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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 September 30, 2022

 

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 November 03, 2022, the registrant had 37,020,518 shares of common stock outstanding.

 

 

 

 
 

 

AYRO, Inc.

Quarter Ended September 30, 2022

 

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, 2022 and December 31, 2021 F-1
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 F-2
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 F-3
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 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 15
ITEM 6. Exhibits 16
     
SIGNATURES 18

 

i
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

     September 30,     December 31, 
   2022   2021 
ASSETS          
Current assets:          
Cash  $39,428,850   $69,160,466 
Marketable securities   15,790,595    - 
Accounts receivable, net   456,372    969,429 
Inventory   1,479,501    3,744,037 
Prepaid expenses and other current assets   2,327,563    2,276,178 
Total current assets   59,482,881    76,150,110 
           
Property and equipment, net   1,663,385    835,160 
Intangible assets, net   99,023    88,322 
Operating lease – right-of-use asset   857,576    1,012,884 
Deposits and other assets   22,491    41,288 
Total assets  $62,125,356   $78,127,764 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $1,163,398   $647,050 
Accrued expenses   1,622,149    2,990,513 
Current portion lease obligation – operating lease   159,910    206,426 
Total current liabilities   2,945,457    3,843,989 
Lease obligation - operating lease, net of current portion   737,124    859,543 
Total liabilities   3,682,581    4,703,532 
           
Stockholders’ equity:          
Preferred Stock, (authorized – 20,000,000 shares)   -    - 
Convertible Preferred Stock Series H, ($0.0001 par value; authorized – 8,500 shares; issued and outstanding – 8 shares as of September 30, 2022 and December 31, 2021, respectively)   -    - 
Convertible Preferred Stock Series H-3, ($.0001 par value; authorized – 8,461 shares; issued and outstanding – 1,234 as of September 30, 2022 and December 31, 2021, respectively)   -    - 
Convertible Preferred Stock Series H-6, ($.0001 par value; authorized – 50,000 shares; issued and outstanding – 50 as of September 30, 2022 and December 31, 2021, respectively)   -    - 
Common Stock, ($0.0001 par value; authorized – 100,000,000 shares; issued and outstanding – 37,131,380 and 36,866,975 as of September 30, 2022 and December 31, 2021, respectively)   3,713    3,687 
Additional paid-in capital   132,907,975    131,654,776 
Accumulated deficit   (74,468,913)   (58,234,231)
Total stockholders’ equity   58,442,775    73,424,232 
Total liabilities and stockholders’ equity  $62,125,356   $78,127,764 

 

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)

 

     2022     2021     2022     2021 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Revenue  $373,186   $559,370   $2,381,592   $1,870,306 
Cost of goods sold   955,003    955,466    4,959,660    2,030,447 
Gross loss   (581,817)   (396,096)   (2,578,068)   (160,141)
                     
Operating expenses:                    
Research and development   1,837,510    4,165,732    3,749,714    9,135,410 
Sales and marketing   384,748    646,713    1,566,790    1,873,955 
General and administrative   3,000,156    6,805,788    8,446,785    14,168,782 
Total operating expenses   5,222,414    11,618,233    13,763,289    25,178,147 
                     
Loss from operations   (5,804,231)   (12,014,329)   (16,341,357)   (25,338,288)
                     
Other income (expense):                    
Other income, net   51,792    12,254    71,389    40,943 
Interest expense   -    -    -    (2,312)
Realized gain on marketable securities   103,000    -    110,490    - 
Unrealized loss on marketable securities   (32,135)   -    (75,204)   - 
Other income (expense), net   122,657    12,254    106,675    38,631 
                     
Net loss  $(5,681,574)  $(12,002,075)  $(16,234,682)  $(25,299,657)
                     
Net loss per share, basic and diluted  $(0.15)  $(0.33)  $(0.44)  $(0.73)
                     
Basic and diluted weighted average Common Stock outstanding   37,094,631    36,312,478    36,995,497    34,615,858 

