UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(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 | ||
per share |
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.
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).
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 | ☐ |
| ☒ | 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 ☐
As of November 17, 2023, the registrant had shares of common stock outstanding.
AYRO, Inc.
Quarter Ended September 30, 2023
Table of Contents
| i |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AYRO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted Cash | ||||||||
| Marketable securities | ||||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease – right-of-use asset | ||||||||
| Deposits and other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion lease obligation – operating lease | ||||||||
| Total current liabilities | ||||||||
| Derivative liability | ||||||||
| Warrant liability | ||||||||
| Lease obligation - operating lease, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| MEZZANINE EQUITY | ||||||||
| Series
H-7 Convertible redeemable preferred stock, ($
par value and $ | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred Stock, (authorized – shares) | ||||||||
| Convertible Preferred Stock Series H, ($ par value; authorized – shares; issued and outstanding – shares as of September 30, 2023, and December 31, 2022, respectively) | ||||||||
| Convertible Preferred Stock Series H-3, ($ par value; authorized – shares; issued and outstanding – shares as of September 30, 2023, and December 31, 2022, respectively) | ||||||||
| Convertible Preferred Stock Series H-6, ($ par value; authorized – shares; issued and outstanding – shares as of September 30, 2023, and December 31, 2022, respectively) | ||||||||
| Common Stock, $ par value; authorized – shares; issued and outstanding – and as of September 30, 2023 and December 31, 2022, respectively) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities, mezzanine equity and stockholders’ equity | $ | $ | ||||||
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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income(expense): | ||||||||||||||||
| Interest Income | ||||||||||||||||
| Change in FV-Warrant Liability | ( | ) | ( | ) | ||||||||||||
| Change in FV-Derivative Liability | ||||||||||||||||
| Unrealized gain (loss) on marketable securities | ( | ) | ( | ) | ||||||||||||
| Realized gain on marketable securities | ||||||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||
| Accretion of discounts to redemption value of H-7 convertible preferred stock | ( | ) | ( | ) | ||||||||||||
| Deemed Dividend (Series H-5 warrants) | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Basic and diluted weighted average Common Stock outstanding | ||||||||||||||||
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 MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Three and Nine Months Ended September 30, 2023
| Series H-7 | Series H | Series H-3 | Series H-6 | Additional | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested Restricted Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested Restricted Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of preferred shares | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of convertible preferred stock, net of discounts and transaction costs | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of rounded shares as a result of the reverse stock split. | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (Accrued Series H-7 Preferred) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend (Series H-5 warrants) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of discounts to redemption value of H-7 convertible preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested Restricted Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||
Three and Nine Months Ended September 30, 2022
| Series H-7 | Series H | Series H-3 | Series H-6 | Additional | ||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested Restricted Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested Restricted Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested Restricted Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-3 |
AYRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| Change in FV-Derivative Liability | ( | ) | ||||||
| Change in FV-Warrant Liability | ||||||||
| Amortization of right-of-use asset | ||||||||
| Bad debt expense | ||||||||
| Unrealized gain on marketable securities | ( | ) | ||||||
| Realized gain on marketable securities | ( | ) | ( | ) | ||||
| Impairment of inventory and prepaid | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Deposits and other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Lease obligations - operating leases | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Change in marketable securities | ( | ) | ( | ) | ||||
| Purchase of intangible assets | ( | ) | ( | ) | ||||
| Net cash used in by investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from private placement of preferred stock, net of transaction costs | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash and non-cash transactions: | ||||||||
| Accrual of Series H-7 Convertible Preferred Stock Dividends | $ | $ | ||||||
| Restricted Stock issued previously accrued | $ | $ | ||||||
| Initial fair value of warrant liability | $ | $ | ||||||
| Initial fair value of derivative liability | $ | $ | ||||||
| Deemed Dividend H-5 Warrants | $ | $ | ||||||
| Accretion of discounts to redemption value of H-7 convertible preferred stock | $ | $ | ||||||
| Accrued fixed assets | $ | $ | ||||||
| Supplemental disclosure of restricted cash: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted Cash | $ | $ | ||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||
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. (“AYRO Operating”), which was formed under the laws of the State of Texas on May 17, 2016 as Austin PRT Vehicle, Inc. and subsequently changed its name to Austin EV, Inc. under an Amended and Restated Certificate of Formation filed with the State of Texas on March 9, 2017. On July 24, 2019, the Company changed its name to AYRO, Inc. and converted its corporate domicile to Delaware. The Company was founded on the basis of promoting resource sustainability. The Company, and its wholly owned subsidiaries, are principally engaged in manufacturing and sales of environmentally conscious, minimal-footprint electric vehicles. The all-electric vehicles are typically sold both directly to customers and to dealers in the United States.
Reverse Stock Split
On September 15, 2023, the Company effected a one-for-eight reverse stock split of the Company’s common stock (the “Reverse Stock Split”). All share and per share information in this quarterly report have been retroactively adjusted to reflect the Reverse Stock Split.
Strategic Review
Following the hiring of the Company’s current Chief Executive Officer in the third quarter of 2021, AYRO initiated a strategic review of its product development strategy, as AYRO focused on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets. In connection with the strategic review by the Company, AYRO cancelled development of its planned next-generation three-wheeled high-speed vehicle.
For the past several years, AYRO’s primary supplier has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory in the automotive district in Hangzhou, China. As a result of rising shipping costs, quality issues with certain components and persistent delays, the Company ceased production of the AYRO 411x from Cenntro in September 2022 in order to focus its resources on the development and launch of the new 411 fleet vehicle model year 2023 refresh (the “Vanish”).
In December of 2021, the Company began research and development on the Vanish, including updates on its supply chain evolution, offshoring/onshoring mix, manufacturing strategy, and annual model year refresh program. The Company commenced low-rate initial production of the Vanish in the second quarter of 2023 and commenced initial sales and delivery of the Vanish in the third quarter of 2023.
| F-5 |
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 $
On
August 7, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”), pursuant to which
it agreed to sell to certain existing investors (the “Investors”) in a private placement (the “Private
Placement”) (i) an aggregate of
shares of the Company’s newly designated Series H-7 convertible preferred stock, par value $ per share, with a stated
value of $
The Purchase Agreement contains certain representations and warranties, covenants, and indemnities customary for similar transactions. The representations, warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the Purchase Agreement and may be subject to limitations agreed upon by the contracting parties. Among other covenants, the Purchase Agreement requires the Company to hold a meeting of its stockholders no later than November 5, 2023, to seek approval under Nasdaq Stock Market Rule 5635(d) (the “Stockholder Approval”) for the issuance of shares of common stock at prices below the “Minimum Price” (as defined in Rule 5635 of the Rules of the Nasdaq Stock Market) on the date of the Purchase Agreement pursuant to the terms of the Preferred Stock and the Warrants. Such Stockholder Approval was obtained at a Special Meeting held on September 14, 2023.
| F-6 |
The Company may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials, including lithium-ion battery cells, semiconductors, and integrated circuits. Any such increase or supply interruption could materially and negatively impact the 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. Certain production-ready components may be delayed in shipment to Company facilities which has and may continue to cause delays in validation and testing for these components, which would in turn create a delay in the availability of saleable vehicles.
The Company uses various raw materials, including aluminum, steel, carbon fiber, non-ferrous metals (such as copper), and cobalt. The prices for these raw materials fluctuate depending on market conditions, and global demand and could adversely affect business and operating results. For instance, the Company is exposed to multiple risks relating to price fluctuations for lithium-ion cells. These risks include:
| ● | the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric vehicle industry as demand for such cells increases; | |
| ● | disruption in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and | |
| ● | an increase in the cost of raw materials, such as cobalt, used in lithium-ion cells. |
Any disruption in the supply of lithium-ion battery cells, semiconductors, or integrated circuits could temporarily disrupt production of the Company’s vehicles until a different supplier is fully qualified. Moreover, battery cell manufacturers may refuse to supply electric vehicle manufacturers if they determine that the vehicles are not sufficiently safe. Furthermore, fluctuations or shortages in petroleum and other economic conditions may cause the Company to experience significant increases in freight charges and raw material costs. Substantial increases in the prices for our raw materials would increase operating costs and could reduce our margins if the increased costs cannot be recouped through increased electric vehicle prices. There can be no assurance that the Company will be able to recoup the increasing costs of raw materials by increasing vehicle prices.
We have made certain indemnities, under which we may be required to make payments to an indemnified party, in relation to certain transactions. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware. In connection with our facility leases, we have indemnified our lessors for certain claims arising from the use of the facilities. The duration of the indemnities vary and, in many cases, are indefinite. These indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities.
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 accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2023, may not be indicative of results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes to those statements for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2023, as amended on May 1, 2023.
| F-7 |
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.
The Company’s most significant estimates include marketable securities, revenue recognition, the measurement of stock-based compensation expenses, fair value measurements of warrant and derivative liabilities and accretion of preferred stock. Actual results could differ from these estimates.
Restricted Cash
As
of September 30, 2023, cash of $
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 $
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.
| F-8 |
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 $
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.
Derivative Financial Instruments
The Company evaluates all its financial instruments to determine if such instruments contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the statement of operations each period. Bifurcated embedded derivatives are classified with the related host contract in the Company’s balance sheet. These particular derivatives are assessed under ASC 480 and ASC 815.
