in cash		40,562,037			27,275,016

Cash, beginning of period		36,537,097			641,822

Cash, end of period	$	77,099,134		$	27,916,838

Supplemental disclosure of cash and non-cash transactions:
Cash paid for interest	$	1,971		$	78,794
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
Accrued offering costs	$	-		$	74,200
Deemed dividend on modification of Series H-5 warrants	$	-		$	432,727
Restricted Stock for service, vested not issued	$	2,648,371		$	-

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 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 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.

Strategic Review

Following the hiring of its new Chief Executive Officer in the third quarter of 2021, the Company initiated a strategic review of its product development strategy, as it focuses on creating value within the electric vehicle, last-mile delivery, and smart payload markets. While completing the strategic review, the Company has paused all material research and development activity and expenditures, including expenses associated with its planned next generation three-wheeled vehicle.

This process may result in the Company deciding to modify or discontinue current or planned products, in reallocating time and resources among existing products, in exploring new products or in making other operational changes, including to the Company’s reliance on internal and external resources. It could also result in delays in the expected timing for the launch of new products, if the Company determines to continue their development. Any decisions on advancing, reprioritizing or eliminating any of the Company’s products will be based on an evaluation of a number of factors, including the Company’s assessment of internal and external resources, the potential market for such products, the costs and complexities of manufacturing, the potential of competing products, the likelihood of any challenges to its intellectual property, regardless of merit, the ongoing and potential effects of the COVID-19 or any future pandemics, and industry and market conditions generally, and will be subject to the approval of the strategic and budget committee of the board of directors.

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 $12,002,075 and $25,299,657 for the three and nine months ended September 30, 2021, respectively, and negative cash flows from operations of $18,723,657 for the nine months ended September 30, 2021. At September 30, 2021, the Company had cash balances totaling $77,099,134. In addition, overall working capital increased by $38,602,374 during the nine months ended September 30, 2021. Management believes that the existing cash at September 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 three quarters of 2021, resulting in sales that were less than expected through the first three quarters of 2021. AYRO expects the pandemic to continue to have an adverse impact on sales and demand for products throughout the remainder of 2021.

The Company relies on foreign suppliers, including Cenntro, its largest supplier, for a number of raw materials, instruments and technologies that the Company purchases. The Company’s success is dependent on the ability to import or transport such products from Cenntro and other overseas vendors in a timely and cost-effective manner. The Company relies heavily on third parties, including ocean carriers and truckers, in that process. The global shipping industry is experiencing ocean shipping disruptions, trucking shortages, increased ocean shipping rates and increased trucking and fuel costs, and the Company cannot predict when these disruptions will end.

F-6

There is currently a shortage of shipping capacity from China and other parts of Asia, and as a result, receipt of imported products may be disrupted or delayed. The shipping industry is also experiencing issues with port congestion and pandemic-related port closures and ship diversions. Labor disputes among freight carriers and at ports of entry are common, and The Company expects labor unrest and its effects on shipping products to be a challenge for it. A port worker strike, work slow-down or other transportation disruption in the port of Long Beach, California could significantly disrupt the Company’s business. The Company is currently experiencing such disruption at the port due to multiple factors brought about by the COVID-19 pandemic, such as supply and demand imbalance, a shortage of warehouse workers, truck drivers, transport equipment (tractors and trailers) and other causes, which have resulted in heightened congestion, bottleneck and gridlock, leading to abnormally high transportation delays. This has materially and adversely affected the Company’s business and could continue to materially and adversely affect the business and financial results for the fourth quarter of 2021. If significant disruptions along these lines continue, this could lead to further significant disruptions in the Company’s business, delays in shipments, and revenue and profitability shortfalls, which could adversely affect the business, prospects, financial condition and operating results.

The global shipping industry is also experiencing unprecedented increases in shipping rates from the trans-Pacific ocean carriers due to various factors, including limited availability of shipping capacity. For example, the cost of shipping products by ocean freight has recently increased to at least three times historical levels and will have a corresponding impact on profitability. The Company may find it necessary to rely on an increasingly expensive spot market and other alternative sources to make up any shortfall in shipping needs. Additionally, if increases in fuel prices occur, transportation costs would likely further increase. Similarly, supply chain disruptions such as those described in the preceding paragraphs may lead to an increase in transportation costs. Such cost increases have adversely affected the Company’s business and could have additional adverse effects on the business, prospects, financial condition and operating results.

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 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 increasing costs of raw materials by increasing vehicle prices.

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-7

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 nine months ended September 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 $98,464 and $29,944 for the three months ended September 30, 2021 and 2020 and $208,139 and $60,734 for the nine months September 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. 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.

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 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.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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-8

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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Options to purchase common stock		1,362,765		1,781,488		1,362,765		1,781,488
Restricted Stock Unvested		493,000		421,253		493,000		421,253
Restricted stock vested – unissued		434,166		-		434,166		-
Warrants outstanding		6,108,823		1,988,175		6,108,823		1,988,175
Preferred Stock outstanding		2,475		3,272		2,475		3,272
Totals		8,401,229		4,194,188		8,401,229		4,194,188

NOTE 4. REVENUES

Disaggregation of Revenue

Revenue by type was as follows:

SCHEDULE OF DISAGGREGATION OF REVENUE

	2021		2020		2021		2020
	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue type
Product revenue	$	494,011	$	348,480	$	1,710,579	$	741,570
Shipping revenue		65,359		38,381		123,040		76,249
Subscription revenue		-		-		-		1,786
Service income		-		1,793		36,687		1,793
Revenue	$	559,370	$	388,654	$	1,870,306	$	821,398

F-9

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 September 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.

