AYRO, INC. 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
References in this management's discussion and analysis to "we," "us," "our,"
"the Company," "our Company," or "AYRO" refer to
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
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
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;
? if our Master Procurement Agreement with Club Car is terminated, we will need
to identify new strategic channel partners to support the sales of our
vehicles;
? our failure to meet the continued listing requirements of
Market could result in a delisting of our common stock;
? if we lose our exclusive license to manufacture the
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; 1
? our business, results of operations and financial condition may be adversely
impacted by public health epidemics, including the COVID-19 outbreak;
? 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;
? a significant portion of our revenues is derived from a single customer;
? our future growth depends on customers' willingness to adopt electric vehicles;
? 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;
? 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 ours or our prime supplier's
facilities, or a catastrophic loss of ours or our prime supplier's
manufacturing facilities, may cause significant lost or delayed production and
adversely affect our results of operations;
? we may become subject to product liability claims, which could harm our
financial condition and liquidity if we are not able to successfully defend or
insure against such claims;
? 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;
? 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;
? 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 and 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;
2
? 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;
? if we fail to deliver vehicles and accessories to market as scheduled, our
business will be harmed;
? 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, and our long-term capital requirements are
subject to numerous risks;
? increased safety, emissions, fuel economy or other regulations may result in
higher costs, cash expenditures, and/or sales restrictions;
? 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.
? 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 other intellectual property in the future, and
if we fail to obtain licenses we need 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;
? 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;
? 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 the 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 on
3 Merger
On
Overview
We design and manufacture compact, sustainable electric vehicles for closed campus mobility, low speed urban and community transport, local on-demand and last mile delivery and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers, including universities, business and medical campuses, last mile delivery services and food service providers. We are currently updating our next model year (model year 2023) vehicle lineup in support of the aforementioned markets.
Strategic Review
Following the hiring of our new Chief Executive Officer in the third quarter of 2021, we initiated a strategic review of our product development strategy, as we focus on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets. In connection with the strategic review, we canceled development of our planned next-generation three-wheeled high speed vehicle.
For the past several years, our primary supplier has been
In
Nasdaq Minimum Bid Price Requirement
On
In order to regain compliance with Nasdaq's minimum bid price requirement, our
common stock must maintain a minimum closing bid price of
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. The majority of our sales are currently comprised
of sales of our four-wheeled vehicle to
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 ("
Under our Manufacturing License Agreement with Cenntro (the "MLA"), in order for us to maintain our exclusive territorial rights pursuant to the MLA, we must meet certain minimum purchase requirements.
4
We have imported semi-knocked-down vehicle kits from Cenntro for the
On
We intend for the new Vanish to utilize assemblies and products that will
largely eliminate our dependency on Chinese imports and optimize the supply
chain to rely primarily upon North American and European sources. Final assembly
of the Vanish is expected to occur in our
Master Procurement Agreement with Club Car
In
Although Club Car did not meet the volume threshold for 2020 or 2021, we have
not sold our model year 2022 411x vehicles commercially other than through Club
Car. Under the terms of the MPA, we receive orders from Club Car dealers for
vehicles of specific configurations, and we invoice Club Car once the vehicle
has shipped. The MPA has an initial term of five (5) years commencing
In connection with 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. Accordingly, we are evaluating our relationship with Club Car and may seek to replace Club Car with new business partners and channel partners for selling our products beginning with the Vanish. Any loss of Club Car as a customer, or significant reduction in purchases by Club Car, could have an adverse impact on our financial condition and operating results.
Manufacturing Services Agreement with Karma
On
On
5
In late
Supply Agreement with Gallery Carts
During 2020, we entered into a supply agreement with Gallery Carts ("Gallery"),
a leading provider of food and beverage kiosks, carts, and mobile storefront
solutions. Joint development efforts have led to the launch of the parties'
first all-electric configurable mobile hospitality vehicle for "on-the-go"
venues across
The configurable Powered Vendor Box, in the rear of the vehicle, features
long-life lithium batteries that power the preconfigured hot/cold beverage and
food equipment and is directly integrated with the 411 and 411x. The canopy
doors, as well as the full vehicle, can be customized with end-user logos and
graphics to enhance the brand experience. Gallery, with 40 years of experience
delivering custom food kiosk solutions, has expanded into electric mobile
delivery vehicles, as customers increasingly want food, beverages and
merchandise delivered to where they are gathering. For example, a recent study
conducted by
Gallery, a premier distributor of
Factors Affecting Results of Operations
Master Procurement Agreement
In
COVID-19 Pandemic
Our business, results of operations and financial condition have been adversely
impacted by the coronavirus outbreak both in
Tariffs
Countervailing tariffs on certain goods from
Shipping Costs and Delays
A majority of our raw materials have historically been shipped via container
from overseas vendors in
6
The shipping industry is also experiencing issues with port congestion and
pandemic-related port closures and ship diversions. A port worker strike, work
slow-down or other transportation disruption in domestic ports could
significantly disrupt our business or that of our vendors. We are currently
experiencing such disruption due to multiple factors brought about by the
COVID-19 pandemic, such as supply and demand imbalance, a shortage of warehouse
workers, truck drivers, transport equipment (tractors and trailers) and other
causes, which have resulted in heightened congestion, bottlenecks and gridlock,
leading to abnormally high transportation delays. This has materially and
adversely affected our business and financial results for the three and nine
months ended
The global shipping industry is also experiencing unprecedented increases in shipping rates from ocean carriers due to various factors, including limited availability of shipping capacity. For example, the cost of shipping our products by ocean freight has recently increased to at least three times historical levels and has had a corresponding impact upon our profitability. Additionally, if further increases in fuel prices occur, our transportation costs would likely further increase. Shipping pricing and logistical challenges have had an unfavorable impact on our margins and our ability to assemble vehicles during 2021 and the first three quarters of 2022. We expect these impacts to continue through the fourth quarter of 2022.