Fair Value Measurements
In accordance with ASC 820 (Topic 820, Fair Value Measurements and Disclosures), the company uses a three-level hierarchy for fair value measurements of certain assets and liabilities for financial reporting purposes that distinguishes between market participant assumptions developed from market data obtained from outside sources (observable inputs) and our own assumptions about market participant assumptions developed from the best information available to us in the circumstances (unobservable inputs). The fair value hierarchy is divided into three levels based on the source of inputs as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active; and | |
| ● | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
| F-9 |
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. The Company recognizes all employee and non-employee share-based compensation as an expense in the financial statements on a straight-line basis over the requisite service period, based on the terms of the awards. Equity-classified awards principally related to stock options, restricted stock awards (“RSAs”) and equity-based compensation, are measured at the grant date fair value of the award. The Company determines grant date fair value of stock option awards using the Black-Scholes option-pricing model. The fair value of RSAs is determined using the closing price of the Company’s common stock on the grant date. For service based vesting grants, expense is recognized ratably over the requisite service period based on the number of options or shares. For value-based vesting grants, expense is recognized via straight line expense over the expected period per grant as determined by outside valuation experts. Stock-based compensation is reversed for forfeitures in the period of forfeiture.
The Company estimates the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. Key inputs and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected term, the risk-free interest rate over the expected term, the expected annual dividend yield, and the expected stock price volatility. The expected volatility is based on a combination of the historical and implied volatility of the Company’s publicly traded, near-the-money stock options, and the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant and, since the Company does not currently pay or plan to pay a dividend on its common stock, the expected dividend yield was zero.
Stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the underlying equity instrument. The attribution of the fair value of the equity instrument is charged directly to compensation expense over the period during which services are rendered.
Basic and diluted net loss per share is determined by dividing net loss by the weighted average ordinary shares outstanding during the period. For all periods presented with a net loss, the shares underlying the ordinary share options and warrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate both basic and diluted loss per share is the same for periods with a net loss.
In accordance with ASC 260, warrants that are accounted for as liabilities which are potentially dilutive have not been included in diluted earnings per share as they would have been anti-dilutive during the three and nine months ended September 30, 2023.
| F-10 |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Options to purchase common stock | ||||||||||||||||
| Restricted stock unvested | ||||||||||||||||
| Warrants outstanding | ||||||||||||||||
| Preferred stock outstanding | ||||||||||||||||
| Totals | ||||||||||||||||
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, which reduces the number of accounting models for convertible instruments, amends diluted earnings per share calculations for convertible instruments and allows more contracts to qualify for equity classification. ASU 2020-06 was effective for interim and annual periods beginning after December 15, 2021. The Company adopted ASU 2020-06 as of January 1, 2023. The adoption did not result in a material change to these unaudited condensed consolidated financial statements.
Inflation Risk
The Company does not believe that inflation has had a material effect on its business, financial condition, or results of operations. If costs were to become subject to significant inflationary pressures, the Company may not be able to fully offset such higher costs through price increases. The Company’s inability or failure to do so could harm the business, financial condition, and results of operations.
NOTE 4. REVENUES
Disaggregation of Revenue
Revenue by type was as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue type | ||||||||||||||||
| Product revenue | $ | $ | $ | $ | ||||||||||||
| Shipping revenue | ||||||||||||||||
| Miscellaneous income | ||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
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, 2023, and December 31, 2022, warranty reserves were recorded
within accrued expenses of $
NOTE 5. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of amounts due from invoiced customers and product deliveries and were as follows:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Trade receivables | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ( | ) | ||||||
| Accounts receivable, net | $ | $ | ||||||
The
Company reduced allowance for doubtful accounts by $
NOTE 6. INVENTORY
Inventory consisted of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-progress | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
For
the three months ended September 30, 2023, and 2022, depreciation for fleet inventory was $
| F-11 |
NOTE 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Prepayments for inventory | $ | $ | ||||||
| Prepayments for insurance | ||||||||
| Prepayments on advances on design | ||||||||
| Prepayments on software | ||||||||
| Prepaid other | ||||||||
| Total Prepaid Expenses and Other Current Assets | $ | $ | ||||||
NOTE 8. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Computer and equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Lease improvements | ||||||||
| Computer software | ||||||||
| Property and equipment, gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense for the three months ended September 30, 2023, and 2022 was $
NOTE 9. ACCRUED EXPENSES
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued professional and consulting fees | $ | $ | ||||||
| Accrued payroll | ||||||||
| Accrued warranty reserve | ||||||||
| Accrued expenses other | ||||||||
| Total accrued expenses | $ | $ | ||||||
NOTE 10. STOCKHOLDERS’ EQUITY
Restricted Stock
On February 1, 2023, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company granted shares of restricted stock to non-executive directors at a value of $ per share. During the nine months ended September 30, 2023, were vested and an equal number of shares of common stock were issued.
On February 1, 2022, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company issued shares of restricted stock to non-executive directors at a value of $ per share. As of December 31, 2022, shares of common stock remained unissued; these shares were issued during the nine months ended September 30, 2023.
On February 24, 2021, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company issued shares of restricted stock to non-executive directors at a value of $ per share. As of December 31, 2021, shares of common stock remained unissued; these shares were issued during the nine months ended September 30, 2022.
Share Increase Amendment
On September 14, 2023, the Company amended its certificate of incorporation to increase the number of authorized shares of common stock from to and made a corresponding change to the number of authorized shares of capital stock, effective September 15, 2023.
| F-12 |
Series H Convertible Preferred Stock
| Number of Series H Preferred Stock outstanding as of September 30, 2023 | ||||
| Multiplied by the stated value | $ | |||
| Equals the gross stated value | $ | |||
| Divided by the conversion price | $ | |||
| Equals the convertible shares of Company Common Stock | ||||
| Multiplied by the fair market value of Company Common Stock as of September 30, 2023 | $ | |||
| Equals the payment | $ |
Series H-3 Convertible Preferred Stock
| Number of Series H-3 Preferred Stock outstanding as of September 30, 2023 | ||||
| Multiplied by the stated value | $ | |||
| Equals the gross stated value | $ | |||
| Divided by the conversion price | $ | |||
| Equals the convertible shares of Company Common Stock | ||||
| Multiplied by the fair market value of Company Common Stock as of September 30, 2023 | $ | |||
| Equals the payment | $ |
Series H-6 Convertible Preferred Stock
| Number of Series H-6 Preferred Stock outstanding as of September 30, 2023 | ||||
| Multiplied by the stated value | $ | |||
| Equals the gross stated value | $ | |||
| Divided by the conversion price | $ | |||
| Equals the convertible shares of Company Common Stock | ||||
| Multiplied by the fair market value of Company Common Stock as of September 30, 2023 | $ | |||
| Equals the payment | $ |
August 2023 Private Placement
On
August 7, 2023, the Company entered into the Purchase Agreement with the Investors, pursuant to which it agreed to sell to the
Investors (i) an aggregate of Series
H-7 Preferred Shares with a stated value of $
In connection with the Private Placement,
pursuant to an Engagement Letter, dated August 7, 2023, between the Company and Palladium Capital Group, LLC (the “Placement Agent”),
the Company agreed to pay the Placement Agent (i) a cash fee equal to
The
Series H-7 Preferred Shares are convertible into common stock (the “Conversion Shares”) at the election of the holder at
any time at an initial conversion price of $
| F-13 |
Notwithstanding the foregoing, the Company’s ability to settle conversions and make amortization and dividend make-whole payments using shares of common stock is subject to certain limitations set forth in the Certificate of Designations. Further, the Certificate of Designations contains a certain beneficial ownership limitation after giving effect to the issuance of shares of common stock issuable upon conversion of, or as part of any amortization payment or dividend make-whole payment under, the Certificate of Designations or Warrants.
The Certificate of Designations includes certain Triggering Events including, among other things, the suspension from trading or the failure of the common stock to be trading or listed (as applicable) on an eligible market for a period of five (5) consecutive trading days, the Company’s failure to pay any amounts due to the holders of the Series H-7 Preferred Shares when due. In connection with a Triggering Event, each holder of Series H-7 Preferred Shares will be able to require the Company to redeem in cash any or all of the holder’s Series H-7 Preferred Shares at a premium set forth in the Certificate of Designations.
The
Series H-7 Preferred Shares were determined to be more akin to a debt-like host than an equity-like host. The Company identified the
following embedded features that are not clearly and closely related to the debt host instrument: 1) make-whole interest upon a contingent
redemption event, 2) make-whole interest upon a conversion event, 3) an installment redemption upon an Equity Conditions Failure (as
defined in the Certificate of Designations), and 4) variable share-settled installment conversion. These features were bundled together,
assigned probabilities of being effected and measured at fair value. Subsequent changes in fair value of these features are recognized
in the Consolidated Statement of Operations. The Company estimated the $
The
discount to the fair value is included as a reduction to the carrying value of the Series H-7 Preferred Shares. During the three
months ended September 30, 2023, the Company recorded a total discount of approximately $
million upon issuance of the Series H-7 Preferred Shares, which was comprised of the issuance date fair value of the associated
embedded derivative of approximately $
Following the Reverse Stock Split, as discussed in Note 1 above, the Conversion Price was reduced to $2.00 per share pursuant to the terms of the Certificate of Designation.