 

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)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   (Deficit)   Total 
   Three and Nine Months Ended September 30, 2022 
   Series H   Series H-3   Series H-6       Additional         
   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   (Deficit)   Total 
Balance, December 31, 2021   8   $-    1,234   $-    50   $-    36,866,956   $3,687   $131,654,776   $(58,234,231)  $73,424,232 
Stock Based Compensation                                        288,110         288,110 
Vesting of Restricted Stock                                 43,000    4    329,377         329,381 
Net Loss        -          -          -                    (4,578,660)   (4,578,660)
Balance, March 31, 2022   8    -    1,234    -    50    -    36,909,956    3,691    132,272,263    (62,812,891)   69,463,063 
Stock Based Compensation                                        303,553         303,553 
Vesting of Restricted Stock                                 110,562    11    (11)        - 
Net Loss       -         -         -                    (5,974,448)   (5,974,448)
Balance, June 30, 2022   8    -    1,234    -    50    -    37,020,518    3,702    132,575,805    (68,787,339)   63,792,168 
                                                        
Stock Based Compensation                                        332,181         332,181 
Vesting of Restricted Stock                                 110,862    11    (11)        - 
Net Loss       -         -         -                    (5,681,574)   (5,681,574)
Balance, September 30, 2022   8   $-    1,234   $-    50   $-    37,131,380   $3,713   $132,907,975   $(74,468,913)  $58,442,775 

 

   Three and Nine Months Ended September 30, 2021 
   Series H   Series H-3   Series H-6           Additional         
   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   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 
                                                        
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)        - 
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)        - 
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 

 

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)

 

     2022     2021 
   Nine Months Ended 
   September 30, 
   2022   2021 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(16,234,682)  $(25,299,657)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   442,890    384,157 
Stock-based compensation   923,844    6,997,986 
Amortization of right-of-use asset   155,308    149,376 
Bad debt expense   2,136    92,176 
Realized gain on marketable securities   (110,490)     
Unrealized loss on marketable securities   75,204    - 
Impairment of inventory and prepaid   2,351,947    - 
Change in operating assets and liabilities:          
Accounts receivable   510,922    (66,550)
Inventory   462,025    (1,568,687)
Prepaid expenses and other current assets   (1,430,565)   (841,465)
Deposits   18,798    (18,797)
Accounts payable   516,347    420,420 
Accrued expenses   (473,953)   1,168,858 
Contract liability   -    (24,000)
Lease obligations - operating leases   (168,935)   (117,474)
Net cash used in operating activities   (12,959,204)   (18,723,657)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (970,557)   (512,298)
Purchase of marketable securities, net   (15,755,309)   - 
Purchase of intangible assets   (46,546)   (57,227)
Net cash used in investing activities   (16,772,412)   (569,525)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Repayments of debt   -    (21,609)
Proceeds from exercise of warrants, net of fees   -    100,000 
Proceeds from exercise of stock options   -    1,506,999 
Proceeds from issuance of Common Stock, net of fees and expenses   -    58,269,829 
Net cash provided by financing activities   -    59,855,219 
           
Net change in cash   (29,731,616)   40,562,037 
           
Cash, beginning of year   69,160,466    36,537,097 
           
Cash, end of quarter  $39,428,850   $77,099,134 
           
Supplemental disclosure of cash and non-cash transactions:          
Cash paid for interest  $-   $1,971 
Restricted Stock issued, previously accrued  $329,381   $- 
Accrued Fixed Assets  $193,053      
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets  $-   $120,440 

 

 

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 (as discussed below) of AYRO Operating Company, Inc. (“AYRO Operating”), which was formed under the laws of the State of Texas on May 17, 2016 as Austin PRT Vehicle, Inc. and subsequently changed its name to Austin EV, Inc. under an Amended and Restated Certificate of Formation filed with the State of Texas on March 9, 2017. On July 24, 2019, the Company changed its name to AYRO, Inc. and converted its corporate domicile to Delaware. The Company was founded on the basis of promoting resource sustainability. The Company, and its wholly-owned subsidiaries, are principally engaged in manufacturing and sales of environmentally-conscious, minimal-footprint electric vehicles. The all-electric vehicles are typically sold both directly and to dealers in the United States.

