Attached files
Exhibit 99.1
AYRO
MD&A AND BUSINESS
AYRO
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis of
AYRO’s financial condition and operating results together
with AYRO’s financial statements and related notes included
elsewhere in the exhibits to this Current Report on Form 8-K (the
"Form 8-K"). This discussion and analysis and other parts of this
section contain forward-looking statements based upon current
beliefs, plans and expectations that involve risks, uncertainties
and assumptions. See “ Forward-Looking
Statements” under Item 8.01 of this Form 8-K.
AYRO’s actual results may differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those set forth under “Risk
Factors” or in other parts of this
Form
8-K .
Overview
AYRO
designs, manufactures and markets three- and four-wheeled
purpose-built electric vehicles primarily to commercial customers.
These vehicles allow the end user an environmentally friendly
alternative to internal combustion engines for light duty uses,
including logistics, maintenance and cargo services, at a lower
total cost of ownership. AYRO’s four-wheeled vehicles are
classified as low-speed vehicles (LSVs) based on federal and state
regulations and are ideal for both college and corporate campuses.
AYRO’s three-wheeled vehicle is classified as a motorcycle
for federal purposes and an autocycle in states that have passed
certain autocycle laws, allowing the user to operate the vehicle
with a standard automobile driver’s license. AYRO’s
three-wheeled vehicle is not an LSV and is ideal for urban
transport. The majority of AYRO’s sales are comprised of
sales of its four-wheeled vehicle to Club Car through a strategic
arrangement entered in early 2019. AYRO plans to continue growing
its business through its experienced management team by leveraging
its supply chain, allowing it to scale production without a large
capital investment.
AYRO
has also developed a strategic partnership with Autonomic, a
division of Ford. Pursuant to AYRO’s agreement with
Autonomic, AYRO received a license to use Autonomic’s
transportation mobility cloud and has agreed to jointly develop the
monetization of cloud-based vehicle applications.
Manufacturing
Agreement with Cenntro
In
April 2017, AYRO entered into a Manufacturing Licensing Agreement
with Cenntro Automotive Group, Ltd., or Cenntro, one of
AYRO’s equityholders, that provides for its four-wheel
sub-assemblies to be licensed and sold to AYRO for final
manufacturing and sale in the United States.
Master
Procurement Agreement with Club Car
In
March 2019, AYRO entered into a five-year Master Procurement
Agreement, or the MPA, with Club Car, a division of Ingersoll Rand
Inc., for the sale of AYRO’s four-wheeled vehicle. The MPA
grants Club Car the exclusive right to sell AYRO’s
four-wheeled vehicle in North America, provided that Club Car
orders at least 500 vehicles per year. Under the terms of the MPA,
AYRO receives orders from Club Car dealers for vehicles of specific
configurations, and AYRO invoices Club Car once the vehicle has
shipped. The MPA has an initial term of five (5) years commencing
January 1, 2019 and may be renewed by Club Car for successive
one-year periods upon 60 days’ prior written notice. Pursuant
to the MPA, AYRO granted Club Car a right of first refusal for
sales of 51% or more of AYRO’s assets or equity interests,
which right of first refusal is exercisable for a period of 45 days
following AYRO’s delivery of an acquisition notice to Club
Car. AYRO also agreed to collaborate with Club Car on new products
similar to its four-wheeled vehicle and improvements to existing
products and granted Club Car a right of first refusal to purchase
similar commercial utility vehicles AYRO develops during the term
of the MPA. AYRO is currently engaged in discussions with Club Car
to develop additional products to be sold by Club Car in Europe and
Asia but there can be no assurance that these discussions will be
successful.
1
Recent
Developments
During
the calendar year 2019, AYRO continued to develop its products,
establishing channel relationships and filling out the management
team. To support AYRO’s growth, AYRO raised operating funds
with the following debt and equity initiatives:
●
In the first
quarter of 2019, AYRO sold convertible promissory notes to seven
individual lenders for an aggregate of $800,000. The notes have a
maturity date of 60 days, subject to AYRO’s right to extend
the notes for one period of 60 days in AYRO’s discretion. The
notes accrued interest at the rate of 12% per annum for the first
60 days and at 15% for the 60-day extension. The lenders had the
option to convert the notes and accrued interest into Series Seed 2
Preferred Stock at $1.75 per share before the 60-day extension
period expired. In May 2019, four lenders converted $350,000 of
principal and $9,062 of accrued interest into 205,178 of
AYRO’s Series Seed 2 Preferred Stock. In September 2019, one
lender converted $100,000 of convertible notes to a twelve-month
term loan. Additionally, two lenders redeemed an aggregate of
$60,000 in principal from their outstanding note. In December 2019,
the remaining $290,000 in principal and associated accrued interest
was converted to preferred stock as identified below. Warrants to
purchase up to 97,500 of AYRO’s common stock at a price of
$2.00 per share were issued in connection with the notes. A
discount on debt related to the common stock issuance of $69,174
was recorded and is being amortized over the life of the
notes.
●
In the third
quarter of 2019, AYRO received cash in exchange for term loans from
six individual lenders, totaling $350,000. The notes have a term of
12 months and bear interest at the rate of 12% per annum, which is
payable quarterly. AYRO issued 1.056 shares of its common stock to
the lenders for each dollar borrowed, for an aggregate of 369,600
shares of common stock. A discount on debt related to the common
stock issuance of $185,675 was recorded and is being amortized over
the life of the notes.
●
During the first
half of 2019, AYRO issued 1,092,215 shares of Series Seed 2
Preferred Stock for $1.75 per share, for aggregate cash proceeds of
$1,911,375. During the second quarter of 2019, AYRO sold 238,500
shares of Series Seed 3 Preferred Stock for $2.00 per share for
aggregate cash proceeds of $477,000. During the third quarter of
2019, AYRO issued 65,000 shares of Series Seed 3 Preferred Stock
for $2.00 per share for aggregate cash proceeds of
$130,000.
●
In October 2019,
AYRO received $500,000 under a 120-day bridge term loan bearing
interest at the rate of 14% per annum, payable quarterly, from Mark
Adams, a founding board member. As an inducement for the bridge
loan, AYRO granted Mr. Adams 528,000 shares of common stock. On
December 13, 2019, Mr. Adams agreed to extend the maturity date for
this loan until April 30, 2021 in exchange for AYRO’s
issuance of 500,000 shares of common stock.
●
In October 2019,
Sustainability Initiatives, LLC (“SI”), a company owned
by Christian Okonsky and Mark Adams, AYRO’s founders and
board members, agreed to terminate the revenue royalty-based
contract with AYRO in exchange for 850,000 shares of common
stock.
●
In November 2019,
AYRO received cash in exchange for a term loan from an individual
lender of $75,000. The note has a term of 12 months and bears
interest at the rate of 12% per annum, payable quarterly. AYRO
issued 1.056 shares of its common stock to the lenders for each
dollar borrowed, for an aggregate of 79,200 shares of common
stock.
●
In December 2019,
AYRO, SI, Christian Okonsky and Mark Adams agreed to cancel options
to purchase an aggregate of 1,750,000 shares of common stock in
exchange for AYRO’s issuance of 1,593,550 shares of common
stock.
●
In December 2019,
AYRO issued Sustainability Consultants, LLC (“SCLLC”),
an entity that is controlled by Mark Adams, Will Steakley and John
Constantine, who are principal stockholders of AYRO, 247,500 shares
of common stock for services rendered under AYRO’s consulting
agreement with SCLLC.
●
In December 2019,
Cenntro agreed to convert $1,100,000 of the accounts payable due to
Cenntro into 1,100,000 shares of AYRO’s Series Seed 3
Preferred Stock.
●
In December 2019, a
local marketing firm agreed to convert 90% of the amount AYRO owed
that company to a term loan with a principal amount of $137,729.03
and bearing interest at the rate of 15% per annum, payable
quarterly, with a maturity date of May 31, 2021. AYRO also issued
the marketing firm 66,000 shares of common stock in conjunction
with this term loan.
●
In December 2019,
notes payable to eight individual lenders in the total amount of
$715,000 plus accrued interest were converted into 777,301 shares
of AYRO’s Series Seed 3 Preferred Stock.
Merger
Agreement with DropCar and Related Transactions
On
December 19, 2019, AYRO entered into an Agreement and Plan of
Merger and Reorganization (the “Merger Agreement”) with
DropCar, Inc. (“DropCar”), pursuant to which, among
other matters, and subject to the satisfaction or waiver of the
conditions set forth in the Merger Agreement, a wholly owned
subsidiary of DropCar will merge with and into AYRO, with AYRO
continuing as a wholly owned subsidiary of DropCar and the
surviving corporation of the merger (the “Merger”). The
Merger is intended to qualify for federal income tax purposes as a
tax-free reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended. Subject to the terms
and conditions of the Merger Agreement, at the closing of the
Merger, (a) each outstanding share of AYRO common stock and
preferred stock will be converted into the right to receive shares
of DropCar common stock at the Exchange Ratio described below; and
(b) each of AYRO’s outstanding stock options and warrants
that have not previously been exercised prior to the closing of the
Merger will be assumed by DropCar.
2
Under the
exchange ratio formula in the Merger Agreement (the “Exchange
Ratio”), upon the closing of the Merger, on a pro forma basis
and based upon the number of shares of DropCar common stock to be
issued in the Merger, current DropCar stockholders (along with
DropCar’s financial advisor) will own approximately 20% of
the combined company and current AYRO investors will own
approximately 80% of the combined company (including the additional
financing transaction referenced below). For purposes of
calculating the Exchange Ratio, the number of outstanding shares of
DropCar common stock immediately prior to the Merger does not take
into account the dilutive effect of shares of DropCar common stock
underlying options, warrants or certain classes of preferred stock
outstanding as of the date of the Merger Agreement.