During
each of the three and nine months ended September 30, 2023, the Company recorded a gain of approximately $
| F-14 |
Common Stock Warrants
Pursuant
to the Private Placement, the Company issued to Investors Warrants initially exercisable for
The 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. The Warrants are also entitled to certain adjustments following any stock
split, stock dividend, stock combination, reverse stock split, recapitalization or other similar transaction involving the outstanding
Common Stock. Such adjustments were triggered as a result of the Reverse Stock Split, resulting in an adjusted exercise price per share
from $
The
Warrants were determined to be subject to liability classification as they are considered to be indexed to the Company’s own
stock but fail to meet the requirements for equity classification in accordance with ASC 815. As such, the Company recorded the
Warrants as a liability at fair value with subsequent changes in fair value recognized in earnings. The Company utilized the Black
Scholes Model to calculate the value of these warrants issued during the three months ended September 30, 2023. The fair value of
the Warrants of approximately $
Transaction
costs incurred attributable to the issuance of the Warrants of $
During
each of the three and nine months ended September 30, 2023, and 2022, the Company recorded a loss of approximately $
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 price of $
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 $
The warrants were valued using the Black-Scholes option pricing model on the date of the modification and issuance using the following assumptions for the initial deemed dividend: (a) fair value of common stock of $ per share, (b) expected volatility of %, (c) dividend yield of %, (d) risk-free interest rate of %, and (e) expected life of years. The warrants were valued using the Black-Scholes option pricing model on the date of the modification and issuance using the following assumptions for the second deemed dividend: (a) fair value of common stock of $ per share, (b) expected volatility of %, (c) dividend yield of %, (d) risk-free interest rate of %, and (e) expected life of years.
A summary of the Company’s warrants to purchase common stock activity is as follows:
| Weighted Average | ||||||||||||
| Shares Underlying | Weighted Average | Remaining Contractual Term | ||||||||||
| Warrants | Exercise Price | (in years) | ||||||||||
| Outstanding at December 31, 2022 | $ | |||||||||||
| Granted | - | |||||||||||
| Exercised | - | |||||||||||
| Expired | ( | ) | - | |||||||||
| Outstanding at September 30, 2023 | $ | |||||||||||
| F-15 |
AYRO 2020 Long Term Incentive Plan
The Company has reserved a total of shares of its common stock pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, including shares of restricted stock that have been issued. The Company has stock options, restricted stock and warrants remaining under this plan as of September 30, 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Options
| Weighted Average | Contractual Life | |||||||||||
| Number of Shares | Exercise Price | (Years) | ||||||||||
| Outstanding at December 31, 2022 | $ | |||||||||||
| Forfeitures | ( | ) | ||||||||||
| Outstanding at September 30, 2023 | $ | |||||||||||
Of the outstanding options, were vested and exercisable as of September 30, 2023. At September 30, 2023, the aggregate intrinsic value of stock options vested and exercisable was $.
The Company recognized $ and $ of stock option expense for the three months ended September 30, 2023, and 2022, and $ and $ for the nine months ended September 30, 2023, and September 30, 2022, respectively. Total compensation cost related to non-vested stock option awards not yet recognized as of September 30, 2023, was $ and will be recognized on a straight-line basis through the end of the vesting periods through April 2025. The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.
Restricted Stock
| Weighted | ||||||||
| Number of | Average Grant | |||||||
| Shares | Price | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Outstanding at September 30, 2023 | $ | |||||||
| F-16 |
On February 1, 2023, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company granted shares of restricted stock to non-executive directors at a value of $ per share. There are vested and unissued shares of restricted stock awards as of September 30, 2023. As of September 30, 2023, shares of restricted stock remain unvested and unissued.
The Company recognized compensation expense related to all restricted stock during the three months ended September 30, 2023, and 2022 of $ and $ and for the nine months ended September 30, 2023, and 2022 $ and $, respectively. Total compensation cost related to non-vested restricted stock not yet recognized as of September 30, 2023, was $.
NOTE 12. CONCENTRATIONS AND CREDIT RISK
Revenues
One
customer accounted for approximately
Accounts Receivable
As
of September 30, 2023, two customers accounted for
Purchasing
The
Company places orders with various suppliers. Certain suppliers accounted for more than
During the nine months ended September 30, 2022, one supplier
accounted for approximately
| F-17 |
NOTE 13. COMMITMENTS AND CONTINGENCIES
Manufacturing Agreements
On July 28, 2022, the Company partnered with Linamar Corporation (“Linamar”) a Canadian manufacturer, in a manufacturing agreement (the “Linamar MLA”) to provide certain sub assembly and assembly parts, including the cabin frame and skate for the Vanish (collectively, the “Products”). During the term of the Linamar MLA, Linamar has the exclusive right to supply the Products to the Company, subject to certain exceptions. The Linamar MLA has an initial term of three years and will automatically renew for successive two-year terms unless either party has given at least 12 months’ written notice of nonrenewal. Either party may terminate the Linamar MLA at any time upon 12 months’ written notice, and in the event of a change in control of the Company prior to the end of the initial term, the Company may terminate upon written notice within three days of completion of such change in control.
In
the event the Company terminates the Linamar MLA prior to its expiration, whether following a change in control or otherwise, the Company
must purchase any remaining raw material inventory, finished goods inventory and work in progress and any unamortized capital equipment
used in production and testing of the Products and pay a termination fee of $
Supply Chain Agreements
In 2017, the Company executed a supply chain contract with Cenntro, which has historically been the Company’s primary supplier. Cenntro was previously a significant stockholder in AYRO Operating. Cenntro owns the design of the AYRO 411 Fleet vehicles and has granted the Company an exclusive license to purchase the AYRO 411 Fleet vehicles for sale in North America. The Company purchased 100% of its vehicle chassis, cabs, and wheels for AYRO 411 Fleet Vehicles through this supply chain relationship with Cenntro. The Company must sell a minimum number of units in order to maintain its exclusive supply chain contract.
As
of December 31, 2021, the net balance between prepaid expenses and accrued expenses with Cenntro was a prepaid balance of $
The Company has canceled all purchase orders and future builds with Cenntro and currently intends to only order replacement parts from Cenntro in the future.
Litigation
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, that it believes are incidental to the operation of its business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations, financial positions, or cash flows.
On March 23, 2018, DropCar was made aware of an audit being conducted by the New York State Department of Labor (“DOL”) regarding a claim filed by an employee. The DOL is investigating whether DropCar properly paid overtime for which DropCar has raised several defenses. In addition, the DOL is conducting its audit to determine whether the Company owes spread of hours pay (non-exempt worker whose workday is longer than ten hours must receive an extra hour of pay at the basic minimum hourly rate). Management believes the case has no merit.
DropCar
was audited by the New York State Department of Taxation and Finance (“DOTF”) for its sales tax paid over the period of 2017
– 2020. The DOTF believes DropCar owes additional sales tax plus interest. Management is investigating the details of this audit.
As of December 31, 2021, the Company has accrued $
| F-18 |
NOTE 14. FAIR VALUE MEASUREMENTS
Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of and during the nine months ended September 30, 2023. The carrying amounts of cash equivalents, accounts receivable, other current assets, other assets, accounts payable, and accrued expenses approximated their fair values as of September 30, 2023, due to their short-term nature. The fair value of the bifurcated embedded derivative related to the convertible preferred stock was estimated using a Monte Carlo simulation model, which uses as inputs the fair value of our common stock and estimates for the equity volatility and traded volume volatility of our common stock, the time to maturity of the convertible preferred stock, the risk-free interest rate for a period that approximates the time to maturity, dividend rate, a penalty dividend rate, and our probability of default. The fair value of the warrant liability was estimated using the Black Scholes Model which uses as inputs the following weighted average assumptions, as noted above: dividend yield, expected term in years, equity volatility, and risk-free interest rate.
Fair Value on a Recurring Basis
The Company follows the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. The estimated fair value of the warrant liability and bifurcated embedded derivatives represent Level 3 measurements. The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis at September 30, 2023, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
The following table sets forth a summary of the change in the fair value of the warrant liability that is measured at fair value on a recurring basis:
| At Inception | ||||||||||||
| September 30, | August 10, | |||||||||||
| Description | Level | 2023 | 2023 | |||||||||
| Liabilities: | ||||||||||||
| Warrant liability (see Note 10) | 3 | $ | $ | |||||||||
| Bifurcated embedded derivative liability (see Note 10) | 3 | $ | $ | |||||||||
The following table sets forth a summary of the change in the fair value of the bifurcated embedded derivative liability that is measured at fair value on a recurring basis:
| September 30, 2023 | ||||
| Balance on December 31, 2022 | $ | |||
| Issuance of warrants | ||||
| Change in fair value of warrant liability | ||||
| Balance on September 30, 2023 | $ | |||
The following table sets forth a summary of the change in the fair value of the bifurcated embedded derivative liability that is measured at fair value on a recurring basis:
| September 30, 2023 | ||||
| Balance on December 31, 2022 | $ | |||
| Issuance of convertible preferred stock with bifurcated embedded derivative | ||||
| Change in fair value of bifurcated embedded derivative | ( | ) | ||
| Balance on September 30, 2023 | $ | |||
NOTE 15. SUBSEQUENT EVENTS
On October 20, 2023, Club Car filed a complaint against the Company in the Superior Court of Columbia County, Georgia (Civil Action File No. 2023ECV0838) (the “Club Car Complaint”), alleging that the Company had breached its contractual obligations to Club Car under the Company’s master procurement agreement with Club Car (the “MPA”) due to alleged defects in the vehicles sold to Club Car and the Company’s termination of warranty support following termination of the MPA. Club Car seeks unspecified damages and indemnification for past and future customer claims with respect to the vehicles sold to Club Car under the MPA. The Company intends to vigorously contest these allegations.
| F-19 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. This management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our filings with the Securities and Exchange Commission (“SEC”) that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. See “Cautionary Note Regarding Forward-Looking Statements.”