 

Strategic Review

 

Following the hiring of our new Chief Executive Officer in the third quarter of 2021, we initiated a strategic review of our product development strategy, as we focus on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets. In connection with the strategic review, we canceled development of our planned next-generation three-wheeled high speed vehicle.

 

For the past several years, the Company’s primary supplier has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory in the automotive district in Hangzhou, China. As a result of rising shipping costs, quality issues with certain components and persistent delays, the Company has decided to cease production of the AYRO 411x from Cenntro in September 2022 in order to focus its resources on the development and launch of the new 411 fleet vehicle model year 2023 refresh, the Vanish.

 

In December 2021, the Company began design and development on the Vanish, including updates on its supply chain evolution, offshoring/onshoring mix, manufacturing strategy, and annual model year refresh program.

 

Merger

 

On May 28, 2020, pursuant to the previously announced Agreement and Plan of Merger, dated December 19, 2019, 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, Inc., a Delaware corporation previously known as AYRO, Inc. (“AYRO Operating”), 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”).

 

F-5
 

 

NOTE 2. 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 $16,234,682 for the nine months ended September 30, 2022, and negative cash flows from operations of $12,959,204 for the nine months ended September 30, 2022. At September 30, 2022, the Company had cash balances totaling $39,428,850 and marketable securities of $15,790,595. In addition, as a result of the net losses incurred working capital has decreased by $15,768,697 during the nine months ended September 30, 2022. Management believes that the existing cash at September 30, 2022 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, 2021 and into 2022, the measures taken by the governments of countries affected has adversely affected the Company’s business, financial condition, and results of operations.

 

The Company has historically relied on foreign suppliers, including Cenntro which has been its largest supplier, for a number of raw materials, instruments and technologies that the Company purchases. The Company intends to reduce its reliance on foreign suppliers by sourcing components for the Vanish from vendors in the United States and in Europe, but its vendors may be reliant on foreign suppliers. The Company’s success is dependent on the ability for it and its suppliers to import or transport such products from 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.

 

There is currently a shortage of shipping capacity worldwide, and as a result, receipt of imported products by the Company or its vendors 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 and its vendors. A port worker strike, work slow-down or other transportation disruption in domestic ports 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, bottlenecks 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 our business and financial results. If significant disruptions along these lines continue, this could lead to further significant disruptions in the Company’s business, delays in shipments, (including shipments of components from overseas to the Company’s vendors), and revenue and profitability shortfalls, which could adversely affect the business, prospects, financial condition and operating results.

 

On October 3, 2022, AYRO, Inc. (the “Company”) received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s common stock for the 30 consecutive business day period between August 19, 2022 and September 30, 2022, the Company did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). The letter also indicated that the Company will be provided with a compliance period of 180 calendar days, or until April 3, 2023 (the “Compliance Period”), in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).

 

F-6
 

 

The global shipping industry is also experiencing unprecedented increases in shipping rates from 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 has a corresponding impact on profitability. The Company and its vendors 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 further 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 Company’s business, prospects, financial condition and operating results.

 

The Company and its vendors 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 Company’s 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. Even if the Company reduces its reliance on foreign vendors, it still may be impacted by such shortages if its domestic vendors rely upon foreign sources for components. 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.

 

We have made certain indemnities, under which we may be required to make payments to an indemnified party, in relation to certain transactions. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware. In connection with our facility leases, we have indemnified our lessors for certain claims arising from the use of the facilities. The duration of the indemnities vary and, in many cases, are indefinite. These indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities.

 

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”). All intercompany accounts and transactions have been eliminated in consolidation.