SCHEDULE OF CONTRACT LIABILITIES

	Nine Months Ended September 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 September 30, 2021 and December 31, 2020, warranty reserves were recorded within accrued expenses of $69,903 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:

SCHEDULE OF ACCOUNTS RECEIVABLE

	September 30,			December 31,
	2021			2020
Trade receivables	$	906,229		$	839,679
Less: Allowance for doubtful accounts		(166,005	)		(73,829	)
Accounts receivable, net	$	740,224		$	765,850

NOTE 6. INVENTORY, NET

Inventory consisted of the following:

SCHEDULE OF INVENTORY

	September 30,		December 31,
	2021		2020
Raw materials	$	2,507,785	$	634,085
Work-in-progress		-		-
Finished goods		162,497		539,169
Inventory	$	2,670,282	$	1,173,254

F-10

Depreciation expense for fleet inventory for the three months ended September 30, 2021 and 2020 was $23,886 and $0, and for the nine months ended September 30, 2021 and 2020, $71,658 and $0, respectively. Management has determined that no reserve for inventory obsolescence was required as of September 30, 2021 and December 31, 2020. However, $388,735 of obsolete 411 finished goods inventory was written of in Q3 2021.

NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

	September 30,		December 31,
	2021		2020
Prepaid final assembly services	$	349,220	$	520,000
Prepayments for inventory		1,849,371		976,512
Prepaid other		251,634		112,250
	$	2,450,225	$	1,608,762

NOTE 8. PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

	September 30,			December 31,
	2021			2020
Computer and equipment	$	848,569		$	815,704
Furniture and fixtures		171,342			127,401
Lease improvements		263,497			221,802
Prototypes		300,376			300,376
Computer software		455,875			62,077
Property and equipment		2,039,659			1,527,360
Less: Accumulated depreciation		(1,136,583	)		(916,048	)
Property and equipment, net	$	903,076		$	611,312

Depreciation expense for the three months ended September 30, 2021 and 2020 was $74,655 and $86,664, and for the nine months ended September 30, 2021 and 2020 was $220,535 and $258,276, respectively.

NOTE 9. INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

SCHEDULE OF INTANGIBLE ASSETS

	September 30, 2021
	Gross Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Amortization Period
Supply chain development	$	404,622	$	(366,836	)	$	37,786		0.37 yrs.
Patents and trademarks		118,290		(46,966	)		71,324		2.41 yrs.
	$	522,912	$	(413,802	)	$	109,110

	December 31, 2020
	Gross Amount		Accumulated Amortization			Net Carrying Amount		Weighted- Average Amortization 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-11

Amortization expense for the three months ended September 30, 2021 and 2020, was $31,941 and $28,805 and for the nine months ended September 30, 2021 and 2020, was $91,964 and $85,656, 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-12

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 nine months ended September 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 nine months ended September 30, 2021, the Company issued 555,004 shares of common stock from the exercise of stock options and received cash proceeds of $1,506,999.

During the nine months ended September 30, 2021, the Company issued 724,724 shares of common stock upon the vesting of restricted stock.

F-13

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, of which 15,115 shares were vested during the year ended December 31, 2020. See Note 11. 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 nine months ended September 30, 2021, 1,158,891 additional shares vested, of which 434,166 shares were accelerated vesting upon the resignation of the Company’s former chief executive officer. The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2021 of $2,990,493 and $5,827,028 respectively. $2,684,371 of expense was incurred and accrued at September 30, 2021, until issued, from the one time accelerated vesting of 434,166 restricted stock shares related to the separation agreement of the Company’s former chief executive officer.

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 September 30, 2021, such payment would be calculated as follows:

SCHEDULE OF PAYMENT OF PREFERRED STOCK


Number of Series H Preferred Stock outstanding as of September 30, 2021		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 September 30, 2021	$	3.41
Equals the payment	$	24

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-14

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 September 30, 2021, such payment would be calculated as follows:

SCHEDULE OF PAYMENT OF PREFERRED STOCK


Number of Series H-3 Preferred Stock outstanding as of September 30, 2021		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 September 30, 2021	$	3.41
Equals the payment	$	3,505

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 September 30, 2021, such payment would be calculated as follows:

SCHEDULE OF PAYMENT OF PREFERRED STOCK


Number of Series H-6 Preferred Stock outstanding as of September 30, 2021		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 September 30, 2021	$	3.41
Equals the payment	$	4,910

F-15

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 September 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 nine months ended September 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 nine months ended September 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 September 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 September 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 September 30, 2021, there were 52,023 Series J Warrants outstanding.

F-16

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 September 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, 2025. As of December 31, 2020, 126,000 of the June Placement Agent Warrants had been exercised. As of September 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, 2025. As of September 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, 2025. As of September 30, 2021, there were 129,500 July 22 Placement Agent Warrants outstanding.

F-17

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 September 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 September 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 September 30, 2021, there were 56,256 November Finder Warrants and 57,756 November Placement Agent Warrants were outstanding.