References in this management’s discussion and analysis to “we,” “us,” “our,” “the Company,” “our Company,” or “AYRO” refer to AYRO, Inc. and its subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terms such as “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “guides,” “intends,” “is confident that,” “may,” “plans,” “seeks,” “projects,” “targets,” “would” and “will” or the negative of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, but are not limited to, future financial and operating results, the company’s plans, objectives, expectations and intentions, statements concerning the strategic review of our product development strategy, the development and launch of the AYRO Vanish (the “Vanish”) and other statements that are not historical facts. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from our historical experience and our present expectations, or projections described under the sections in this Form 10-Q and our other reports filed with the SEC titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
A summary of the principal risk factors that make investing in our securities risky and might cause our actual results to differ materially from those projected in these forward-looking statements is set forth below. If any of the following risks occur, our business, financial condition, results of operations, cash flows, cash available for distribution, ability to service our debt obligations and prospects could be materially and adversely affected.
| ● | we may be acquired by a third party; |
| ● | we have a history of losses and have never been profitable, and we expect to incur additional losses in the future and may never be profitable; |
| ● | a significant portion of our revenues has historically been derived from Club Car LLC (“Club Car”) pursuant to the MPA (as defined below). Following our termination of the MPA, our sales could decrease significantly, and we will need to identify new strategic channel partners to support the sales of our vehicles; |
| ● | we face risks associated with litigation and claims; |
| ● | holders of our Series H-7 convertible preferred stock with a stated value of $1,000 per share (“Series H-7 Preferred Stock”) are entitled to certain payments that may be paid in cash or in shares of common stock depending on the circumstances, if we make these payments in cash, we may be required to expend a substantial portion of our cash resources, and if we make these payments in common stock, it may result in substantial dilution to the holders of our common stock; |
| ● | the certificate of designations for the Series H-7 Preferred Stock (the “Certificate of Designations”) and the warrants issued concurrently therewith contain anti-dilution provisions and other adjustment provisions that have resulted in the reduction of the conversion price of the Series H-7 Preferred Stock and the exercise price of such warrants and may do so again in the future. These features may increase the number of shares of common stock issuable upon conversion of the Series H-7 Preferred Stock or upon the exercise of the warrants; |
| ● | under the Purchase Agreement (as defined below) we are subject to certain restrictive covenants that may make it difficult to procure additional financing; |
| 1 |
| ● | we rely on a single third-party supplier and manufacturer located in Canada for certain sub-assembly and assembly parts for the Vanish and any disruption in the operations of this third-party supplier could adversely affect our business and results of operations; |
| ● | if we lose our exclusive license to manufacture the AYRO 411x model (“411x”) in North America, Cenntro could sell identical or similar products through other companies or directly to our customers; |
| ● | we may be unable to replace lost manufacturing capacity on a timely and cost-effective basis, which could adversely impact our operations and ability to meet delivery timelines; |
| ● | we may experience delays in the development and introduction of new products; |
| ● | the market for our products is developing and may not develop as expected; |
| ● | we are currently evaluating our product development strategy, which may result in significant changes and have a material impact on our business, results of operations and financial condition; |
| ● | our business is subject to general economic and market conditions, including trade wars and tariffs; |
| ● | if disruptions in our transportation network continue to occur or our shipping costs continue to increase, we may be unable to sell or timely deliver our products, and our gross margin could decrease; |
| ● | our limited operating history makes evaluating our business and future prospects difficult and may increase the risk of any investment in our securities; |
| ● | if we are unable to effectively implement or manage our growth strategy, our operating results and financial condition could be materially and adversely affected; |
| ● | developments in alternative technologies or improvements in the internal combustion engine may have a materially adverse effect on the demand for our electric vehicles; |
| ● | the markets in which we operate are highly competitive, and we may not be successful in competing in these industries; |
| ● | our future growth depends on customers’ willingness to adopt electric vehicles; |
| ● | we may experience lower-than-anticipated market acceptance of our current models and the vehicles in development; |
| ● | if we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and our reputation may be damaged; |
| ● | if we fail to include key feature sets relative to the target markets for our electric vehicles, our business will be harmed; |
| ● | unanticipated changes in industry standards could render our vehicles incompatible with such standards and adversely affect our business; |
| ● | our future success depends on our ability to identify additional market opportunities and develop and successfully introduce new and enhanced products that address such markets and meet the needs of customers in such markets; |
| ● | unforeseen or recurring operational problems at our facilities, or a catastrophic loss of our manufacturing facilities, may cause significant lost or delayed production and adversely affect our results of operations; |
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| ● | we may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims; |
| ● | if our vehicles fail to perform as expected due to defects, our ability to develop, market and sell our electric vehicles could be seriously harmed; |
| ● | we depend on key personnel to operate our business, and the loss of one or more members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business; |
| ● | transitioning from an offshoring to an onshoring business model carries risk; |
| ● | we currently have limited electric vehicles marketing and sales experience, and if we are unable to establish sales and marketing capabilities or enter into dealer agreements to market and sell our vehicles, we may be unable to generate any revenue; |
| ● | failure to maintain the strength and value of our brand could have a material adverse effect on our business, financial condition, and results of operations; |
| ● | the range of our electric vehicles on a single charge declines over time, which may negatively influence potential customers’ decisions whether to purchase our vehicles; |
| ● | an unexpected change in failure rates of our products could have a material adverse impact on our business, financial condition, and operating results; |
| ● | increases in costs, disruption of supply or shortage of raw materials, in particular lithium-ion battery cells, chipsets and displays, could harm our business; |
| ● | customer financing and insuring our vehicles may prove difficult because retail lenders are unfamiliar with our vehicles and our vehicles have a limited loss history determining residual values within the insurance industry; |
| ● | our electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been observed to catch fire or vent smoke and flames; |
| ● | our business may be adversely affected by labor and union activities; |
| ● | we rely on our dealers for the service of our vehicles and have limited experience servicing our vehicles, and if we are unable to address the service requirements of our future customers, our business will be materially and adversely affected; |
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| ● | if we fail to deliver vehicles and accessories to market as scheduled, our business will be harmed; |
| ● | failure in our information technology and storage systems could significantly disrupt the operation of our business; |
| ● | we may be required to raise additional capital to fund our operations, and such capital raising may be costly or difficult to obtain, and could dilute our stockholders’ ownership interests; |
| ● | our long-term capital requirements are subject to numerous risks; |
| ● | we may invest in or acquire other businesses, and our business may suffer if we are unable to successfully integrate acquired businesses into our company or otherwise manage the growth associated with multiple acquisitions; |
| ● | increased safety, emissions, fuel economy or other regulations may result in higher costs, cash expenditures, and/or sales restrictions; |
| ● | our vehicles are subject to multi-jurisdictional motor vehicle standards; |
| ● | we may fail to comply with evolving environmental and safety laws and regulations; |
| ● | changes in regulations could render our vehicles incompatible with federal, state, or local regulations, or use cases; |
| ● | unusual or significant litigation, governmental investigations or adverse publicity arising out of alleged defects in our vehicles, or otherwise, may derail our business; |
| ● | we are required to comply with state-specific regulations regarding the sale of vehicles by a manufacturer; |
| ● | we have identified a material weakness in our internal control over financial reporting, and if we are unable to remediate the material weakness, or if we experience additional material weaknesses in the future, our business may be harmed; |
| ● | if we are unable to adequately protect our proprietary designs and intellectual property rights, our competitive position could be harmed; |
| ● | we may need to obtain rights to intellectual property from third parties in the future, and if we fail to obtain licenses or fail to comply with our obligations in existing agreements under which we have licensed intellectual property and other rights from third parties, we could lose our ability to manufacture our vehicles; |
| ● | many of our proprietary designs are in digital form, and a breach of our computer systems could result in these designs being stolen; |
| ● | our proprietary designs are susceptible to reverse engineering by our competitors; |
| ● | if we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us; |
| ● | legal proceedings or third-party claims of intellectual property infringement and other challenges may require us to spend substantial time and money and could harm our business; |
| ● | we are generally obligated to indemnify our sales channel partners, customers, suppliers and contractors for certain expenses and liabilities resulting from intellectual property infringement claims regarding our products, which could force us to incur substantial costs; |
| ● | we are subject to exposure from changes in the exchange rates of local currencies; and |
| ● | we are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws. |
For a more detailed discussion of these and other factors that may affect our business and that could cause our actual results to differ materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K as filed with the SEC on March 23, 2023 and amended on May 1, 2023 (“Form 10-K”). Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise, except as required by law.
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Overview
We design and manufacture compact, sustainable electric vehicles for closed campus mobility, low speed urban and community transport, local on-demand and last mile delivery and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers, including universities, business and medical campuses, last mile delivery services and food service providers. We have commenced sales and delivery of our current model, the Vanish, in support of the aforementioned markets.
Reverse Stock Split
On September 15, 2023, we effected a one-for-eight reverse stock split of our common stock (the “Reverse Stock Split”). All share and per share information in this quarterly report have been retroactively adjusted to reflect the Reverse Stock Split.
Strategic Review
Following the hiring of our current Chief Executive Officer in the third quarter of 2021, we initiated a strategic review of our product development strategy, as we focus on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets. In connection with our strategic review, we cancelled development of our planned next-generation three-wheeled high-speed vehicle.
For the past several years, our primary supplier has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory in the automotive district in Hangzhou, China. As a result of rising shipping costs, quality issues with certain components and persistent delays, we ceased production of the 411x from Cenntro in September 2022 in order to focus our resources on the development and launch of the new 411 fleet vehicle model year 2023 refresh, the Vanish. We began design and development of the Vanish in December 2021, including updates to our supply chain, the offshoring/onshoring mix, our manufacturing strategy, and our annual model year refresh program. We commenced low-rate initial production of the Vanish in the second quarter of 2023 and commenced initial sales and delivery of the Vanish in the third quarter of 2023.
Products
Our vehicles provide the end user an environmentally friendly alternative to internal combustion engine vehicles (cars powered by gasoline or diesel oil), for light duty uses, including low-speed logistics, maintenance services, cargo services, and personal/group transport in a quiet, zero emissions vehicle with a lower total cost of ownership.