 

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, 2022, 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, 2021, which are included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 23, 2022 as amended May 2, 2022.

 

F-7
 

 

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, valuation of long lived assets, sales warranties, and the measurement of stock-based compensation expenses. Actual results could differ from these estimates.

 

Marketable Securities

 

Marketable securities include investment in fixed income bonds and U.S. Treasury securities that are considered to be highly liquid and easily tradeable. The marketable securities are considered trading securities and are measured at fair value and are accounted for in accordance with ASC 320. The marketable securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the Company’s fair value hierarchy. The Company held $15,790,595 in marketable securities as of September 30, 2022.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services.

 

To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

 

Nature of goods and services

 

The following is a description of the Company’s products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:

 

Product revenue

 

Product revenue from customer contracts is recognized on the sale of each electric vehicle as vehicles are shipped to customers. The majority of the Company’s vehicle sales orders generally have only one performance obligation: sale and delivery of complete vehicles. Ownership and risk of loss transfers to the customer based on FOB shipping point and freight charges are the responsibility of the customer. Revenue is typically recognized at the point control transfers or in accordance with payment terms customary to the business. The Company provides product warranties to assure that the product assembly complies with agreed upon specifications. The Company’s product warranty is similar in all material respects to the product warranties provided by the Company’s suppliers, therefore minimizing the warranty liability to the standard labor rates associated with the defective part replacement. Customers do not have the option to purchase a warranty separately; as such, warranty is not accounted for as a separate performance obligation. The Company’s policy is to exclude taxes collected from a customer from the transaction price of automotive contracts.

 

Shipping revenue

 

Amounts billed to customers related to shipping and handling are classified as shipping revenue. The Company has elected to recognize the cost for freight and shipping when control over vehicles has transferred to the customer as an operating expense. The Company has reported shipping expenses of $79,767 and $98,464 for the three months ended September 30, 2022 and 2021 and $335,812 and $208,139 for the nine months ended September 30, 2022 and 2021 respectively, included in SG&A.

 

F-8
 

 

Services and other revenue

 

Services and other revenue consist of non-warranty after-sales vehicle services. Revenue is typically recognized at a point in time when services and replacement parts are provided.

 

Miscellaneous income

 

Miscellaneous income consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer receivable balance. This revenue is earned when a customer’s receivable balance becomes delinquent and its collection is reasonably assured and is calculated using a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge.

 

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 and non-employee share-based compensation as an expense in the financial statements on a straight-line basis over the requisite service period, based on the terms of the awards. Equity-classified awards principally related to stock options, restricted stock awards (“RSAs”) and equity-based compensation, are measured at the grant date fair value of the award. The Company determines grant date fair value of stock option awards using the Black-Scholes option-pricing model. The fair value of RSAs is determined using the closing price of the Company’s common stock on the grant date. For service based vesting grants, expense is recognized ratably over the requisite service period based on the number of options or shares. For value-based vesting grants, expense is recognized via straight line expense over the expected period per grant as determined by outside valuation experts. Stock-based compensation is reversed for forfeitures in the period of forfeiture.

 

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.

 

Stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the underlying equity instrument. The attribution of the fair value of the equity instrument is charged directly to compensation expense over the period during which services are rendered.

 

Basic and Diluted Loss Per Share

 

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

 

F-9
 

 

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

 

     2022     2021     2022     2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Options to purchase common stock   785,422    1,362,765    785,422    1,362,765 
Restricted stock unvested   770,824    493,000    770,824    493,000 
Restricted stock vested – unissued   -    434,166    -    434,166 
Warrants outstanding   6,106,023    6,108,823    6,106,023    6,108,823 
Preferred stock outstanding   2,475    2,475    2,475    2,475 
Total   7,664,744    8,401,229    7,664,744    8,401,229 

 

NOTE 4. REVENUES

 

Disaggregation of Revenue

 

Revenue by type was as follows:

 

     2022     2021     2022     2021 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Revenue type                    
Product revenue  $332,792   $494,011   $2,170,943   $1,710,579 
Shipping revenue   35,507    65,359    165,762    123,040 
Miscellaneous income   4,887    -    44,887    - 
Service income   -    -    -    36,687 
Total Revenue  $373,186   $559,370   $2,381,592   $1,870,306 

 

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, 2022 and December 31, 2021, warranty reserves were recorded within accrued expenses of $410,017 and $240,517, respectively.