Supply Chain
Beginning in the second quarter of 2021, we offered a configuration of our 411x powered by lithium-ion battery technology. Additionally, our powered food box offerings are currently powered by lithium-ion battery technology. Our business depends on the continued supply of battery cells and other parts for our vehicles. During the year 2021 and the first three quarters of 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. We expect these shortages of lithium-ion battery cells and the varying supply limitations of other critical components to continued impacting our business through the fourth quarter of 2022. In addition, we could be impacted by shortages of other products or raw materials, including silicon chips that we use or our suppliers use in the production of our vehicles or parts sourced for our vehicles.
In
Inventory Obsolescence
At
7
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 our 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. In
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 cost of revenue to increase in absolute dollars as product revenue
increases. At
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.
8 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 it 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
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.
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 expense consists 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 sales channels.
General and Administrative Expense
General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources and fees for third-party professional services, and allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing our business.
Other (Expense) Income
Other (expense) income consists of income received or expenses incurred for activities outside of our core business. Other expense consists primarily of interest expense and unrealized gain/loss on marketable securities.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to
9 Results of Operations
Three months ended
The following table sets forth our results of operations for each of the periods
set forth below:
For the Three Months Ended September 30,
2022 2021 Change
Revenue $ 373,186 $ 559,370 $ (186,184 )
Cost of goods sold 955,003 955,466 (463 )
Gross loss (581,817 ) (396,096 ) (185,721 )
Operating expenses:
Research and development 1,837,510 4,165,732 (2,328,222 )
Sales and marketing 384,748 646,713 (261,965 )
General and administrative 3,000,156 6,805,788 (3,805,632 )
Total operating expenses 5,222,414 11,618,233 (6,395,819 )
Loss from operations (5,804,231 ) (12,014,329 ) 6,210,098
Other income and (expense):
Other income, net 51,792 12,254 39,538
Realized gain on marketable securities 103,000 - 103,000
Unrealized loss on marketable securities (32,135 ) - (32,135 )
Net loss $ (5,681,574 ) $ (12,002,075 ) $ 6,470,501
Revenue
Revenue was
Cost of goods sold and gross loss
Cost of goods sold remained unchanged for the three months ended
Gross margin percentage was (155.9%) for the three months ended
Research and development expense
Research and development ("R&D") expense was
10 Sales and marketing expense
Sales and marketing expense was
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
Other income and expenses
The Company recorded a realized gain of
Nine months ended
The following table sets forth our results of operations for each of the periods
set forth below:
For the Nine Months Ended September 30,
2022 2021 Change
Revenue $ 2,381,592 $ 1,870,306 $ 511,286
Cost of goods sold 4,959,660 2,030,447 2,929,213
Gross loss (2,578,068 ) (160,141 ) (2,417,927 )
Operating expenses:
Research and development 3,749,714 9,135,410 (5,385,696 )
Sales and marketing 1,566,790 1,873,955 (307,165 )
General and administrative 8,446,785 14,168,782 (5,721,997 )
Total operating expenses 13,763,289 25,178,147 (11,414,858 )
Loss from operations (16,341,357 ) (25,338,288 ) 8,996,931
Other income and (expense):
Other income, net 71,389 40,943 30,446
Interest expense - (2,312 ) 2,312
Realized gain on marketable securities 110,490 - 110,490
Unrealized loss on marketable securities (75,204 ) - (75,204 )
Net loss $ (16,234,682 ) $ (25,299,657 ) $ 9,064,975
Revenue
Revenue was
Cost of goods sold and gross profit
Cost of goods sold increased by
11
Gross margin percentage was (108.3%) for the nine months ended
Research and development expense
Research and development ("R&D") expense was
Sales and marketing expense
Sales and marketing expense was
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
Other income and expenses
The Company recorded a realized gain of
Liquidity and Capital Resources
As of
Our business is capital-intensive, and future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the results of our strategic review, the expansion of our sales and marketing teams, the timing of new product introductions and the continuing market acceptance of our products and services. We are working to control expenses and deploy our capital in the most efficient manner.
12
Following the hiring of our new Chief Executive Officer in the third quarter of 2021, we are evaluating other options for the strategic deployment of capital beyond our ongoing strategic initiatives, including potentially entering other segments of the electric vehicle market. We anticipate being opportunistic with our capital, and we intend to explore potential partnerships and acquisitions that could be synergistic with our competitive stance in the market.
We are subject to a number of risks similar to those of earlier stage commercial
companies, including dependence on key individuals and products, the
difficulties inherent in the development of a commercial market, the potential
need to obtain additional capital, competition from larger companies, other
technology companies and other technologies. Based on the foregoing, management
believes that the existing cash at
In connection with the strategic review, we canceled development of our planned
next-generation three-wheeled vehicle. In
© Edgar Online, source