Manufacturing Agreement with Cenntro
In 2017, AYRO Operating partnered with Cenntro in a supply chain agreement to provide sub-assembly manufacturing services. Cenntro owns the design of the AYRO Club Car 411 and 411x (“AYRO 411 Fleet”) vehicles and has granted us an exclusive license to purchase the AYRO 411 Fleet vehicles for sale in North America.
Under our Manufacturing License Agreement with Cenntro (the “Cenntro MLA”), in order for us to maintain our exclusive territorial rights pursuant to the Cenntro MLA, we must meet certain minimum purchase requirements.
We imported semi-knocked-down vehicle kits from Cenntro for the AYRO 411 Fleet models that comprised our model year 2022 lineup. The vehicle kits were received through shipping containers at the assembly facility of Karma Automotive LLC (“Karma”), our previous manufacturing partner in southern California, as well as at our customization, service and integration facility in Round Rock, Texas. The vehicles were then assembled with tailored customization requirements per order.
On May 31, 2022, we received a letter from Cenntro purporting to terminate all agreements and contracts between the Company and Cenntro. Although we do not believe Cenntro’s termination of the Cenntro MLA is valid, we have determined to cease production of the 411x and focus our resources on the Vanish. We have canceled all purchase orders and future builds with Cenntro and currently intend to only order replacement parts for vehicles from Cenntro in the future. Cenntro inventory remaining on hand as of September 30, 2023, was valued at $109,238. We expect to lose our exclusive license under the Cenntro MLA, in which case Cenntro could sell identical or similar products through other companies or directly to our customers, which could have a material adverse effect on our results of operations and financial condition.
The new Vanish utilizes assemblies and products that largely eliminate our dependency on Chinese imports and optimize the supply chain to rely primarily upon North American and European sources. Final assembly of the Vanish occurs in our Round Rock, Texas facilities.
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Manufacturing Agreement with Linamar
On July 28, 2022, we partnered with Linamar Corporation (“Linamar”), a Canadian manufacturer, in a manufacturing agreement (the “Linamar MLA”) to provide certain sub assembly and assembly parts, including the cabin frame and skate for the Vanish (collectively, the “Products”). During the term of the Linamar MLA, Linamar has the exclusive right to supply the Products to the Company, subject to certain exceptions. The Linamar MLA has an initial term of three years and will automatically renew for successive two-year terms unless either party has given at least 12 months’ written notice of nonrenewal. Either party may terminate the Linamar MLA at any time upon 12 months’ written notice, and in the event of a change in control of the Company prior to the end of the initial term, we may terminate upon written notice within three days of completion of such change in control.
In the event we terminate the Linamar MLA prior to its expiration, whether following a change in control or otherwise, we must purchase any remaining raw material inventory, finished goods inventory, work in progress and any unamortized capital equipment used in production and testing of the Products and pay a termination fee of $750,000, subject to certain adjustments. We are dependent on the Linamar MLA, and in the event of its termination our manufacturing operations and customer deliveries would be materially impacted.
Under the Linamar MLA, we must commit to certain minimum purchases, to be determined by AYRO on a quarterly basis.
We import the Products from Linamar in Canada, and we manufacture and assemble the Vanish at our customization, service, and integration facility in Round Rock, Texas. Over 98% of the vehicle assemblies, components, and products for the Vanish are from North American and European sources.
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Club Car MPA Termination
The majority of our sales have historically been comprised of sales to Club Car pursuant to a master procurement agreement (the “MPA”) entered into by and among AYRO Operating Company, Inc., our subsidiary (“AYRO Operating”), and Club Car on March 5, 2019. The MPA granted Club Car the exclusive right to sell the AYRO 411 Fleet in North America, provided that Club Car ordered at least 500 vehicles per year. Club Car did not meet this volume threshold for 2020, 2021 or 2022. Pursuant to the MPA, AYRO Operating granted Club Car a right of first refusal for sales of 51% or more of AYRO Operating’s assets or equity interests, which right of first refusal is exercisable for a period of 45 days following delivery of an acquisition notice to Club Car. AYRO Operating also agreed to collaborate with Club Car on new products similar to the AYRO 411 Fleet and improvements to existing products and granted Club Car a right of first refusal to purchase similar commercial utility vehicles which AYRO Operating may develop during the term of the MPA.
On April 4, 2023, AYRO Operating delivered notice of termination of the MPA to Club Car, and we intend to replace Club Car with new business partners for selling our products beginning with the Vanish. We do not expect Club Car to remain a customer going forward. In connection with the termination of the MPA and the forthcoming introduction of the Vanish, we are reevaluating our channel strategy with an eye towards distributing our next-generation platform and payloads in a manner that maximizes visibility, moderates channel costs, and creates value. The loss of Club Car as a customer could have a material adverse effect on our sales, financial condition, and results of operations.
Recent Developments
August 2023 Private Placement
On August 7, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain existing investors (the “Investors”), pursuant to which we agreed to sell to the Investors in a private placement (the “Private Placement”) (i) an aggregate of 22,000 shares of our newly-designated Series H-7 Preferred Stock, initially convertible into up to 2,750,000 shares of our common stock (the “Preferred Shares”) at a conversion price (the “Conversion Price”) of $8.00 per share, and (ii) warrants to acquire up to an aggregate of 2,750,000 shares of common stock at an initial exercise price (“Exercise Price”) of $8.00 per share (the “Investor Warrants,”). Following the Reverse Stock Split, the Conversion Price was reduced to $2.00 per share pursuant to the terms of the Certificate of Designations and the Exercise Price was reduced to $2.00 per share pursuant to the terms of the Warrants (as defined below).
The Private Placement is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. Each of the Investors has represented to us that it is an accredited investor within the meaning of Rule 501(a) of Regulation D and that it is acquiring the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The Preferred Shares and Investor Warrants were offered without any general solicitation by us or our representatives.
The Private Placement closed on August 10, 2023. The aggregate gross proceeds from the Private Placement were approximately $22 million. We expect to use the net proceeds from the Private Placement for general corporate purposes.
The Purchase Agreement contains certain representations and warranties, covenants, and indemnities customary for similar transactions. The representations, warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the Purchase Agreement and may be subject to limitations agreed upon by the contracting parties.
In connection with the Private Placement, pursuant to an Engagement Letter, dated August 7, 2023, between the Company and Palladium Capital Group, LLC (the “Placement Agent”), we agreed to pay the Placement Agent (i) a cash fee equal to 6% of the gross proceeds from any sale of securities in the Private Placement and (ii) warrants (“Placement Agent Warrants,” and together with the Investor Warrants, the “Warrants”) to purchase shares of common stock equal to 2% of the number of shares of common stock that the Preferred Shares are initially convertible into, with an initial exercise price of $8.00 per share (subsequently reduced to $2.00 per share pursuant to a Stock Combination Event Adjustment (as defined below) following the Reverse Stock Split) and a five-year term.
Series H-7 Preferred Stock
The terms of the Preferred Shares are as set forth in the Certificate of Designations, which was filed with the Secretary of State of the State of Delaware prior to the closing of the Private Placement. The Preferred Shares are convertible into shares of common stock (the “Conversion Shares”) at the election of the holder at any time at an initial Conversion Price of $8.00. The Conversion Price is subject to adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment in the event of any issuances of common stock, or securities convertible, exercisable or exchangeable for common stock, at a price below the then-applicable Conversion Price (subject to certain exceptions). Following the Reverse Stock Split, the Conversion Price for the Preferred Shares was reduced to $2.00 per share pursuant to the terms of the Certificate of Designations. We are required to redeem the Preferred Shares in twelve equal monthly installments, commencing on a date between February 7, 2024, and August 7, 2025, at the election of each Investor. The amortization payments due upon such redemption are payable, at our election, in cash at 105% of the Installment Redemption Amount (as defined in the Certificate of Designations), or subject to certain limitations, in shares of common stock valued at the lower of (i) the Conversion Price then in effect and (ii) the greater of (A) 80% of the average of the three lowest closing prices of the common stock during the thirty trading day period immediately prior to the date the amortization payment is due or (B) $0.744, or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Stock Market, which amortization payments are subject to certain adjustments as set forth in the Certificate of Designations.
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The holders of the Preferred Shares are entitled to dividends of 8% per annum, compounded monthly, which are payable in cash or shares of common stock at our option, in accordance with the terms of the Certificate of Designations. Upon the occurrence and during the continuance of a Triggering Event (as defined in the Certificate of Designations), the Preferred Shares will accrue dividends at the rate of 15% per annum. Upon conversion or redemption, the holders of the Preferred Shares are also entitled to receive a dividend make-whole payment assuming for calculation purposes that the stated value remained outstanding through and including the twelve (12) month anniversary of the first installment date as elected by an Investor. Except as required by applicable law, the holders of Preferred Shares are entitled to vote with holders of the common stock on as as-converted basis, with the number of votes to which each holder of Preferred Shares is entitled to be calculated assuming conversion at the Minimum Price (as defined in Rule 5635 of the Rules of the Nasdaq Stock Market) applicable immediately before the execution and delivery of the Purchase Agreement.
Notwithstanding the foregoing, our ability to settle conversions and make amortization and dividend make-whole payments using shares of common stock is subject to certain limitations set forth in the Certificate of Designations, including a limit on the number of shares that may be issued until the time, if any, that our stockholders have approved the issuance of more than 19.9% of our outstanding shares of common stock in accordance with Nasdaq listing standards (the “Nasdaq Stockholder Approval”). We agreed to seek the Nasdaq Stockholder Approval at a meeting of stockholders, and such approval was obtained at the Company’s special meeting of stockholders held on September 14, 2023. Our directors and officers executed an agreement to vote their shares in favor of the Nasdaq Stockholder Approval. The Certificate of Designations also contains a certain beneficial ownership limitation after giving effect to the issuance of shares of common stock issuable upon conversion of, or as part of any amortization or dividend make-whole payment under, the Certificate of Designations or Warrants. Such amount may be lowered with the consent of the holder and the Company.