 

NOTE 5. ACCOUNTS RECEIVABLE, NET

 

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

 

     2022     2021 
   September 30,   December 31, 
   2022   2021 
Trade receivables  $456,372   $1,142,567 
Less: Allowance for doubtful accounts   -    (173,138)
Accounts receivable, net  $456,372   $969,429 

 

The Company reduced allowance for doubtful accounts by $173,138 for the nine months ended September 30, 2022, due to collecting on past due accounts, and recorded $2,136 of bad debt expense of direct write off for the nine months ended September 30, 2022.

 

NOTE 6. INVENTORY

 

Inventory consisted of the following:

 

           
   September 30,   December 31, 
   2022   2021 
Raw materials  $537,166   $3,481,614 
Work-in-progress   -    51,441 
Finished goods   942,335    210,982 
Total  $1,479,501   $3,744,037 

 

For the three months ended September 30, 2022 and 2021, depreciation recorded for fleet inventory was $23,886 and $23,886, and for the nine months ended September 30, 2022 and 2021, was $71,661 and $71,658 respectively. The Company determined that testing of obsolescence was required for inventory due to the quality of certain purchased components from Cenntro’s lithium-ion line (“NCM”). 17 vehicles tested in the second quarter of 2022 were determined to have 49 unique failures. An inspection of the remaining NCM units discovered a 100% failure rate. As a result, all inventory associated with Cenntro’s NCM line was written off to cost of goods sold for $1,317,289. The Club Car Discount during the three and nine months ended September 30, 2022 required a $413,561 net realizable value adjustment, necessitating the value of inventory to be written down.

 

F-10
 

 

NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

           
   September 30,   December 31, 
   2022   2021 
Prepaid final assembly services  $167,331   $439,660 
Prepayments for inventory   1,101,693    1,622,617 
Prepayments for insurance   207,599    - 
Prepayments on advances on design   608,159    - 
Prepayments on software   133,099    - 
Prepaid other   109,682    213,901 
Total Prepaid Expenses and Other Current Assets  $2,327,563   $2,276,178 

 

During the nine months ended September 30, 2022 the Company impaired prepaid balances of $1,377,709 from Cenntro when purchase orders were on hold due to quality issues and refunds were not collectable.

 

NOTE 8. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

           
   September 30,   December 31, 
   2022   2021 
Computer and equipment  $1,344,204   $853,695 
Furniture and fixtures   316,665    173,155 
Lease improvements   662,013    282,271 
Prototypes   450,225    300,376 
Computer software   455,875    455,875 
Property and equipment, gross   3,228,982    2,065,372 
Less: Accumulated depreciation   (1,565,597)   (1,230,212)
Property and equipment, net  $1,663,385   $835,160 

 

Depreciation expense for the three months ended September 30, 2022 and 2021 was $151,980 and $74,655, and for the nine months ended September 30, 2022 and 2021 was $335,385 and $220,535, respectively.

 

NOTE 9. MARKETABLE SECURITIES

 

Marketable securities consisted of the following:

 

September 30, 2022
      Realized   Unrealized   Transferred    
   Cost Basis   Gains   Loss   to Cash   Total 
Bonds  $12,235,258   $110,490   $(75,204)  $(4,244,691)  $8,025,853 
US Treasury securities   7,764,742    -    -    -    7,764,742 
   $20,000,000   $110,490   $(75,204)  $(4,244,691)  $15,790,595 

 

NOTE 10. STOCKHOLDERS’ EQUITY

 

Restricted Stock

 

On February 24, 2021, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company granted 172,000 shares of restricted stock to non-executive directors at a value of $7.66 per share. 43,000 shares of common stock remained unissued as of December 31, 2021; these shares were issued during the nine months ended September 30, 2022.