Simultaneous with
the signing of the Merger Agreement, accredited investors,
including certain investors in DropCar, purchased $1.0 million of
AYRO’s convertible bridge notes bearing interest at the rate
of 5% per annum (the “Bridge Notes”). The Bridge Notes
automatically convert into shares of AYRO common stock immediately
prior to the consummation of the Merger representing an aggregate
of 7.45% of the outstanding common stock of the combined company
after giving effect to the Merger. In addition, immediately prior
to the execution and delivery of the Merger Agreement, AYRO entered
into agreements with accredited investors, including certain
stockholders of DropCar, pursuant to which such investors agreed to
purchase, prior to the consummation of the Merger, shares of AYRO
common stock (or common stock equivalents) representing an
aggregate of 16.55% of the outstanding common stock of the combined
company after giving effect to the Merger and warrants to purchase
an equivalent number of shares of AYRO common stock for an
aggregate purchase price of $2.0 million (the “AYRO Private
Placement”). As additional consideration to the lead investor
in the AYRO Private Placement, AYRO also entered into a stock
subscription agreement with the lead investor, pursuant to which,
immediately prior to the Merger, AYRO will issue up to an aggregate
of 1,750,000 shares of AYRO common stock for the nominal per share
purchase price of $0.001 per share, or, if applicable, pre-funded
warrants to purchase AYRO common stock, in lieu of AYRO common
stock (the “Nominal Stock Subscription”). The
consummation of the transactions contemplated by the Nominal Stock
Subscription is conditioned upon the satisfaction or waiver of the
conditions set forth in the Merger Agreement.
On
December 19, 2019, AYRO entered into a letter agreement with ALS
Investment, LLC (“ALS”), which provides that if the
merger is consummated by June 19, 2020, upon consummation of the
merger, AYRO shall issue ALS shares of common stock of the combined
company, which shall be equal to 4.5% of the outstanding shares of
common stock of the combined company giving effect to the merger.
In addition to introducing AYRO and DropCar, ALS will provide, as
an independent contractor, consulting services to AYRO relating to
financial, capital market and investor relations for twelve months
following the closing of the merger.
Factors
Affecting Results of Operations
Master Procurement Agreement.
In March 2019, AYRO entered into the MPA with Club Car. In
partnership with Club Car and its interaction with its substantial
dealer network, AYRO has redirected its business development
resources towards supporting Club Car’s enterprise and fleet
sales function as Club Car proceeds in its new product introduction
initiatives.
Devirra Transaction. In the
first half of 2018, AYRO engaged in a one-time sale of automotive
parts from AYRO’s China-based supplier to one of its
customers in New Jersey (the “Devirra Transaction”).
Pursuant to the Devirra Transaction, AYRO purchased the products
which were then drop-shipped directly from the supplier to the end
customer. Total revenue for the Devirra Transaction was $4,065,000.
The cost of goods sold related to the Devirra Transaction was
$4,003,068. The total gross margin for the one-time Devirra
Transaction for the six months ended June 30, 2018 was 1.45%. This
one-time transaction should be taken into account when making
comparisons between 2018 and 2019.
Components
of Results of Operations
Revenue
AYRO
derives revenue from the sale of its three- and four-wheeled
electric vehicles, rental revenue from vehicle revenue sharing
agreements with AYRO’s tourist destination fleet operators,
or DFOs, and, to a lesser extent, shipping, parts and service fees.
Provided that all other revenue recognition criteria have been met,
AYRO typically recognizes 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 AYRO’s international
distributors. These international distributors assist with import
regulations, currency conversions and local language. AYRO’s
vehicle product sales revenues vary from period to period based on,
among other things, the customer orders received and AYRO’s
ability to produce and deliver the ordered products. Customers
often specify requested delivery dates that coincide with their
need for AYRO’s vehicles.
3
Because
these customers may use AYRO’s 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. AYRO
has observed limited seasonality trends in the sales of its
vehicles, depending on model.
Cost of Revenue
Cost of
revenue 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 revenue also includes
freight and changes to AYRO’s warranty reserves. Allocated
overhead costs consist of certain facilities and utility costs.
AYRO expects cost of revenue to increase in absolute dollars, as
product revenue increases.
Operating Expenses
AYRO’s
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.
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. AYRO expects its
general and administrative expense to increase in absolute dollars
as it continues to invest in growing the business.
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. AYRO expects sales
and marketing expenses to increase in absolute dollars as AYRO
expands its sales force, expands its product lines, increases
marketing resources, and further develops sales
channels.
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. AYRO expects its research and development expenses to
increase in absolute dollars as it continues to invest in new and
existing products.
4
Other Income (Expense), Net
Other
income (expense) consists of income received or expenses incurred
for activities outside of AYRO’s core business. Other expense
consists primarily of interest expense.
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 AYRO conducts business.
Results of Operations
Comparison of the Nine-Month Periods Ended September 30, 2019 and
2018
Results
of operations for the nine-month period ended September 30, 2018
includes operating results for a single transaction for
AYRO’s supply chain. For this single, non-repeatable
transaction, AYRO recognized $4,065,000 of revenue in the first
half of 2018 at a gross margin of approximately 1.45%. The
following tables set forth AYRO’s results of operations for
the nine-month periods ended September 30, 2019 and 2018,
respectively.
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
2018
|
|
Revenue
|
$745,530
|
$5,239,429
|
|
Cost
of Goods Sold
|
577,539
|
4,965,204
|
|
Gross
Profit
|
167,991
|
274,225
|
|
Operating
Expenses:
|
|
|
|
Research
and Development
|
780,605
|
565,372
|
|
Sales
and Marketing
|
932,902
|
684,239
|
|
General
and Administrative
|
3,437,176
|
1,809,754
|
|
Total
Operating Expenses
|
5,150,683
|
3,059,365
|
|
Loss
from Operations
|
(4,982,692)
|
(2,785,140)
|
|
Other
Income and Expense:
|
|
|
|
Other
Income
|
1,198
|
18
|
|
Interest
Expense
|
(233,084)
|
(38,448)
|
|
Net Loss
|
$(5,214,578)
|
$(2,823,570)
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
$10,263,192
|
$10,241,866
|
|
|
|
|
|
Net
Loss per common share
|
$(0.51)
|
$(0.28)
|
5
Non-GAAP Financial Measure
AYRO
presents Adjusted EBITDA because AYRO considers it to be an
important supplemental measure of AYRO’s operating
performance and AYRO believes it may be used by certain investors
as a measure of AYRO’s operating performance. Adjusted EBITDA
is defined as income (loss) from operations before interest income
and expense, income taxes, depreciation, amortization of intangible
assets, impairment of long-lived assets, acquisition and financing
costs, stock-based compensation expense and certain non-recurring
expenses.
Adjusted EBITDA is
not a measurement of financial performance under generally accepted
accounting principles in the United States, or GAAP. Because of
varying available valuation methodologies, subjective assumptions
and the variety of equity instruments that can impact AYRO’s
non-cash operating expenses, AYRO believes that providing a
non-GAAP financial measure that excludes non-cash and non-recurring
expenses allows for meaningful comparisons between AYRO’s
core business operating results and those of other companies, as
well as providing AYRO with an important tool for financial and
operational decision making and for evaluating AYRO’s own
core business operating results over different periods of
time.
AYRO’s
Adjusted EBITDA measure may not provide information that is
directly comparable to that provided by other companies in
AYRO’s industry, as other companies in AYRO’s industry
may calculate non-GAAP financial results differently, particularly
related to non-recurring, unusual items. AYRO’s Adjusted
EBITDA is not a measurement of financial performance under GAAP and
should not be considered as an alternative to operating income or
as an indication of operating performance or any other measure of
performance derived in accordance with GAAP. AYRO does not consider
Adjusted EBITDA to be a substitute for, or superior to, the
information provided by GAAP financial results.
Below
is a reconciliation of Adjusted EBITDA to net loss for the nine
months ended September 30, 2019 and 2018.
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
2018
|
|
Net
Loss
|
$(5.214.578)
|
$(2,823,570)
|
|
Depreciation
and Amortization
|
388,686
|
148,390
|
|
Stock-based
compensation expense
|
1,360,623
|
306,320
|
|
Interest
expense
|
233,084
|
38,448
|
|
Settlement
expenses (1)
|
0
|
151,488
|
|
Acquisition
and financing costs
|
0
|
0
|
|
Provision
(benefit) for income taxes
|
3,147
|
0
|
|
Adjusted EBITDA
|
$(3,229,038)
|
$(2,178,924)
|
______________________
(1)
Settlement expenses represent one-time amounts paid in connection
with the departure of AYRO’s former chief executive
officer.
6
Net revenue
For the
nine-month period ended September 30, 2019, total revenue decreased
$4,493,899, as compared to the same period in 2018. The decrease in
revenue was primarily driven by a one-time sale of automotive parts
from AYRO’s China-based supplier to one of its customers in
New Jersey during 2018, or the Devirra Transaction. The products
purchased by the customer were drop-shipped directly from
AYRO’s supplier to the end customer. Total revenue for the
Devirra Transaction was $4,065,000. AYRO’s revenues in the
first nine months of 2019 were also impacted by the MPA that it
entered with Club Car on March 13, 2019. The MPA provides Club Car
with exclusive distribution rights in North America of AYRO’s
four-wheeled AYRO 411 vehicle. During AYRO’s negotiations
with Club Car throughout the fourth quarter of 2018 and up to March
13, 2019, AYRO gave Club Car and its dealers an unrestricted dealer
channel, which precluded AYRO from signing new AYRO 411 dealers in
the fourth quarter of 2018 and the first quarter of 2019. As a
result, AYRO experienced a decline in AYRO 411 sales during the
first nine months of 2019. Sales during the nine months ended
September 30, 2019 included sales of the AYRO 311 vehicle, which
was deployed in February 2019.