The Certificate of Designations includes certain Triggering Events (as defined in the Certificate of Designations), including, among other things, the suspension from trading or the failure of the common stock to be trading or listed (as applicable) on an eligible market for a period of five (5) consecutive trading days and our failure to pay any amounts due to the holders of the Preferred Shares when due. In connection with a Triggering Event, each holder of Preferred Shares will be able to require us to redeem in cash any or all of the holder’s Preferred Shares at a premium set forth in the Certificate of Designations.
We are subject to certain affirmative and negative covenants regarding the incurrence of indebtedness, the existence of liens, investment transactions, the repayment of indebtedness, the payment of cash in respect of dividends (other than dividends pursuant to the Certificate of Designations), distributions or redemptions, the transfer of assets, and certain minimum cash requirements and establishment of a segregated deposit account for the proceeds of the offering, among other matters.
There is no established public trading market for the Preferred Shares, and we do not intend to list the Preferred Shares on any national securities exchange or nationally recognized trading system.
Warrants
The Warrants are exercisable for shares of common stock (the “Warrant Shares”) immediately at an initial Exercise Price of $8.00 per share and expire five years from the date of issuance. The Exercise Price is subject to adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment, on a “full ratchet” basis, in the event of any issuances of common stock, or securities convertible, exercisable or exchangeable for common stock, at a price below the then-applicable Exercise Price (subject to certain exceptions). Following the Reverse Stock Split, the Exercise Price was reduced to $2.00 per share pursuant to the terms of the Warrants and the number of Warrant Shares issuable upon the exercise of the Warrants was increased proportionately. There is no established public trading market for the Warrants, and we do not intend to list the Warrants on any national securities exchange or nationally recognized trading system.
Registration Rights
The Preferred Shares, the Conversion Shares, the Warrants, and the Warrant Shares have not been registered under the Securities Act. In connection with the Purchase Agreement, on August 7, 2023, the Company and the Investors entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which we are required to file a resale registration statement (the “Registration Statement”) with the SEC to register for resale 150% of the Conversion Shares and the Warrant Shares promptly following the closing date, but in no event later than 30 calendar days after the closing date, and to have such Registration Statement declared effective by the Effectiveness Date (as defined in the Registration Rights Agreement). We filed a registration statement for the resale of such securities on September 8, 2023, as amended on September 27, 2023. We will be obligated to pay certain liquidated damages to the Investors if we fail to file or cause the Registration Statement to be declared effective by the SEC when required or fail to maintain the effectiveness of the Registration Statement pursuant to the terms of the Registration Rights Agreement.
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Nasdaq Minimum Bid Price Requirement
As previously reported, on October 3, 2022, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the 30 consecutive business day period between August 19, 2022 and September 30, 2022, we did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”).
The letter also indicated that we would be provided with a compliance period of 180 calendar days, or until April 3, 2023, in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A). On April 4, 2023, we received a letter from Nasdaq notifying us that we have been granted an additional 180-day period, or until October 2, 2023, to regain compliance with the Minimum Bid Price Requirement.
On September 15, 2023, we effected the Reverse Stock Split in order to regain compliance with the Minimum Bid Price Requirement. On October 2, 2023, we received written notice from the Listing Qualifications Department of Nasdaq stating that because our common stock had a closing bid price at or above $1.00 per share for the last 10 consecutive business days, from September 18 to September 29, 2023, we had regained compliance with the Minimum Bid Price Requirement, and that the matter is now closed.
Factors Affecting Results of Operations
Master Procurement Agreement
In March 2019, we entered into the MPA with Club Car. In partnership with Club Car and in interaction with its dealer network, we directed our business development resources towards supporting Club Car’s enterprise and fleet sales function as Club Car proceeds in its new product introduction initiatives. Substantially all of our sales have historically been to Club Car pursuant to the MPA. On April 4, 2023, we delivered notice of termination of the MPA to Club Car, and we intend to replace Club Car with new business partners for selling our products beginning with the Vanish. We do not expect Club Car to remain a customer going forward.
Tariffs
Countervailing tariffs on certain goods from China continued to have an adverse impact on raw material costs throughout 2021 and 2022.
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Supply Chain
Beginning in the second quarter of 2021, we offered a configuration of our 411x powered by lithium-ion battery technology. Additionally, our powered food box offerings are currently powered by lithium-ion battery technology. Our business depends on the continued supply of battery cells and other parts for our vehicles. During 2021 and 2022, we at times experienced supply chain shortages of both lithium-ion battery cells and other critical components used to produce our vehicles, which has slowed our planned production of vehicles. In addition, we could be impacted by shortages of other products or raw materials, including silicon chips that we or our suppliers use in the production of our vehicles or parts sourced for our vehicles.
The Vanish utilizes assemblies and products that largely eliminate our dependency on Chinese imports and optimize the supply chain to North American and European sources.
Components of Results of Operations
Revenue
We derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts, and service fees. In the past we also derived rental revenue from vehicle revenue sharing agreements with tourist destination fleet operators, and, to a lesser extent, shipping, parts, and service fees. Provided that all other revenue recognition criteria have been met, we typically recognize revenue upon shipment, as title and risk of loss are transferred to customers and channel partners at that time. Products are typically shipped to dealers or directly to end customers, or in some cases to our international distributors. These international distributors assist with import regulations, currency conversions and local language. Our vehicle product sales revenues vary from period to period based on, among other things, the customer orders received and our ability to produce and deliver the ordered products. Customers often specify requested delivery dates that coincide with their need for our vehicles.
Because these customers may use our products in connection with a variety of projects of different sizes and durations, a customer’s orders for one reporting period generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers.
Cost of Goods Sold
Cost of goods sold primarily consists of costs of materials and personnel costs associated with manufacturing operations, and an accrual for post-sale warranty claims. Personnel costs consist of wages and associated taxes and benefits. Cost of goods sold also includes freight and changes to our warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect the cost of revenue to increase in absolute dollars as product revenue increases.
Operating Expenses
Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.
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Stock-based compensation
We account for stock-based compensation expense in accordance with Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for share-based awards based on the estimated fair value on the date of grant.
The fair value of each stock option granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award. The fair value of the options granted to non-employees is measured and expensed as the options vest.
Restricted stock grants are stock awards that entitle the holder to receive shares of our common stock as the award vests over time. The fair value of each restricted stock grant is based on the fair market value price of common stock on the date of grant, and it is measured and expensed as the restricted stock vests.
We estimate the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. Key inputs and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected term, the risk-free interest rate over the expected term, the expected annual dividend yield, and the expected stock price volatility. The expected volatility is based on a combination of the historical and implied volatility of our publicly traded, near-the-money stock options, and the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant and, since we do not currently pay or plan to pay a dividend on its common stock, the expected dividend yield was zero.
Research and Development Expense
Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, amortization of product development costs, product strategic advisory fees, third-party engineering and contractor support costs and allocated overhead. We expect our research and development expenses to increase in absolute dollars as we continue to invest in new and existing products.
Sales and Marketing Expense
Sales and marketing expenses consist primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications, and brand-building activities. We expect sales and marketing expenses to increase in absolute dollars as we expand our sales force, expand our product lines, increase marketing resources, and further develop potential sales channels.
General and Administrative Expense
General and administrative expenses consist primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources and fees for third-party professional services, and allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing our business.
Other (Expense) Income
Other (expense) income consists primarily of interest expense, unrealized gain/loss on marketable securities and changes in fair values of warrants and derivative liabilities.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to the United States government and to the state tax authorities in jurisdictions in which we conduct business. In the case of a tax deferred asset, we reserve the entire value for future periods.
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Results of Operations
Three months ended September 30, 2023, compared to three months ended September 30, 2022
The following table sets forth our results of operations for each of the periods set forth below:
| Three Months Ended September 30, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Revenue | $ | 88,395 | $ | 373,186 | $ | (284,791 | ) | |||||
| Cost of goods sold | 231,837 | 955,003 | (723,166 | ) | ||||||||
| Gross loss | (143,441 | ) | (581,817 | ) | 438,375 | |||||||
| Operating expenses: | ||||||||||||
| Research and development | 1,335,167 | 1,837,511 | (502,344 | ) | ||||||||
| Sales and marketing | 390,684 | 384,748 | 5,936 | |||||||||
| General and administrative | 4,370,684 | 3,000,156 | 1,370,528 | |||||||||
| Total operating expenses | 6,096,535 | 5,222,414 | 874,121 | |||||||||
| Loss from operations | (6,239,976 | ) | (5,804,231 | ) | (435,745 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest Income | 35,557 | 51,792 | (16,235 | ) | ||||||||
| Change in FV-Warrant Liability | (10,095,960 | ) | - | (10,095,960 | ) | |||||||
| Change in FV-Derivative Liability | 3,216,000 | - | 3,216,000 | |||||||||
| Unrealized gain/loss on marketable securities | 403,996 | (32,135 | ) | 436,131 | ||||||||
| Realized gain on marketable securities | 90,812 | 103,000 | (12,189 | ) | ||||||||
| Other income (expense), net | (6,349,596 | ) | 122,657 | (6,472,254 | ) | |||||||
| Net loss | $ | (12,589,572 | ) | $ | (5,681,574 | ) | $ | (6,907,998 | ) | |||
Revenue
Revenue was $0.09 million for the three months ended September 30, 2023, as compared to $0.37 million for the same period in 2022, a decrease of 76.3%, or $0.28 million. The decrease in revenue was the result of a reduction in sales to Club Car as we wind down our relationship with Club Car.