 

On February 1, 2022, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company granted 442,249 shares of restricted stock to non-executive directors at a value of $1.29 per share. During the nine months ended September 30, 2022, 221,424 shares were issued and vested.

 

F-11
 

 

Preferred Stock

 

Series H Convertible Preferred Stock

 

As of September 30, 2022, in the event of liquidation, the holders of preferred stock were entitled to receive payments as follows:

 

      
Number of Series H Preferred Stock outstanding as of September 30, 2022   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, 2022  $0.59 
Liquidation Value  $4 

 

Series H-3 Convertible Preferred Stock

 

As of September 30, 2022, in the event of liquidation, the holders of preferred stock were entitled to receive payments as follows:

 

      
Number of Series H-3 Preferred Stock outstanding as of September 30, 2022   1,234 
Multiplied by the stated value  $138.00 
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, 2022  $0.59 
Liquidation Value  $607 

 

Series H-6 Convertible Preferred Stock

 

As of September 30, 2022, in the event of liquidation, the holders of preferred stock were entitled to receive payments as follows:

 

      
Number of Series H-6 Preferred Stock outstanding as of September 30, 2022   50 
Multiplied by the stated value  $72.00 
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, 2022  $0.59 
Liquidation Value  $850 

 

Warrants

 

    Shares Underlying
Warrants
   Weighted Average
Exercise Price
   Weighted Average
Remaining Contractual
Term (in years)
 
Outstanding at December 31, 2021    6,108,823   $7.37    2.31 
Granted    -    -      
Exercised    -    -      
Expired    (2,800)   165.60      
Outstanding at September 30, 2022    6,106,023   $7.30    1.57 

 

F-12
 

 

NOTE 11. STOCK-BASED COMPENSATION

 

2014 Equity Incentive Plan

 

The Company’s equity incentive plan created in 2014 (the “2014 Plan”) was amended in 2018 to increase the number of shares of Company common stock available for issuance. Pursuant to the 2014 Plan, 141,326 shares of common stock were reserved for issuance. As of September 30, 2022, there were no shares available for grant under the 2014 Plan.

 

AYRO 2017 Long Term Incentive Plan

 

The Company has reserved a total of 477,983 shares of its common stock pursuant to the AYRO, Inc. 2017 Long-Term Incentive Plan. The Company had 128,606 shares of common stock outstanding under the plan at September 30, 2022. At September 30, 2022, no shares remained available for grant under future awards under the 2017 Long-Term Incentive Plan. In conjunction with the 2020 incentive plan, the remaining unissued amounts were cancelled.

 

AYRO 2020 Long Term Incentive Plan

 

The Company has reserved a total of 4,089,650 shares of its common stock pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan (the “Plan”), including shares of restricted stock that have been issued. The Company had awards concerning an aggregate of 1,366,183 shares of common stock outstanding under the Plan at September 30, 2022, including stock options and restricted stock. At September 30, 2022, 1,151,399 shares remained available for grant under future awards under the Plan.

 

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 September 30,   Nine Months Ended September 30, 
   2022   2021   2022   2021 
Research and development  $5,269   $18,786   $15,069   $62,980 
Sales and marketing   6,001    60,771    19,816    184,853 
General and administrative   320,911    3,580,935    888,959    6,750,153 
Total  $332,181   $3,660,492   $923,844   $6,997,986 

 

Options

 

The following table reflects the stock option activity:

 

    Number of Shares   Weighted Average
Exercise Price
  

Contractual Life

(Years)

 
Outstanding at December 31, 2021    1,338,675   $5.14    8.26 
Granted    173,500    0.97      
Forfeitures    (726,753)   3.14      
Outstanding at September 30, 2022    785,422   $6.10    7.97 

 

Of the outstanding options, 608,726 were vested and exercisable as of September 30, 2022. At September 30, 2022 the aggregate intrinsic value of stock options vested and exercisable was $0.