Cost of goods sold and gross margin
Cost of
goods sold decreased by $4,387,665 for the nine months ended
September 30, 2019, as compared to the same period in 2018. The
decrease in cost of goods sold related to the Devirra Transaction
was $4,003,068.
Gross
margin percentage was 23% for the nine months ended September 30,
2019, as compared to 5% for the nine months ended September 30,
2018. The increase in gross margin percentage was primarily driven
by the Devirra Transaction during 2018, which had a gross margin
percentage of 1.5%. Gross margin percentage for product revenue not
including the Devirra Transaction increased from 18% during the
nine-month period ended September 30, 2018 to 23% during the
nine-month period ended September 30, 2019, an increase of 5%. The
increase in gross margin excluding the Devirra Transaction was
predominately attributable to increases in product pricing as well
as efficiency gains in the manufacturing process.
7
Below
is a reconciliation of gross margin percentage excluding the
Devirra Transaction to gross margin percentage for the nine months
ended September 30, 2018:
|
|
Nine months ended
September 30, 2018
|
|
Revenue
|
$5,239,429
|
|
Less: Devirra
Transaction Revenue
|
4,065,000
|
|
Adjusted
Revenue
|
$1,174,429
|
|
|
|
|
Cost of Goods
Sold
|
$4,965,204
|
|
Less: Costs of Good
Sold related to Devirra Transaction
|
4,003,068
|
|
Adjusted Cost of
Goods Sold
|
$962,136
|
|
|
|
|
Gross Margin
Percentage
|
5%
|
|
Gross Margin
Percentage excluding the Devirra Transaction
|
18%
|
General and administrative expenses
General
and administrative expense increased $1,627,422, or 89.9%, for the
nine months ended September 30, 2019, as compared to same period in
2018. General and administrative expense increased primarily due to
increased headcount resulting in higher employee compensation
related costs and administrative costs, including hiring a chief
financial officer on March 13, 2018 and a manufacturing director on
May 21, 2018. Additionally, AYRO relocated to larger office
facilities in April 2018 and expanded its facilities in July 2019,
both of which resulted in higher rent and utilities expense during
the nine months ended September 30, 2019 versus the same period in
2018. AYRO also expanded its product liability and other insurance
policies in August 2018.
Sales and marketing expense
Sales
and marketing expense increased by $248,663, or 36.3%, for the nine
months ended September 30, 2019, as compared to the same period in
2018. These expenses are mainly comprised of salary and related
costs and consulting services fees. The majority of the increase in
sales and marketing expense was to support and develop industry
standard product management, product marketing and go-to-market
marketing communication strategies, primarily surrounding the new
AYRO 311 vehicle.
Research and development expense
Research and
development expense increased by $215,233, or 38.1%, for the nine
months ended September 30, 2019, as compared to same period in
2018. These expenses were mainly compromised of salary and related
costs, professional services, royalty-based services provided under
the Chief Visionary Officer, or CVO, agreement and prototypes
attributable to continued development of new and enhanced product
offerings. The CVO revenue-based royalty fee decreased by $115,494
during the nine months ended September 30, 2019, as compared to
same period in 2018, which was offset by a year-over-year increase
in headcount-related expenses of $106,374 and $256,037 of
consulting expenses supporting new product
development.
Interest expense
Interest expense
increased $194,636 for the nine months ended September 30, 2019, as
compared to same period in 2018, as a result of issuances of
convertible debt to seven individual angel investors in January and
February 2019, plus finance charges accrued for certain accounts
payable. Interest expense in 2019 also includes noncash
amortization of warrant discounts issued in conjunction with debt
offerings.
8
Comparison of the Years Ended December 31, 2018 and
2017
The
following tables set forth AYRO’s results of operations for
the years ended December 31, 2018 and 2017, respectively, in both
dollars and a percentage of revenue.
|
|
For the year ended
December 31,
|
|
|
|
2018
|
2017
|
|
Revenue
|
$5,302,964
|
$39,415
|
|
Cost
of Goods Sold
|
5,008,700
|
38,448
|
|
Gross
Profit
|
294,264
|
967
|
|
Operating
Expenses:
|
|
|
|
Research
and Development
|
768,382
|
171,376
|
|
Sales
and Marketing
|
999,724
|
163,944
|
|
General
and Administrative
|
2,578,078
|
742,002
|
|
Total
Operating Expenses
|
4,346,184
|
1,077,322
|
|
Loss
from Operations
|
(4,051,920)
|
(1,076,355)
|
|
Other
Income and Expense:
|
|
|
|
Other
Income
|
47
|
7,600
|
|
Interest
Expense
|
(144,618)
|
(12,331)
|
|
Net Loss
|
$(4,196,491)
|
$(1,081,086)
|
|
|
|
|
|
Weighted-average
fully diluted shares
|
10,242,650
|
8,888,746
|
|
|
|
|
|
Net
Loss per fully diluted share
|
$(0.41)
|
$(0.12)
|
Non-GAAP Financial Measure
AYRO
presents Adjusted EBITDA because AYRO considers it to be an
important supplemental measure of the company’s operating
performance, and AYRO believes it may be used by certain investors
as a measure of AYRO’s operating performance. Adjusted EBITDA
is defined as income (loss) from operations before interest income
and expense, income taxes, depreciation, amortization of intangible
assets, impairment of long-lived assets, acquisition and financing
costs, stock-based compensation expense and certain non-recurring
expenses.
Below
is a reconciliation of Adjusted EBITDA to net loss for the year
ended December 31, 2018 and 2017.
|
|
For the year ended
December 31,
|
|
|
|
2018
|
2017
|
|
Net
Loss
|
$(4,196,491)
|
$(1,081,086)
|
|
Depreciation
and Amortization
|
288,549
|
35,184
|
|
Stock-based
compensation expense
|
586,371
|
86,010
|
|
Interest
expense
|
144,618
|
12,331
|
|
Settlement
expenses(1)
|
162,488
|
49,168
|
|
Acquisition
and financing costs
|
0
|
0
|
|
Provision
(benefit) for income taxes
|
742
|
50
|
|
Adjusted EBITDA
|
$(3,013,723)
|
$(898,343)
|
_________________
(1)
Settlement expenses represent one-time amounts paid in connection
with the departure of a former executive officer of the
Company.
9
Net Revenue
Total
revenue increased overall by $5,263,549 during the year ended
December 31, 2018 as compared to the year ended December 31, 2017.
The increase in revenue was primarily driven by the fact that 2018
was AYRO’s first full year of operations and during the
period prior to January 2018, there was no salesforce.
Additionally, the one-time Devirra Transaction occurred in the
first half of 2018, which contributed $4,065,000 of the revenue
variance.
Cost of goods sold and gross margin
Cost of
goods sold increased by $4,970,252 for the year ended December 31,
2018, as compared to the year ended December 31, 2017. The increase
in revenue was primarily driven by the fact that 2018 was
AYRO’s first full year of operations and the prior to January
2018, there was no salesforce. Additionally, the one-time Devirra
Transaction occurred in the first half of 2018, which contributed
$4,003,068 of the cost of goods sold variance.
AYRO’s gross
margin percentage was 6% during the year ended December 31, 2018
and negligible for the year ended December 31, 2017.
General and administrative expense
General
and administrative expense increased $1,836,076, or 247%, for the
year ended December 31, 2018 (AYRO’s first full year of
operations), as compared to the year ended December 31, 2017. AYRO
began hiring its core employee base in November 2017. The increase
was primarily driven by employee compensation expenses and related
costs, office rent, travel and consulting services.
Marketing and selling expense
Marketing and
selling expense increased by $835,780, or 510% for the year ended
December 31, 2018 (AYRO’s first full year of operations), as
compared to the year ended December 31, 2017. AYRO began hiring its
core employee base in November 2017 through March 2018. The
increase was primarily driven by employee compensation expenses and
related costs, commissions, tradeshows and
advertising.
Research and development expense
Research and
development expense increased by approximately $597,005, or 348%,
for the year ended December 31, 2018 (AYRO’s first full year
of operations) as compared to the year ended December 31, 2017.
AYRO began hiring its core employee base in November 2017 through
March 2018. The increase was primarily driven by employee
compensation expenses and related costs, professional services,
royalty-based services provided under the CVO agreement and
prototypes attributable to continued development of new and
enhanced product offerings.
Interest expense
Interest expense
increased $132,287 for the year ended December 31, 2018 compared to
year ended December 31, 2017 as a result of finance charges accrued
for certain accounts payable in 2018.
10
Liquidity
and Capital Resources
As of
September 30, 2019, AYRO had approximately $60,000 in cash and cash
equivalents and working capital deficit of approximately
$(1,654,063). As of December 31, 2018, AYRO had approximately
$39,243 in cash and cash equivalents and working capital deficit of
approximately $(980,213). The deficit increase was primarily due to
an increase in accounts payable with Cenntro, AYRO’s primary
supply chain and largest single stockholder.
AYRO’s
sources of cash since AYRO’s inception in 2017 have been
predominantly from the sale of equity and debt.
In
December 2019, Cenntro agreed to convert $1,100,000 in accounts
payable to 1,100,000 of AYRO’s Series Seed 3 Preferred Stock.
Additionally, a service provider agreed to convert $137,729 in
accounts payable to a long-term promissory note.