Cost of goods sold and gross loss
Cost of goods sold decreased by $0.72 million, or 75.7% for the three months ended September 30, 2023, as compared to the same period in 2022, corresponding with the decrease in vehicle sales.
Research and development expense
Research and development (“R&D”) expense was $1.33 million for the three months ended September 30, 2023, as compared to $1.84 million for the same period in 2022, a decrease of $0.50 million, or 27.3%. The decrease was primarily due to reduced R&D expenses from consultants of $1.0 million offset by an increase in salaries of $0.50 million, as the Company entered into low-rate initial production of the Vanish.
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Sales and marketing expense
Sales and marketing expense was $0.39 million for the three months ended September 30, 2023, as compared to $0.38 million for the same period in 2022, an increase of $0.01 million, or 1.54%, as we continued our focus on marketing-related initiatives surrounding the Vanish.
General and administrative expenses
The majority of our operating losses from continuing operations resulted from general and administrative expenses. General and administrative expenses consist primarily of costs associated with our overall operations and with being a public company. These costs include personnel, legal and financial professional services, insurance, investor relations, and compliance related fees. General and administrative expense was $4.37 million for the three months ended September 30, 2023, compared to $3.0 million for the same period in 2022, an increase of $1.37 million, or 45.68% primarily due to cost and associated expenses related to the issuance of Series H-7 Preferred Stock of $1.237 million. There was an increase in stock-based compensation of $0.13 million.
Other income and expense
We recorded a $6.47 million decrease of net other income due to the accounting treatment of the change in fair value of both warrant and derivative liabilities of $6.88 million, a $0.02 million decrease in interest income on cash accounts, and a decrease in realized gains of $0.01 million on marketable securities, partially offset by an increase in unrealized gains of $0.44 million on marketable securities.
Nine months ended September 30, 2023, compared to nine months ended September 30, 2022
The following table sets forth our results of operations for each of the periods set forth below:
| Nine Months Ended September 30, | ||||||||||||
| 2023 | 2022 | Change | ||||||||||
| Revenue | $ | 341,023 | $ | 2,381,592 | $ | (2,040,569 | ) | |||||
| Cost of goods sold | 783,656 | 4,959,660 | (4,176,004 | ) | ||||||||
| Gross loss | (442,633 | ) | (2,578,068 | ) | 2,135,435 | |||||||
| Operating expenses: | ||||||||||||
| Research and development | 5,870,555 | 3,749,714 | 2,120,841 | |||||||||
| Sales and marketing | 1,529,637 | 1,566,790 | (37,153 | ) | ||||||||
| General and administrative | 10,461,733 | 8,446,785 | 2,014,948 | |||||||||
| Total operating expenses | 17,861,925 | 13,763,289 | 4,098,636 | |||||||||
| Loss from operations | (18,304,558 | ) | (16,341,357 | ) | (1,963,201 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest Income | 370,387 | 71,389 | 298,998 | |||||||||
| Change in FV-Warrant Liability | (10,095,960 | ) | - | (10,095,960 | ) | |||||||
| Change in FV-Derivative Liability | 3,216,000 | - | 3,216,000 | |||||||||
| Unrealized gain/loss on marketable securities | 602,211 | (75,204 | ) | 677,415 | ||||||||
| Realized gain on marketable securities | 143,344 | 110,490 | 32,854 | |||||||||
| Other income (expense), net | (5,764,018 | ) | 106,675 | (5,870,693 | ) | |||||||
| Net loss | $ | (24,068,576 | ) | $ | (16,234,682 | ) | $ | 7,833,894 | ||||
Revenue
Revenue was $.34 million for the nine months ended September 30, 2023, as compared to $2.38 million for the same period in 2022, a decrease of 85.7%, or $2.04 million. The decrease in revenue was the result of a reduction in sales to Club Car as we wind down our relationship with Club Car.
Cost of goods sold and gross loss
Cost of goods decreased by $4.18 million, or 84.2% for the nine months ended September 30, 2023, as compared to the same period in 2022, corresponding with the decrease in vehicle sales and a $1.32 million write-off of NCM inventory and $0.62 million of Cenntro prepaid and accrued balances that were expensed in the same period in 2022.
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Research and development expense
Research and development (“R&D”) expense was $5.87 million for the nine months ended September 30, 2023, as compared to $3.75 million for the same period in 2022, an increase of $2.12 million, or 56.6%. The increase was primarily due to pre-production and low-rate initial production costs for the Vanish, including an increase in R&D contracting for professional service and design costs of $0.85 million, an increase in salaries and related expenses of $0.68 million and an increase in shop and tool supplies expenses of $0.66 million.
Sales and marketing expense
Sales and marketing expense was $1.53 million for the nine months ended September 30, 2023, as compared to $1.57 million for the same period in 2022, a decrease of $0.04 million, or 2.4%, as we restructured our sales and marketing staff and marketing-related initiatives surrounding the Vanish. Salaries and related expenses decreased by $0.47 million due to a reduction in our sales and marketing resources. Contracting for professional marketing services increased by $0.19 million. Bad debt increased by $0.29 million due to winding down our relationship with Club Car.
General and administrative expenses
The majority of our operating losses from continuing operations resulted from general and administrative expenses. General and administrative expenses consist primarily of costs associated with our overall operations and with being a public company. These costs include personnel, legal and financial professional services, insurance, investor relations, and compliance related fees. General and administrative expense was $10.46 million for the nine months ended September 30, 2023, compared to $8.45 million for the same period in 2022, an increase of $2.01 million, or 23.9% primarily due to $1.237 million of issuance costs and associated legal expenses related to the issuance of Series H-7 Preferred Stock. Salaries and related expenses increased by $0.27 million, primarily due to expanding headcount. Depreciation and stock-based compensation increased by $0.13 million and decreased by $0.18 million, respectively.
Other income and expense
We recorded a $5.87 million decrease of net other income resulting from the accounting treatment of the change in fair value of both warrant and derivative liabilities of $6.88 million, partially offset by a $0.30 million increase in interest income on cash accounts, an increase in unrealized gains of $0.68 million on marketable securities, and an increase in realized gains of $0.03 million on marketable securities.
Liquidity and Capital Resources
As of September 30, 2023, we had $3.29 million in cash and cash equivalents, $10.0 million in restricted cash and $34.63 million in marketable securities and working capital of $53.48 million. As of December 31, 2022, we had $39.1 million in cash, $9.85 million in marketable securities and working capital of $49.67 million. The decrease in cash and increase in working capital was primarily a result of our operating loss partially offset by the issuance of Series H-7 Preferred Stock, the proceeds of which were primarily invested in marketable securities. Our sources of cash since inception have been predominately from the sale of equity and debt.
On August 7, 2023, we entered into the Purchase Agreement with the Investors, pursuant to which we agreed to sell to the Investors (i) an aggregate of 22,000 Preferred Shares, initially convertible into up to 2,750,000 shares of our common stock at a conversion price of $8.00 per share, and (ii) Investor Warrants to acquire up to an aggregate of 2,750,000 shares of common stock at an exercise price of $8.00 per share, for aggregate gross proceeds of approximately $22,000,000.
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We are subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, and competition from larger companies, other technology companies and other technologies. Based on the foregoing, management believes that the existing cash, cash equivalents and marketable securities at September 30, 2023, will be sufficient to fund operations for at least the next twelve months following the date of this report.
As discussed above, in connection with our strategic review we canceled development of our planned next-generation three-wheeled vehicle. We commenced low-rate initial production of the Vanish in the second quarter of 2023 and commenced initial sales and delivery of the Vanish in the third quarter of 2023.
Summary of Cash Flows
The following table summarizes our cash flows:
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows: | ||||||||
| Net cash used in operating activities | $ | (21,302,119 | ) | $ | (12,959,204 | ) | ||
| Net cash used in investing activities | $ | (26,138,696 | ) | $ | (16,772,413 | ) | ||
| Net cash provided by financing activities | $ | 21,632,156 | $ | - | ||||
Operating Activities
During the nine months ended September 30, 2023, we used $21.30 million in cash in operating activities, an increase in use of $8.34 million compared to the cash used in operating activities of $12.96 million during the same period in 2022. The increase in cash used in operating activities was primarily a result of raw materials purchased and $1.7 million of prepayments for inventory and manufacturing services, payments of accrued expenses, and an increase in our operating loss as we continue to build our core business.
Our ability to generate cash from operations in future periods will depend in large part on profitability, the rate and timing of collections of our accounts receivable, inventory turns and our ability to manage other areas of working capital.
Investing Activities
During the nine months ended September 30, 2023, we used cash of $26.14 million in investing activities as compared to $16.77 million of cash used in investing activities during the nine months ended September 30, 2022, an increase of $9.37 million. The net increase was primarily due to our investment in marketable securities of $24.03 million for the nine months ended September 30, 2023, as compared to $15.76 million for the nine months ended September 30, 2022.
Financing Activities
During the nine months ended September 30, 2023, financing activities provided $21.63 million from the issuance of Series H-7 Preferred Stock, a 100% increase compared to the same period in 2022.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.
Our critical accounting estimates have changed from those previously reported in our Form 10-K in regard to the Series H-7 Preferred Stock and Warrants and the treatment of the associated warrant and derivative liabilities, which did not exist at the time the Form 10-K was filed.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including our principal executive and principal financial officers, we evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were ineffective due to the material weakness in internal control over financial reporting discussed below.