 

The Company recognized $18,821 and $669,999 of stock option expense for the three months ended September 30, 2022 and 2021, and $44,899 and $1,170,958 for the nine months ended September 30, 2022 and September 30, 2021, respectively. Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2022 was $191,176 and will be recognized on a straight-line basis through the end of the vesting periods through December 2023. The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.

 

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

 

   For the nine months ended
September 30, 2022
 
Company Common Stock as of Grant Date May 6, 2022   0.97 
Time to Maturity   6 
Dividend   - 
Annual risk-free interest rate   2.04%
Annualized volatility   130.23%
Black-Scholes Value   0.87 

 

Restricted Stock

 

   Number of
Shares
   Weighted Average
Grant Price
 
Outstanding at December 31, 2021   450,000   $2.48 
Granted   542,248    1.06 
Vested   (221,424)   1.29 
Outstanding at September 30, 2022   770,824   $1.89 

 

F-13
 

 

On February 1, 2022, pursuant to the Plan, the Company issued 442,248 shares of restricted stock to non-executive directors at a value of $1.29 per share. On August 23, 2022, pursuant to the employment agreement with David E. Hollingsworth, the Company issued 100,000 shares of restricted stock at a value of $0.03 per share. Vesting will occur as predetermined value-based targets are met. We estimate the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. The Company recognized compensation expense related to all restricted stock during the three months ended September 30, 2022 and 2021 of $313,360 and $2,990,493 and for the nine months ended September 30, 2022 and 2021 of $878,945 and $5,827,028, respectively. Total compensation cost related to non-vested restricted stock not yet recognized as of September 30, 2022 was $631,307.

 

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, LLC (“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. 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, so long as those minimums are met. One customer accounted for approximately 100% of the Company’s revenues for the three months ended September 30, 2022 and for 99% for the three months ended September 30, 2021. Two customers accounted for approximately 96% and 4%, respectively, of the Company’s revenues for the nine months ended September 30, 2022 and for 71% and 28%, respectively, of the Company’s revenues for the nine months ended September 30, 2021.

 

In connection with the forthcoming introduction of the Vanish, the Company is reevaluating its channel strategy with an eye towards distributing their next-generation platform and payloads in a manner that maximizes visibility, moderates channel costs and creates value. Accordingly, the Company is evaluating their relationship with Club Car and may seek to replace Club Car with new business partners and channel partners for selling their products beginning with the Vanish. Any loss of Club Car as a customer, or significant reduction in purchases by Club Car, could have an adverse impact on the Company’s financial condition and operating results.

 

Accounts Receivable

 

As of September 30, 2022 one customer accounted for approximately 100% of the Company’s net accounts receivable. As of December 31, 2021 two customers accounted for more than 10% of the Company’s net accounts receivable. One customer accounted for approximately 87% of the Company’s gross account receivable and a second customer accounted for approximately 10% of the Company’s net accounts receivable.

 

Purchasing

 

The Company places orders with various suppliers. During the nine months ended September 30, 2022 and 2021, three suppliers provided more than 10% of the Company’s raw materials purchases. During the nine months ended September 30, 2022, one supplier accounted for approximately 57%, and two other suppliers accounted for 12% of the Company’s raw materials purchases. During the nine months ended September 30, 2021 one supplier accounted for approximately 51%, and another supplier accounted for 11% of the Company’s raw materials purchases. The Company’s purchases of raw materials from three suppliers were approximately 49%, 17%, and 13% respectively, of its total purchases of raw materials for the three months ended September 30, 2022, and approximately 56% and 16%, respectively, of such purchases for the three months ended September 30, 2021. Any disruption in the operation of any of these suppliers could adversely affect the Company’s operations.