In
October 2019, AYRO raised $500,000 in a 120-day short-term loan
from Mark Adams, one of AYRO’s founding board members. This
loan has a 14% interest rate per annum, payable quarterly and an
equity incentive of 528,000 shares of AYRO common stock. In
December 2019, this loan term was extended to April 30, 2021 in
exchange for the issuance of 500,000 shares of AYRO common
stock.
In
November 2019, AYRO received cash in exchange for term loans from
an individual lender of $75,000. The note has a term of for twelve
months and bears interest at the rate of 12% per annum, payable
quarterly. AYRO issued 79,200 shares of AYRO common stock to the
lender in connection with this loan.
In
December 2019, AYRO converted notes payable to eight individual
lenders in the total amount of $715,000 plus accrued interest into
777,301 shares of AYRO’s Series Seed 3 Preferred Stock, thus
reducing the amount of outstanding debt.
On
December 19, 2019, AYRO entered into the Merger Agreement with
DropCar, pursuant to which a subsidiary of DropCar will merge with
and into AYRO, with AYRO continuing as a wholly owned subsidiary of
DropCar. Simultaneously with the signing of the Merger Agreement,
certain accredited investors, including certain stockholders of
DropCar, purchased $1.0 million of AYRO’s convertible Bridge
Notes and agreed to purchase, prior to the Merger, shares of AYRO
common stock and warrants for $2.0 million in the AYRO Private
Placement and 1,750,000 shares of AYRO common stock for nominal
consideration in the Nominal Stock Subscription.
During
the nine months ended September 30, 2019, AYRO’s primary
sources of liquidity came from existing cash, cash generated from
operations, proceeds of $1,911,375 from the sales of 1,092,515
shares of AYRO’s Series Seed 2 Preferred Stock, $607,000 from
the sales of 303,500 shares of AYRO’s Series Seed 3 Preferred
Stock, issuance of $800,000 of promissory notes to seven individual
investors convertible into AYRO’s Series Seed 2 Preferred
Stock and the issuance of $350,000 of promissory notes to six
individual investors as term loans.
The
terms of the convertible promissory notes issued include interest
accrued at twelve percent (12%) per annum for the first sixty (60)
days and fifteen percent (15%) per annum thereafter. The holder can
convert the notes and accrued interest at $1.75 per share into
AYRO’s Series Seed 2 Preferred Stock.
11
The
terms of the promissory notes issued as term loans include interest
accrued at twelve percent (12%) per annum and the holders were
issued shares of common stock calculated by multiplying the
principal amount of the note by 1.056.
During
2018, AYRO’s primary sources of liquidity were from cash
generated from the sale of $3,298,007 of Series Seed 1 Preferred
Stock and Series Seed 2 Preferred Stock.
AYRO’s
business is capital intensive, and future capital requirements will
depend on many factors including AYRO’s growth rate, the
timing and extent of spending to support development efforts, the
expansion of AYRO’s sales and marketing teams, the timing of
new product introductions and the continuing market acceptance of
AYRO’s products and services.
Based
on AYRO’s current operating and funding plans and business
conditions, AYRO believes that existing cash, together with
DropCar’s cash on hand upon consummation of the merger and
the cash AYRO will receive pursuant to the AYRO Private Placement,
and cash generated from operations, will be sufficient to satisfy
AYRO’s anticipated cash requirements for the next twelve
months but that AYRO will be required to seek additional equity or
debt financing in the next 15 months. In the event that additional
financing is required from outside sources, AYRO may not be able to
raise monies on terms acceptable to it or at all. If AYRO is unable
to raise additional capital when desired, AYRO’s business,
operating results and financial condition would be adversely
affected.
AYRO’s
financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The financial
statements do not include any adjustments that might be necessary
should AYRO be unable to continue as a going concern.
Management’s plan includes raising capital through additional
funding sources, growing its dealer channel base to increase
product sales revenue, and expanding its product portfolio
offerings. If AYRO cannot achieve its operating plan, AYRO may find
it necessary to dispose of assets or undertake other actions, as
may be appropriate.
Cash Flow Analysis
For the Nine Month Periods Ended September 30, 2019 and
2018
The
following table summarizes AYRO’s cash flows for the
nine-month periods ended September 30, 2019 and 2018.
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
Cash Flows:
|
2019
|
2018
|
|
Net
cash used in operating activities
|
$(3,168,709)
|
$(1,789,842)
|
|
Net
cash used in investing activities
|
$(322,773)
|
$(586,977)
|
|
Net
cash provided by financing activities
|
$3,513,063
|
$2,870,750
|
12
Operating Activities
During
the nine months ended September 30, 2019, AYRO used $3,168,709 in
cash from operating activities, an increased use of $1,378,867 when
compared to the cash used in operating activities of $1,789,842
during the same period in 2018. The increase in cash used by
operating activities was primarily a result of an increase in net
loss as AYRO continued to invest in the infrastructure of the
company as AYRO plans for growth. Additionally, working capital
requirements decreased $343,108 attributable to accounts
receivable, inventory, prepaid expenses, accounts payable and
accrued expenses used over the same period in 2018.
AYRO’s
ability to generate cash from operations in future periods will
depend in large part on profitability, the rate and timing of
collections of AYRO’s accounts receivable, inventory turns
and AYRO’s ability to manage other areas of working
capital.
Investing Activities
During
the nine months ended September 30, 2019, AYRO used cash of
$322,773 in investing activities as compared to $586,977 used
during the same period in 2018, a reduction of $264,204. The net
decrease was primarily due to $364,000 of tooling purchased for the
AYRO 311 vehicle in June 2018, combined with an increase in capital
expenditures of equipment purchased in the normal course of
business.
Financing Activities
During
the nine months ended September 30, 2019, AYRO generated a net
$3,512,063 from financing activities, as compared to the cash
generated of $2,870,750 during the same period in 2018. During the
nine months ended September 30, 2019, cash was generated through
the sale of 1,092,215 shares of AYRO’s Series Seed 2
Preferred Stock for total proceeds of $1,911,375 and 303,500 shares
of AYRO’s Series Seed 3 Preferred Stock for total proceeds of
$607,000. Additionally, $800,000 in proceeds were received from the
sale of promissory notes convertible into AYRO’s Series Seed
2 Preferred Stock and 300,000 in proceeds were received from the
sale of promissory notes recorded as short term loans during the
nine months ended September 30, 2019. In the second quarter of
2019, $350,000 of principal and $9,062 of accrued interest from the
convertible notes were exchanged into 205,178 shares of
AYRO’s Series Seed 2 Preferred Stock. During the nine months
ended September 30, 2018, cash was generated through the sale
2,300,000 shares of AYRO’s Series Seed 1 Preferred Stock for
total proceeds of $2,300,000 and 469,219 shares of AYRO’s
Series Seed 2 Preferred Stock for total proceeds of $771,133. In
March 2018, AYRO repurchased 250,000 shares of its Series Seed 1
Preferred Stock from certain early investors for
$250,000.
For the Years Ended December 31, 2018 and 2017
The
following table summarizes AYRO’s cash flows for the years
ended December 31, 2018 and 2017:
|
|
For the years ended December 31,
|
|
|
Cash Flows:
|
2018
|
2017
|
|
Net
cash used in operating activities
|
$(2,364,957)
|
$(863,203)
|
|
Net
cash used in investing activities
|
$(760,922)
|
$(336,577)
|
|
Net
cash provided by financing activities
|
$3,082,578
|
$1,282,324
|
13
Operating Activities
During
the year ended December 31, 2018, AYRO used $2,364,957 in cash from
operating activities, an increase of $1,501,754 when compared to
the $863,203 in cash used in operating activities during the year
ended December 31, 2017. The increase in cash used by operating
activities was primarily a result of growing the infrastructure of
the business. The 2018 fiscal year was AYRO’s first full year
of operations which required an increase in investment in
additional personnel, additional office and warehouse space and
other costs associated with developing a high-quality manufacturing
business. Additionally, cash used in operations for 2018 was
supported by increases in working capital of $956,614, composed of:
reductions in inventories, prepaid expenses combined with increases
in accrued expenses and related party payables (sources of cash) of
$2,259,376; offset by an increase in accounts receivable and
deposits combined with reductions in accounts payable and deferred
revenue (uses of cash) of $1,302,762. The increase in working
capital requirements was predominately offset by an increase in net
loss of $3,115,405 during the year ended December 31, 2018, as
compared to December 31, 2017, and a net increase in non-cash
operating expenses of $753,726, as compared to the prior year.
Non-cash expenditures include allowances for bad debt, depreciation
and amortization and stock-based compensation expense.
AYRO’s
ability to generate cash from operations in future periods will
depend in large part on AYRO’s profitability, the rate and
timing of collections of its accounts receivable, its inventory
turns and its ability to manage other areas of working
capital.
Investing Activities
During
the year ended December 31, 2018, AYRO used cash of $760,922 in
investing activities as compared to $336,577 used during the
comparative period in 2017, an increase in cash used of $424,345.
The net increase is primarily due to cash used in the purchase of
capital equipment including tooling for the AYRO 311 vehicle. Other
than capital expense needed to develop new products, AYRO does not
anticipate any significant purchases of equipment beyond that which
is anticipated for use in the normal course of AYRO’s core
business activity.
Financing Activities
During
the year ended December 31, 2018, AYRO raised $3,298,007 through
non-institutional sales of Series Seed 1 and Series Seed 2
Preferred Stock, as compared to $1,222,500 in the year ended
December 31, 2017. Additionally, in 2018, AYRO redeemed $250,000 of
preferred stock and $375 of common stock to certain early
investors.
In
2018, AYRO financed a delivery truck for $34,946 under a standard
purchase finance agreement.
Contractual
Obligations and Commitments
AYRO
has made certain indemnities, under which it may be required to
make payments to an indemnified party, in relation to certain
transactions. AYRO indemnifies its directors and officers, to the
maximum extent permitted under the laws of the State of Delaware.