In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2022, management identified a material weakness related to segregation of duties. Specifically, due to limited resources and headcount, we did not have multiple people in the accounting function for full segregation of duties.
Management subsequently identified a material weakness related to the Company’s lack of a sufficient number of accounting personnel with the appropriate level of technical knowledge, experience and training in GAAP and SEC reporting requirements.
Plan for Remediation of Material Weakness
We have engaged a third party to conduct a full assessment of our controls and procedures. Additionally, we plan to engage a third party with GAAP and SEC reporting experience to assist with our financial reporting.
Changes in Internal Control over Financial Reporting
Except as described above, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 20, 2023, Club Car filed a complaint against the Company in the Superior Court of Columbia County, Georgia (Civil Action File No. 2023ECV0838) (the “Club Car Complaint”), alleging that the Company had breached its contractual obligations to Club Car under the MPA due to alleged defects in the vehicles sold to Club Car and the Company’s termination of warranty support following termination of the MPA. Club Car seeks unspecified damages and indemnification for past and future customer claims with respect to the vehicles sold to Club Car under the MPA. The Company intends to vigorously contest these allegations.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes to the risk factors as identified in our Form 10-K.
A significant portion of our revenues has historically been derived from Club Car pursuant to the MPA. Following the termination of the MPA, we will need to identify new strategic channel partners to support the sales of our vehicles.
The majority of our sales have historically been comprised of sales to Club Car pursuant to the MPA, with revenues from Club Car constituting approximately 100% of our revenues in 2022 and 79% of our revenues in 2021. On April 4, 2023, we delivered notice of termination of the MPA to Club Car, and we do not expect them to remain a customer going forward. The loss of Club Car as a customer could have a material adverse effect on our sales, financial condition, and results of operations.
Following the termination of the MPA, we will need to identify new strategic channel partners to support the sales of our vehicles. It may take time to identify and add these partners and to train new personnel to market and support our vehicles. We may be unable to identify suitable partners, or such partners may not successfully market and sell our vehicles and may not devote sufficient time and resources to enable our vehicles to develop, achieve or sustain market acceptance. Failure to enter into arrangements with and retain a sufficient number of high-quality strategic channel partners could increase our marketing costs, adversely impact buying and inventory patterns, payment terms or other contractual terms, sell-through or delivery of our vehicles or curtail our routes-to-market, and could have a material adverse effect on our prospects, business, financial condition or results of operations.
We face risks associated with litigation and claims.
We are a party to certain legal proceedings, as further described under “Legal Proceedings.” In addition, from time to time, we may become involved in various claims, disputes and legal or regulatory proceedings that arise in the ordinary course of business and relate to contractual and other obligations. Due to the uncertainties of litigation, we can give no assurance that we will prevail on any claims made against us in any such lawsuit. Also, we can give no assurance that any other lawsuits or claims brought in the future will not have an adverse effect on our financial condition, liquidity, or operating results. Adverse outcomes in some or all of these claims may result in significant monetary damages that could adversely affect our ability to conduct our business.
Holders of our Series H-7 Preferred Stock are entitled to certain payments under the Certificate of Designations that may be paid in cash or in shares of common stock depending on the circumstances. If we make these payments in cash, we may be required to expend a substantial portion of our cash resources. If we make these payments in common stock, it may result in substantial dilution to the holders of our common stock.
Under the Certificate of Designations, we are required to redeem the Series H-7 Preferred Shares in monthly installments, commencing on a date between February 7, 2024, and August 7, 2025. Holders of the Series H-7 Preferred Shares are also entitled to receive dividends, payable in arrears monthly, and dividends payable on installment dates shall be paid as part of the applicable installment amount. Installment amounts are payable, at the company’s election, in shares of common stock or, subject to certain limitations, in cash. Installment amounts paid in cash must be paid in the amount of 105% of the applicable payment amount due. For any installment amounts paid in shares of common stock, the number of shares of common stock shall be calculated by dividing the applicable payment amount due by the “installment conversion price.” The installment conversion price shall be equal to the lower of (i) the Conversion Price (as defined in the Certificate of Designations) in effect as of the applicable payment date and (ii) the greater of (A) 80% of the average of the three lowest closing prices of our common stock during the thirty trading day period immediately prior to the date the payment is due or (B) $0.744 (subject to adjustment for stock splits, stock dividends, stock combinations, recapitalizations or other similar events) or, in any case, such lower amount as permitted, from time to time, by the Nasdaq Stock Market.
Our ability to make payments due to the holders of the Preferred Shares using shares of common stock is subject to certain limitations set forth in the Certificate of Designations. If we are unable to make amortization payments in shares of common stock, we may be forced to make such payments in cash. If we do not have sufficient cash resources to make these payments, we may need to raise additional equity or debt capital, and we cannot provide any assurance that we will be successful in doing so. If are unable to raise sufficient capital to meet our payment obligations, we may need to delay, reduce, or eliminate certain of our operations, sell some or all of our assets or merge with another entity.
Our ability to make payments due to the holders of the Series H-7 Preferred Shares using cash is also limited by the amount of cash we have on hand at the time such payments are due, as well as certain provisions of the Delaware General Corporation Law. Further, we intend to make the amortization payments due to holders of Series H-7 Preferred Stock in the form of common stock to the extent allowed under the Certificate of Designations and applicable law in order to preserve our cash resources. The issuance of shares of common stock to the holders of our Series H-7 Preferred Stock will increase the number of shares of common stock outstanding and could result in substantial dilution to the existing holders of our common stock.
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The Certificate of Designations and the Warrants contain anti-dilution provisions and other adjustment provisions that have resulted in the reduction of the Conversion Price of the Preferred Shares and the Exercise Price of the Warrants and may do so again in the future. These features may increase the number of shares of common stock issuable upon conversion of the Preferred Shares or upon the exercise of the Warrants.
The Certificate of Designations and the Warrants contain anti-dilution provisions, which provisions require the lowering of the applicable Conversion Price or Exercise Price, as then in effect, to the purchase price of equity or equity-linked securities issued in any subsequent offerings. The Certificate of Designations and the Warrants also contain certain other adjustment provisions that provide for the lowering of the applicable Conversion Price or Exercise Price, as then in effect, following any stock split, stock dividend, stock combination, reverse stock split, recapitalization or other similar transaction involving the outstanding Common Stock (a “Stock Combination Event Adjustment”). Pursuant to the Stock Combination Event Adjustment provisions, following the Reverse Stock Split, the Conversion Price and the Exercise Price were both reduced from $8.00 per share to $2.00 per share. Additionally, if in the future, while any shares of the Series H-7 Preferred Shares or Warrants are outstanding, we issue securities for a consideration per share of common stock (the “New Issuance Price”) that is less than the Conversion Price of the Series H-7 Preferred Shares or the Exercise Price of the Warrants, as then in effect, we will be required, subject to certain limitations and adjustments as provided in the Certificate of Designations or the Warrants, to reduce the Conversion Price or the Exercise Price to be equal to the New Issuance Price, which will result in a greater number of shares of common stock issuable upon conversion of the Preferred Shares and the exercise of the Warrants, which in turn will increase the dilutive effect of such conversions or exercises on existing holders of our common stock. It is possible that we will not have a sufficient number of shares available to satisfy the conversion of the Preferred Shares or the exercise of the Warrants if we enter into a future transaction that reduces the applicable Conversion Price or Exercise Price. If we do not have a sufficient number of available shares for any Preferred Share conversions or Warrant exercises, we may need to seek stockholder approval to increase the number of authorized shares of our common stock, which may not be possible and will be time consuming and expensive. The potential for such additional issuances may depress the price of our common stock regardless of our business performance and may make it difficult for us to raise additional equity capital while any of the Preferred Shares or Warrants are outstanding.
Under the Purchase Agreement we are subject to certain restrictive covenants that may make it difficult to procure additional financing.
The Purchase Agreement contains the following restrictive covenants, among others: (i) until Preferred Shares are no longer outstanding, we agreed not to enter into any variable rate transactions; (ii) we agreed to offer to the Investors, until the later of (x) the date on which no Preferred Shares no longer outstanding and (y) the maturity date of the Preferred Shares, the opportunity to participate in any subsequent securities offerings by us; and (iii) we agreed to use our reasonable best efforts to hold a stockholder meeting, at which we would solicit our stockholders’ affirmative vote for the Nasdaq Stockholder Approval no later than November 5, 2023, which approval was obtained at the Company’s special meeting of stockholders held on September 14, 2023. If we require additional funding while these restrictive covenants remain in effect, a financing transaction while remaining in compliance with the terms of the Purchase Agreement, or we may be forced to seek a waiver from the investors party to the Purchase Agreement.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no unregistered shares of the Company’s equity securities during the three months ended September 30, 2023, other than those previously reported in a Current Report on Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| 19 |
Exhibit No. |
Description | |
| 31.1** | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2** | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1*** | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 INS** | Inline XBRL Instance Document | |
| 101 SCH** | Inline XBRL Taxonomy Extension Schema Document | |
| 101 CAL** | Inline XBRL Taxonomy Calculation Linkbase Document | |
| 101 DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101 LAB** | Inline XBRL Taxonomy Labels Linkbase Document | |
101 PRE** 104 |
Inline XBRL Taxonomy Presentation Linkbase Document Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| ** | Filed herewith. |
| *** | Furnished herewith. |
| † | Management or compensatory plan or arrangement. |
| 20 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AYRO, INC. | ||
| Dated: November 20, 2023 | By: | /s/ Thomas M. Wittenschlaeger |
| Thomas M. Wittenschlaeger | ||
Chief Executive Officer (Principal Executive Officer) | ||
| Dated: November 20, 2023 | By: | /s/ David E. Hollingsworth |
| David E. Hollingsworth | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
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