 

Manufacturing

 

Cenntro owns the design of the AYRO 411x model and has granted the Company an exclusive license to manufacture the AYRO 411x model for sale in North America. Under the Manufacturing License Agreement, dated April 27, 2017, between Cenntro and the Company (the “MLA”), the Company is required to purchase a minimum volume of product units from Cenntro, among other obligations, to maintain the license.

 

On May 31, 2022, the Company received a letter from Cenntro purporting to terminate all agreements and contracts between the Company and Cenntro. Although the Company does not believe Cenntro’s termination of the MLA is valid, the Company has determined to cease production of the AYRO 411x and focus its resources on the development and launch of the Vanish. The Company has canceled all purchase orders and future builds with Cenntro and currently intends to only order replacement parts for vehicles from Cenntro in the future. The Company is in discussions with Cenntro concerning the potential repurchase by Cenntro of unsaleable inventory due to quality concerns. AYRO expects to lose its exclusive license under the MLA, in which case Cenntro could sell similar products through other companies or directly to the Company’s customers, which could have a material adverse effect on its results of operations and financial condition.

 

F-14
 

 

NOTE 13. COMMITMENTS AND CONTINGENCIES

 

Manufacturing Agreements

 

On September 25, 2020, AYRO entered into a Master Manufacturing Services Agreement (the “Karma Agreement”) with Karma Automotive, LLC (“Karma”). The Karma Agreement expired in September 2022. Pursuant to the agreement Karma agreed to provide certain manufacturing services, starting in 2021, under an attached statement of work including final assembly, raw material storage and logistical support of our vehicles in return for compensation of $1,160,800.

 

The Company paid Karma an amount of $440,000 for the first production level builds and $80,000 for setup costs. In addition, the Company issued warrants to an advisor to the transaction with a fair value of $66,845 due at signing of the contract, which amount was expensed in the prior year. The payment was recorded as prepaid expense as of December 31, 2020. For the year ended December 31, 2021, the Company recorded expense of $641,140 related to the Karma Agreement for the assembly of the AYRO 411 and 411x vehicles (the “AYRO 411 Fleet”), of which $468,480 was recorded to reduce the total remaining prepaid expense to match the expected number of 411x vehicles to be built in 2022. This amount was recorded against cost of goods for direct labor as part of the first production level builds, and $73,333 was recorded for pre-production costs. $167,331 prepaid balance remained as of September 30, 2022. During the three and nine months ended September 30, 2022, $110,349 and $272,329 was expensed, respectively. During the three and nine months ended September 30, 2021, $60,520 and $90,780 was expensed respectively.

 

Litigation

 

The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, that it believes are incidental to the operation of its business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations, financial positions or cash flows.

 

Supply Chain Agreements

 

In 2017, the Company executed a supply chain contract with Cenntro, which has historically been the Company’s primary supplier. Prior to the Merger, Cenntro was a significant shareholder in AYRO Operating. Cenntro owns the design of the AYRO 411 Fleet vehicles and has granted the Company an exclusive license to purchase the AYRO 411 Fleet vehicles for sale in North America. The Company purchased 100% of its vehicle chassis, cabs and wheels for AYRO 411 Fleet Vehicles through this supply chain relationship with Cenntro. The Company must sell a minimum number of units in order to maintain its exclusive supply chain contract. See Note 12 for concentration amounts.

 

As of December 31, 2021 the net balance between prepaid expenses and accrued expenses with Cenntro was a prepaid balance of $602,016. As of September 30, 2022 the balance was zero. Impairments of prepaid expenses led to a write-down, netted with the balance in accrued expenses. The remainder of the balance was expensed through cost of goods sold for $621,097. Additionally, all inventory associated with Cenntro’s NCM line was written off to cost of goods sold for $1,317,289.

 

The Company has canceled all purchase orders and future builds with Cenntro and currently intends to only order replacement parts from Cenntro in the future.

 

Other

 

As of January 1, 2019, DropCar had accrued approximately $232,000 for the settlement of multiple empl