In connection with AYRO’s facility leases, AYRO has
indemnified its lessors for certain claims arising from the use of
the facilities. The duration of the indemnities varies and, in many
cases, is indefinite. These indemnities do not provide for any
limitation of the maximum potential future payments AYRO could be
obligated to make. Historically, AYRO has not been obligated to
make any payments for these obligations and no liabilities have
been recorded for these indemnities.
14
Off-Balance
Sheet Arrangements
Other
than lease commitments incurred in the normal course of business
and certain indemnification provisions, AYRO does not have any
off-balance sheet financing arrangements or liabilities, guarantee
contracts, retained or contingent interests in transferred assets,
or any obligation arising out of a material variable interest in an
unconsolidated entity. AYRO does not have any subsidiaries to
include or otherwise consolidate into the financial statements.
Additionally, AYRO does not have interests in, nor relationships
with, any special purpose entities.
Related
Party Transactions
Royalty Agreement
On
March 1, 2017, AYRO entered into the Outsourced CVO Services
Agreement with SI that is controlled by Mr. Okonsky and Mr. Adams,
each a founder of AYRO and a current AYRO board member, in its
effort to accelerate the start-up of AYRO’s operations. In
return for acceleration assistance and SI providing services of the
Chief Visionary Officer role, pursuant to the agreement, AYRO paid
a monthly retainer of $6,000 per month. On a quarterly basis, AYRO
also remitted to SI a royalty of a percentage (see table below) of
its revenues less the retainer amounts for the measurement quarter
paid. In connection with this agreement, AYRO granted 350,000
options to purchase shares of AYRO common stock at an exercise
price of $0.667 per share under the AYRO Equity Plan, which was
subsequently cancelled in December 2019.
|
Revenues
|
Royalty
Percentage
|
|
$0 - $25,000,000
|
3.0%
|
|
$25,000,000 -
$50,000,000
|
2.0%
|
|
$50,000,000 -
$100,000,000
|
1.0%
|
|
Over
$100,000,001
|
0.5%
|
SI was
also granted a right to nominate up to two members of AYRO’s
board of directors.
In
addition, on April 1, 2017, AYRO and SI entered into a
fee-for-service agreement, pursuant to which SI agreed to provide
accounting and financial, graphics and marketing services to AYRO,
based on the market-standard hourly rates as set forth in the
agreement.
15
Effective as of
January 1, 2019, AYRO agreed to an amendment to the Outsourced CVO
Services Agreement to reduce the royalty percentage to a flat 0.5%
for all revenue levels. In connection to this amendment, AYRO
granted each of Mr. Okonsky and Mr. Adams an additional 700,000
options to purchase $0.95 per share, pursuant to the AYRO Equity
Plan, which options were fully vested as of September 30, 2019 and
subsequently cancelled in December 2019.
Effective as of
October 14, 2019, AYRO and SI terminated the Outsourced CVO
Services Agreement, and as consideration for SI to terminate the
agreement, AYRO issued 850,000 shares of AYRO common stock to SI
(or its designees).
In
December 2019, the Company, SI, Christian Okonsky and Mark Adams
agreed to cancel (i) the options to purchase 350,000 shares of AYRO
common stock previously granted to SI in March 2017, and (ii) the
options to purchase an aggregate of 1,400,000 shares of AYRO common
stock previously granted to Mr. Okonsky and Mr. Adams in connection
with the amendment to the Outsourced CVO Services Agreement to
reduce the royalty percentages, in exchange for 1,593,550 shares of
AYRO common stock.
For the
years ended 2017, 2018, and 2019 prior to termination, AYRO paid SI
$60,000, $187,494 and $60,000, respectively, pursuant to the
Outsourced CVO Services Agreement, and $123,538, $36,694 and
$1,275, respectively, pursuant to the fee-for service agreement for
accounting and financial, graphics and marketing
services.
Consulting Agreement
On
January 15, 2019, AYRO entered into a fee-for-service-based
agreement with SCLLC, an entity that is controlled by Mr. Adams,
John Constantine and Will Steakley, who are principal stockholders
of AYRO, in an effort to support the strategic direction of AYRO.
The duties of SCLLC include (a) participating in strategic advisory
conference calls with management; (b) making introductions to
interested parties of strategic value; (c) advising AYRO on capital
structure; and (d) acting as ambassadors to promote the company
within the Central Texas community. In 2019, SCLLC received
five-year warrants to purchase an aggregate of 652,500 shares of
AYRO common stock at a $2.00 exercise price and 247,500 shares of
the AYRO common stock in connection with the services rendered.
Payments accrued for services rendered for the year ended December
31, 2019 were $249,938.
Loan from SI
In
January 2019, AYRO received $50,000 in a short-term loan from SI.
The short-term loan did not bear any interest. The amount was
repaid in March 2019.
Adams Note, Amendment and Lock-Up Agreement
On
October 14, 2019, Mr. Adams, a current member of the board of
directors of AYRO, was issued a secured promissory note in the
aggregate principal amount of $500,000, in exchange for funding
$100,000 to AYRO on or before October 15, 2019, and $400,000 on or
before October 24, 2019. The note is secured by a first lien
security interest in all of the assets of AYRO and accrues interest
at 14% per annum, until the promissory note is repaid. The note was
to mature on the earlier of March 12, 2020, or the date that is
three business days following the closing of a reverse merger
transaction involving AYRO.
On
December 13, 2019, AYRO and Mr. Adams entered into an amendment to
the promissory note, extending the maturity date of the note to
April 30, 2021. As consideration, AYRO issued 500,000 shares of
common stock to Mr. Adams. Such shares are subject to a six-month
lock-up period.
16
AYRO
has not paid any principal or interest accrued on the promissory
note. As of December 31, 2019, the aggregate principal amount of
$500,000 is outstanding and $13,386 of interest is accrued and
payable.
Cenntro Agreement
In
April 2017, AYRO entered into a Manufacturing Licensing Agreement
with Cenntro, that provides for its four-wheel sub-assemblies to be
licensed and sold to AYRO for final manufacturing and sale in the
United States.
In
2017, AYRO executed a Stock Purchase Agreement with Cenntro for
three million (3,000,000) shares of AYRO’s common stock. As
consideration, Cenntro contributed cash of $50,000, raw material
inventory items valued at $92,061 and supply chain tooling and
assembly line development and ramp-up valued at $307,939. As of
December 31, 2019, Cenntro owned approximately 13.73% of
AYRO’s outstanding common stock on a fully-diluted
basis.
In
2017, AYRO executed a supply chain contract with Cenntro.
Currently, AYRO purchases 100% of its four-wheel vehicle chassis,
cabs and wheels through this supply chain relationship with
Cenntro. Contract terms are industry-standard and reflect
arms-length market pricing and other relevant terms.
In
2018, AYRO purchased supply-chain tooling to be placed in
Cenntro’s facility with a promissory note to Cenntro for the
cost. The tooling note was repaid in March 2019. As of December 31,
2019 and 2018, the amounts outstanding to Cenntro for factory
tooling were $0 and $324,202, respectively.
In
December 2019, Cenntro agreed to convert $1,100,000 of its accounts
receivable due from AYRO into 1,100,000 shares of AYRO’s
Series Seed 3 Preferred Stock. As of December 31, 2019, and 2018,
the amounts outstanding to Cenntro for trade accounts payable were
$133,117 and $2,149,295, respectively.
Critical
Accounting Policies and Estimates
AYRO’s
accounting policies are fundamental to understanding its
management’s discussion and analysis. AYRO’s
significant accounting policies are presented in Note 1 to its
consolidated financial statements, which are included elsewhere in
the exhibits to this Form 8-K. AYRO has identified certain
significant accounting policies which involve a higher degree of
judgment and complexity in making certain estimates and assumptions
that affect amounts reported in its consolidated financial
statements, as summarized below.
Revenue Recognition
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
(“ASU 2014-09”). ASU 2014-09 amends the guidance for
revenue recognition to replace numerous industry-specific
requirements and converges areas under this topic with those of the
International Financial Reporting Standards. AYRO adopted the ASU
No. 2014-09 for the year ended December 31, 2018.
17
Product
revenue from customer contracts is recognized on the sale of each
electric vehicle as vehicles are shipped to customers. Ownership
and risk of loss transfers to the customer based on FOB shipping
point and freight charges are the responsibility of the customer.
Payments are typically received at the point control transfers or
in accordance with payment terms customary to the
business.
Subscription
revenue from revenue sharing with Destination Fleet Operators
(“DFO”) is recorded in the month the vehicles in
AYRO’s fleet is rented. AYRO established its rental fleet in
late March 2019. For the rental fleet, AYRO retains title and
ownership to the vehicles and places them in DFO’s in resort
communities that typically rent golf cars for use in those
communities. Subscription revenue from revenue sharing activities
for the nine-months ended September 30, 2019 and 2018 were $9,941
and $0, respectively.
Amounts
billed to customers related to shipping and handling are classified
as shipping revenue, and AYRO has elected to recognize the cost for
freight and shipping when control over vehicles has transferred to
the customer as an operating expense. AYRO’s policy is to
exclude taxes collected from a customer from the transaction price
of automotive contracts. Shipping revenue for the nine-months ended
September 30, 2019 and 2018 were $67,168 and $38,049,
respectively.
Services and other
revenue consist of non-warranty after-sales vehicle services.
Service revenue for the nine-months ended September 30, 2019 and
2018 were $5,459 and $0, respectively.
Payments received
in advance of the delivery of vehicles or performance of services
are reported in the accompanying balance sheets as deferred
income.
Stock-Based Compensation
AYRO
accounts for stock-based compensation in accordance with the
guidance of FASB Accounting Standards Codification
(“ASC”) Topic 718, Compensation – Stock
Compensation. Under the fair value recognition provisions of
FASB ASC Topic 718, which requires all stock-based compensation
costs to be measured at the grant date based on the fair value of
the award and is recognized as compensation expense ratably over
the period the services are rendered, which is generally the option
vesting period. AYRO uses the Black-Scholes option pricing method
to determine the fair value of stock options and thus determining
compensation expense associated with the grant. AYRO measures
stock-based compensation expense for its non-employees and
consultants under FASB ASC 505-50, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring or in Conjunction with
Selling Goods and Services. In accordance with ASC Topic
505-50, these stock options and warrants issued as compensation for
services provided to AYRO are accounted for based upon the fair
value of the services provided. The fair value of the equity
instrument is charged directly to compensation expense and
additional-paid-in capital over the period during which services
are rendered.
Net Earnings or Loss Per Share
AYRO’s
computation of earnings (loss) per share (“EPS”)
includes basic and diluted EPS. Basic EPS is measured as the income
(loss) available to common stockholders divided by the weighted
average number of common shares outstanding for the period. Diluted
EPS is similar to basic EPS but presents the dilutive effect on a
per share basis of potential common shares (e.g., common stock
warrants and common stock options) as if they had been converted at
the beginning of the periods presented, or issuance date, if later.
Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the
respective periods. Basic and diluted loss per common share is the
same for all periods presented because all common stock warrants
and common stock options outstanding were
anti-dilutive.
At
September 30, 2019 and 2018, AYRO excluded the outstanding warrant
and option securities, which entitle the holders thereof to
ultimately acquire shares of common stock, from its calculation of
earnings per share, as their effect would have been
anti-dilutive.
18
Use of Accounting Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Management makes these estimates using the
best information available at the time the estimates are made;
however, actual results could differ from those
estimates.
Fair Value Measurements
AYRO
follows FASB ASC 820-10, Fair
Value Measurements and Disclosures, which defines fair
value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The standard
provides a consistent definition of fair value which focuses on an
exit price that would be received upon sale of an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.
The
standard also prioritizes, within the measurement of fair value,
the use of market-based information over entity specific
information and establishes a three-level hierarchy for fair value
measurements based on the nature of inputs used in the valuation of
an asset or liability as of the measurement date.
The
three-level hierarchy for fair value measurements is defined 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.
●
Level 3 –
inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
Categorization
within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The
carrying amounts reported in the accompanying financial statements
for current assets and current liabilities approximate the fair
value because of the immediate or short-term maturities of the
financial instruments. As of September 30, 2019 and 2018, AYRO did
not have any level 2 or level 3 instruments.
Inventories
Inventories are
reported at the lesser of cost (using the first-in, first-out
method, “FIFO”) or net realizable value. Inventories
consist of purchased chassis, cabs, batteries, truck beds/boxes,
component parts as well as freight, tariffs, duties and other
transport-in costs. Inventories are categorized as raw materials,
work-in-process and finished goods as of September 30, 2019 and
December 31, 2018. Work-in-process and finished goods include labor
and overhead costs.
Intangible Assets
Intangible assets
consist of the cost in registering patents for AYRO’s unique
inventions. Such patent-related expenses are recorded at their
estimated fair value on the date of cost encumbrance and are being
amortized over an estimated life of 5 years. Intangible assets also
include investments made with the supply chain partner, who is also
an investor, for tooling and assembly line configuration.
Amortization expense for the nine months ended September 30, 2019
and 2018 was $87,968 and $65,876, respectively.
19
AYRO
follows FASB ASC 360, Accounting
for Impairment or Disposal of Long-Lived Assets (“ASC
360”). ASC 360 requires that if events or changes in
circumstances indicate that the cost of long-lived assets or asset
groups may be impaired, an evaluation of recoverability would be
performed by comparing the estimated future undiscounted cash flows
associated with the asset to the asset’s carrying value to
determine if a write-down to market value would be required.
Long-lived assets or asset groups that meet the criteria in ASC 360
as being held for sale are reflected at the lower of their carrying
amount or fair market value, less costs to sell. AYRO’s
management has determined that there is no impairment as of
September 30, 2019.
Income Taxes
AYRO
accounts for income tax using an asset and liability approach,
which allows for the recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The accounting for deferred income tax calculation represents AYRO
management’s best estimate on the most likely future tax
consequences of events that have been recognized in AYRO’s
financial statements or tax returns and related future
anticipation. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire
before AYRO is able to realize their benefits, or that future
realization is uncertain.
AYRO
evaluates uncertainty in income tax positions based on a
more-likely-than-not recognition standard. If that threshold is
met, the tax position is then measured at the largest amount that
is greater than 50% likely of being realized upon ultimate
settlement. If applicable, AYRO records interest and penalties as a
component of income tax expense.
As of
September 30, 2019 and December 31, 2018, there were no accruals
for uncertain tax positions.
Business Combinations
AYRO
utilizes the acquisition method of accounting for business
combinations and allocate the purchase price of an acquisition to
the various tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. AYRO primarily
establishes fair value using the income approach based upon a
discounted cash flow model. The income approach requires the use of
many assumptions and estimates including future revenues and
expenses, as well as discount factors and income tax rates. Other
estimates include:
● Estimated
step-ups or write-downs for fixed assets and
inventory;
● Estimated
fair values of intangible assets; and
● Estimated
income tax assets and liabilities assumed from the
target.
While
AYRO uses its best estimates and assumptions as part of the
purchase price allocation process to accurately value assets
acquired and liabilities assumed at the business acquisition date,
AYRO’s estimates and assumptions are inherently uncertain and
subject to refinement. As a result, during the purchase price
allocation period, which is generally one year from the business
acquisition date, AYRO records adjustments to the assets acquired
and liabilities assumed, with the corresponding offset to goodwill.
For changes in the valuation of intangible assets between
preliminary and final purchase price allocation, the related
amortization is adjusted in the period it occurs. Subsequent to the
purchase price allocation period, any adjustment to assets acquired
or liabilities assumed is included in operating results in the
period in which the adjustment is determined.
20
From
inception through September 30, 2019, AYRO has not contemplated nor
consummated any acquisitions. However, should AYRO issue shares of
its common stock in an acquisition, it will be required to estimate
the fair market value of the shares issued.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU Topic 2016-02, Leases, (“ASU
842”). The guidance
in this ASU supersedes the leasing guidance in ASU Topic 840,
Leases. Under the new
guidance, lessees are required to recognize lease assets and lease
liabilities on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense
recognition in the income statement.
The new
standard is effective for fiscal years beginning after December 15,
2019. Early adoption is permitted. AYRO is currently evaluating the
impact of the pending adoption of the new standard on its financial
statements.
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”). ASU 2014-09 amends the
guidance for revenue recognition to replace numerous
industry-specific requirements and converges areas under this topic
with those of the International Financial Reporting Standards. ASU
2014-09 implements a five-step process for customer contract
revenue recognition that focuses on transfer of control, as opposed
to transfer of risk and rewards. The amendment also requires
enhanced disclosures regarding the nature, amount, timing and
uncertainty of revenues and cash flows from contracts and
customers. Other major provisions include the capitalization and
amortization of certain contract costs, ensuring the time value of
money is considered in the transaction price, and allowing
estimates of variable consideration to be recognized before
contingencies are resolved in certain circumstances. The amendments
in ASU 2014-09 are effective for reporting periods beginning after
December 15, 2017, and early adoption is prohibited. Entities can
transition to the standard either retrospectively or as a
cumulative-effect adjustment as of the date of the adoption. AYRO
adopted ASU 2014-09 for the year ended December 31, 2018. The
adoption of ASU 2014-09 did not have a material effect on
AYRO’s financial statements.
Concentration
of Credit Risk
Financial
instruments that potentially expose AYRO to concentrations of
credit risk consist principally of cash, cash equivalents and
accounts receivable. AYRO places its cash and cash equivalents with
financial institutions with high credit quality. As of September
30, 2019, AYRO had $60,823 of cash and cash equivalents on deposit
or invested with its financial and lending
institutions.
AYRO
provides credit to customers in the normal course of business. AYRO
performs ongoing credit evaluations of its customers’
financial condition and limit the amount of credit extended when
deemed necessary.
Foreign
Currency Risk
From
inception through September 30, 2019, all transactions for AYRO
have been settled in U.S. dollars. Should AYRO begin transacting
business in other currencies, AYRO is subject to exposure from
changes in the exchange rates of local currencies.
AYRO
has not entered into any financial derivative instruments that
expose it to material market risk, including any instruments
designed to hedge the impact of foreign currency exposures. AYRO
may, however, hedge such exposure to foreign currency exchange
fluctuations in the future.
21
INFORMATION
ABOUT AYRO
The following section describes the business and operations of
AYRO, which will be a substantial portion of the business and
operations of the combined company following the consummation of
the merger. As used in this section, the terms “we,”
“our,” and “us” refer to AYRO.
Business
Overview
AYRO
designs and manufactures compact, sustainable electric vehicles for
closed campus mobility, urban and community transport, local
on-demand and last mile delivery, and government use. AYRO’s
three- and four-wheeled purpose-built electric vehicles are geared
toward commercial customers including universities, last mile
delivery services and food service providers. AYRO was initially
formed as a Texas corporation on May 17, 2016 and converted to a
Delaware corporation on July 24, 2019.
AYRO
Products
AYRO
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 and cargo services, at a lower total
cost.
AYRO Club Car 411
22
Target
specifications and features for the AYRO Club Car 411 are as
follows:
|
AYRO
Club Car 411 – Target Vehicle Specifications
Overview
|
|
|
Chassis
|
|
|
Body
Options; Chassis:
|
Enclosed Van Box,
Pickup with Sides & Tailgate, Flatbed; chassis of reinforced
steel/coated
|
|
Layout:
|
2-wheel
rear wheel drive, 4-wheel vehicle
|
|
Powertrain
|
|
|
Motor/Batteries:
|
10 kW,
13.4 HP
72 Volt
System, 8.64 kWh capacity, EV-designed VRLA batteries
|
|
Dimensions
|
|
|
Length:
|
146 in.
/ 370.8 cm / 12’ 2”
|
|
Width:
|
55 in.
/ 139.7 cm / 4’ 7”
|
|
Height:
|
75 in.
/ 190.5 cm / 6’ 3”
|
|
Dry
Weight:
|
Flatbed
Dry Weight: 2,300 lbs. / 1043 kg;
Pickup
Dry Weight: 2,350 lbs. / 1066 kg;
Cargo
Box Dry Weight: 2,650 lbs. / 1202 kg
|
|
Wheels
& Tires:
|
14” Alloy
Wheels with 175/65/R14 DOT certified street radial
tires
Upgrade
Lift Kit option to 185/70/R14 certified street radial
tires
|
|
Performance
|
|
|
Top
Speed:
|
Up to
25 /45 mph (Governed Speed based on state regulations for low speed
vehicle operations on streets with posted speeds of up to 35 mph
(45 mph in Texas)
|
|
Grade:
|
Up to
22%
|
|
Payload
Capacity:
|
1,100
lbs. /498.9 kg / 1/2 ton
|
|
Turning
Radius:
|
157 in.
/3.9 m / 13’ 1”
|
|
Braking
Distance:
|
25 ft.
@ 25 mph /7.6 m @ 40 km/h / Best in Class
|
The
AYRO Club Car 411 (the “AYRO 411 Fleet”) is a family of
electric, four-wheel compact, light-duty utility trucks sold
exclusively through AYRO’s contracted partner, Club Car, as
part of a global multi-year sustainability solution development,
sales and marketing agreement. Each of the AYRO 411 Fleet of
vehicles is classified as a street legal low speed vehicle
(“LSV”), defined as a four-wheeled motor vehicle, other
than an all-terrain vehicle, that is capable of reaching speeds of
at least 20 miles per hour (“mph”) but not greater than
25 mph, with a gross vehicle weight rating of less than 3,000
pounds and meets the safety standards in Title 49 of the U.S. Code
of Federal Regulations, section 571.50.
23
24
The
AYRO 411 Fleet has an expected range of up to 50 miles and a
maximum speed range of 25 mph (or 40 kilometers per hour), in line
with the United States Department of Transportation
(“USDOT”) regulations for low-speed vehicles and with
most state statutes, which typically limit the speed of LSVs to 25
mph on 35 mph posted roads. The current AYRO 411 Fleet
includes:
●
the 411 Flatbed
truck, which provides drivers with considerable versatility of
use;
●
the 411 Pickup
truck, which is ideal for hauling; and
●
the 411 Cargo Van
Box, a fully enclosed cargo box.
The
AYRO 411 Fleet has zero gas emissions, a recharge capability of up
to six to eight hours using 120V/20A outlets and has a payload
capacity of up to 1,100 pounds. AYRO estimates that the AYRO 411
Fleet’s operating costs are approximately 50% lower per year
compared to similarly sized gas-powered trucks/vans. Vehicles in
the AYRO 411 Fleet are equipped with:
●
Reinforced steel
(coated) chassis houses the motor, controller and enclosed battery
operating system;
●
Auto-grade
suspension with Transverse Leaf Spring on the front and horizontal
spring with coil-over shock in the rear;
●
Power assisted
steering;
●
Street legal if
registered/licensed per standard vehicles by dealer or
user;
●
Multi-point,
anchored DOT compliant safety harnesses for driver and
passenger;
●
a standard back-up
camera (appears on larger LCD display – see
below);
●
a standard 7-inch
(17.7 centimeter) LCD display;
●
a standard manual
parking break;
●
four-wheel all-disk
braking system and corrosion resistant body panels;
and
●
heating and
ventilation systems in the cabin of the truck.
25
With
its low speed, zero-emissions, and cost-effectiveness, the AYRO 411
Fleet seeks to satisfy the needs of a variety of customers,
including university and college campuses, retailers, airports and
ports, business parks and campuses, warehouses, production
facilities, resorts and theme parks, apartments and
condos.
AYRO 311 Autocycle
26
Target
specifications and features for the AYRO 311 are as
follows:
|
AYRO
311 – Target Vehicle Specifications Overview
|
|
|
Chassis
|
|
|
Chassis/Body:
|
Reinforced
powder-coated steel; body options include a two-seater, a
two-seater with option windows, and a one-seater with a custom
cargo area
|
|
Layout:
|
Front-wheel drive,
3-wheeled
|
|
Powertrain
|
|
|
Engine:
|
7.5 kW
/ Permanent Magnet DC, 10.9 horsepower, 85A AC
Controller
|
|
Dimensions
|
|
|
Wheelbase:
|
89.5
in. / 227.3cm
|
|
Length:
|
126 in.
/ 320 cm / 10’5”
|
|
Width:
|
66 in.
/ 168 cm / 5’ 5”
|
|
Height:
|
64 in.
/ 161.2 cm / 5’3”
|
|
Weight:
|
1,352
lbs. / 613 kg
|
|
Wheels:
|
165/55R
15 (Front) 195/50R 15 (Rear)
|
|
Performance
|
|
|
Top
Speed:
|
Up to
50 mph / 80 km
|
|
Grade:
|
Up to
25%
|
|
Payload
Capacity:
|
2
passengers (in-line seating) or 1 passenger + cargo
|
|
Turning
Radius:
|
30 ft.
/ 9.1 m
|
|
Braking
Distance:
|
25 ft.
@ 50 mph / 7.6 m @ 80km/h
|
27
The
AYRO 311 Autocycle (the “AYRO 311”) is a compact,
light-duty street-legal electric vehicle with a maximum speed of up
to 50 mph. Strategically engineered with USDOT-compliant automotive
parts, the AYRO 311 is built to a high-performance standard, has
standard automotive controls and does not require any special
licenses or conditions in order to drive. Like the AYRO 411 Fleet,
it has a range of up to 50 miles, has zero gas emissions and a
recharge capability of up to six to eight hours using 120V/20A and
its operating costs are estimated to be approximately 50% lower per
year compared to gas-powered vehicles.
AYRO
311’s equipment includes:
●
a standard back-up
camera, a standard 7-inch (17.7 centimeter) LCD
display;
●
a standard manual
parking break; enclosed and corrosion resistant body
panels;
●
heating,
ventilation, and fan systems in the cabin of the
vehicle;
●
standard automotive
controls including foot accelerator and brake pedals;
●
a USDOT-approved
windshield, a windshield wiper and washer system;
●
a driver’s
3-point safety belt and a passenger’s 4-point safety belt;
warning flashers;
●
AM and FM
radio;
●
Bluetooth
capabilities;
●
a GPS system
and
●
an SD card
slot.
28
With
its automotive-style controls (a steering wheel and foot pedals),
the AYRO 311 drives like a regular car and accommodates the average
consumer, is designed for neighborhood food delivery, last mile
delivery, parking enforcement and urban dwellers. More
specifically, this product targets urban dwellers due to its
compact size in dense urban environments. The AYRO 311 also targets
commercial customers, such as neighborhood food and product
delivery fleets, gated communities, country clubs, and colleges and
universities due to its highly customizable appearance with a range
of brand and logo wraps, spot graphics, and color options (glossy
white or athletic red), its compact design and ability to go
virtually anywhere. The AYRO 311 also targets municipalities and
facilities as customers for use in parking enforcement, special
events, and public safety.
AYRO 511 (Concept)
AYRO is
currently investigating and researching the concept vehicle, AYRO
511, a new full-time four-wheel drive electric vehicle. The AYRO
511 is expected to have 13 inches (33 centimeters) of clearance and
enhanced stability in a diverse array of terrains and seasons.
Additionally, the truck will be designed to operate with an
automotive-style drive system, cutting driving noise down to a
minimum.
Additional
Models and Vehicles
AYRO is
currently in discussions with Club Car regarding a variety of new
models and vehicles.
Manufacturing
and Supply Chain
Manufacturing Agreement with Cenntro
In
2017, AYRO partnered with Cenntro Automotive Group, Ltd.
(“Cenntro”), which operates a large electric vehicle
factory in the automotive district in Hangzhou, China, in a supply
chain agreement to provide sub-assembly manufacturing services.
Through the partnership, Cenntro acquired nineteen percent (19%) of
AYRO’s common stock. Cenntro beneficially owned approximately
13.7% as of December 31, 2019. Cenntro owns the design of the AYRO
411 Fleet vehicles and has granted AYRO an exclusive license to
purchase the AYRO 411 Fleet vehicles for sale in North
America.
Under
AYRO’s Manufacturing License Agreement with Cenntro (the
“MLA”), in order for AYRO to maintain its exclusive
territorial rights pursuant to the MLA, for the first three years
after the effective date of April 27, 2017, AYRO must meet the
following minimum sale requirements: (i) a minimum of 300 units
sold by the first anniversary of the effective date of the MLA;
(ii) a minimum of 800 units sold by the second anniversary of the
effective date of the MLA; and (iii) a minimum of 1,300 units sold
by the third anniversary of the effective date of the MLA. Cenntro
will determine the minimum sale requirements for the years
thereafter. Should any event of default occur, the other party may
terminate the MLA by providing written notice to the defaulting
party, who will have 90 days from the effective date of the notice
to cure the default. Unless waived by the party providing notice, a
failure to cure the default(s) within the time 90-day time frame
will result in the automatic termination of the MLA. Events of
default under the MLA include a failure to make a required payment
when due, the insolvency or bankruptcy of either party, the
subjection of either party’s property to any levy, seizure,
general assignment for the benefit of creditors, and a failure to
make available or deliver the products in the time and manner
provided for in the MLA.
29
Cenntro
is also being used to perform sub-assembly manufacturing of the
311. AYRO imports semi-knocked-down vehicle kits from Cenntro for
both the 411 and 311 models. The vehicle kits are received through
shipping containers by AYRO’s assembly facility in Round
Rock, Texas. The vehicles are then assembled with limited
customization requirements per order. As such, the partnership with
Cenntro allows AYRO to scale manufacturing operations without
significant investment in capital expenditures, and therefore bring
products to market rapidly.
AYRO
currently occupies 19,000 square feet of manufacturing space
configuration in a “U”-shaped assembly line with
multiple stations per vehicle. AYRO’s manufacturing space, as
currently occupied, allows up to five assembly lines plus adequate
raw material storage. The chart below indicates the number of
vehicles and assembly time required for each. Assembly time also
includes USDOT quality checks and testing as the final step of the
assembly process. Additionally, the number of vehicles indicated
below assumes a single shift. AYRO believes that its volumes could
be doubled per line by adding a second shift that would operate
from 4pm to midnight.
|
Vehicle
|
Assembly time (Man-Hours)
|
Vehicles assembled per line, per month
|
|
AYRO
411
|
12.0
|
200
|
|
AYRO
311
|
14.0
|
200
|
|
AYRO
311x (estimated)
|
15.0
|
180
|
Master Procurement Agreement with Club Car
In
March 2019, AYRO entered into a five-year Master Procurement
Agreement (the “MPA”) with Club Car for the sale of
AYRO’s four-wheeled vehicles. The MPA grants Club Car the
exclusive right to sell the AYRO 411 Fleet in North America,
provided that Club Car orders a mutually agreed on number of AYRO
vehicles per year. Under the terms of the MPA, AYRO receives orders
from Club Car dealers for vehicles of specific configurations, and
AYRO invoices Club Car once the vehicle has shipped. The MPA has an
initial term of five years commencing January 1, 2019 and may be
renewed by Club Car for successive one-year periods upon 60
days’ prior written notice. AYRO also agreed to collaborate
with Club Car on developing new products similar to the AYRO 411
Fleet and improvements to existing products, and AYRO granted Club
Car a right of first refusal to purchase similar commercial utility
vehicles which AYRO develops during the term of the MPA. AYRO is
currently engaged in discussions with Club Car to develop
additional products to be sold by Club Car in Europe and Asia, but
there can be no assurance that these discussions will be
successful. Pursuant to the MPA, AYRO also granted Club Car a right
of first refusal in the event that AYRO intends to sell 51% or more
of its assets or equity interests, which right of first refusal is
exercisable for a period of 45 days following AYRO’s delivery
of an acquisition notice to Club Car.
Strategic Partnership with Autonomic
Additionally, AYRO
is developing a technology platform that can be deployed to any
vehicle as additional value-add subscriptions offered directly to
the end customer. AYRO has partnered with Autonomic, a wholly-owned
subsidiary of Ford Smart Mobility LLC, to collect vehicle health,
use and location information (telematics) in its transportation
mobility cloud and produce purpose-built information back to AYRO,
customers and fleet operators, generating an additional revenue
stream. Working together, the companies aim to develop a range of
services to enable mobility applications for AYRO’s line of
vehicles which power everything from moving products and equipment
to people and last-mile delivery services.
30
Engineering
Development and Production Process Validation
As
a baseline, AYRO’s product development and engineering
efforts align with the Society of Automotive Engineering
(“SAE”) J2258_201611 standards for Light Utility
Vehicles. The J2258 standard provides key compliance criteria for
Gross Vehicle Weight Rating (“GVWR”), occupant
protection and safety restraint systems, lateral and longitudinal
stability, center of gravity and operating controls, among others.
AYRO’s test validation and inspection standards follow
Federal Motor Vehicle Safety Standards (“FMVSS”) 49 CFR
571.500 for LSVs with the additions of SAE J585 and FMVSS 111 for
rear visibility, lighting, signaling, reflectors, changes in
direction of movement, back-up camera response timing and field of
view.
AYRO’s
development standards and test compliance validation processes are
supported by a variety of test documentation including supplier
self-reporting, third party laboratory test reports and regional
compliance validation with the California Air Resource Board
(“CARB”) for speed, range and environmental
performance.
AYRO’s
production system follows a lean, cell-based, manufacturing model.
The process involves the following five sequential cells: (1) cab
preparation, (2) chassis preparation, (3) system integration and
testing, (4) final assembly and integration test, and (5) QA &
FMVSS Compliance. Assembly quality and shift efficiency metrics are
measured daily by AYRO production staff at end of every
shift.
AYRO
maintains a certification and compliance check list for each
vehicle. AYRO’s three and four-wheeled vehicles use an
automotive style steering wheel, turn signal stalk, headlight,
running light and reverse light controls, a multi-speed windshield
wiper and washer and an accelerator and brake pedal consistent with
controls employed in standard passenger cars. As the AEV 311 and
AEV 411 are direct drive vehicles, there is no stick shift, clutch,
paddle shift, or belt driven CSV (continuously variable)
transmission needed to operate the vehicle within the intended
torque band and speed range. Accordingly, AYRO’s vehicles are
homologated under existing 49 CFP 571.500 the U.S., state and local
LSV requirements and the corresponding motorcycle and autocycle
requirements under 49 CFR 571.3.
The
Industry and AYRO’s Competitive Position
The
U.S. electric vehicle market is expected by many commentators to
increase dramatically over the next decade, driven by factors such
as the country’s increasingly urbanized population, the
significant cost of owning and operating gas-powered vehicles, the
growing global awareness of the damaging effects of pollution and
greenhouse gas emissions, and rising investment in clean technology
and supporting infrastructure.
A
segment of the electric vehicle market, low speed electric vehicles
(“LSEVs”)—which are LSVs but cannot be powered by
gas or diesel fuel—are growing increasingly popular as
eco-friendly options for consumers and commercial entities. LSEVs
run on electric motors fueled by a variety of different batteries,
such as lithium ion, molten salt, zinc-air and various nickel-based
designs.
In
2017, the global LSEV market was valued at approximately $2,395
million, according to Allied Market Research, and global sales of
LSEVs have only continued to grow over the past two years, with
sales expected to reach 1.5 million units in 2021. According to the
Low Speed Electric Vehicles Market report conducted by Market Study
Report, over the next five years, the LSEV market is expected to
register a 10.8% compound annual growth rate in terms of revenue,
with the global market size expected to reach $8,870 million by
2024, up from $4,790 million in 2019.
Trends Driving the Need for Electric Vehicles
Trends
such as increasingly stringent government regulations aimed toward
reducing vehicle emissions, growing urban populations, and social
pressure to adopt sustainable lifestyles all create a demand for
more ecologically and economically sustainable methods of
transportation. This demand continues to spur technological
advancements and LSEV market growth.
31
Incentivizing Effect of Government Rules and
Regulations. Expanding rules and regulations governing
vehicle emissions have contributed to growth in the LSEV market. In
particular, the U.S., Germany, France, and China have implemented
stringent laws and regulations governing vehicular emissions,
requiring automobile manufacturers to use advanced technologies to
combat high-emission levels in vehicles. To incentivize
clean-energy use, many governments are increasingly instituting
substantial incentives for consumers to purchase electric vehicles,
such as:
●
tax credits,
rebates, and exemptions; reduced vehicle registration
fees;
●
reduced utility
rates; and
●
parking
incentives.
Further,
governments are establishing infrastructure benchmarks to support
the growth of the electric vehicle industry.
A prime
example of government involvement in developing the electric
vehicle industry, a recent New Jersey bill aims to have 330,000
electric vehicles on state roads by the end of 2024 and a total of
2 million by 2035. To facilitate this goal, the bill calls for the
state to have 400 fast-charging stations and another 1,000
slow-charging stations, both by 2025. Thirty percent of all
apartment, condo and townhouse developments in New Jersey would
need to have chargers by 2030, while half of all franchise hotels
would need to have chargers by 2050. As the network of government
rules and regulations expands, so too should investment in the
research and development of LSEV technology and
infrastructure.
Urbanization on the Rise. According to
the U.N., in 2015, 55% of the world’s population was urban,
and by 2050, it is estimated that this percentage will increase to
68%. As the world
population continues to urbanize, a growing number of consumers are
expected to seek alternatives, such as LSEVs, to internal
combustion engine vehicles in order to save money and space in
congested city streets.
Increasing Sense of Social
Responsibility. In tandem with governmental efforts to curb
pollution and encourage more sustainable transportation practices,
consumers face increasing social pressure to adopt eco-friendly
lifestyles. As this demand grows, the LSEV market should continue
to develop.
Target Markets
The
multipurpose applications and clean energy use of LSEVs make them
popular across a wide array of industries and customers, including
college and university campuses, resorts and hotels, corporate
parks, hospitals, warehouses, individual consumers, last mile
delivery service providers, municipalities, and the food service
industry. A number of these market segments, and AYRO’s
competitive position within them, are discussed in greater detail
below.
Universities. LSEVs are growing
increasingly common on university and college campuses due to a
number of factors. LSEVs fulfill the versatile needs of campuses
better than golf carts or standard combustion vehicles because, not
only does LSEVs’ low speed threshold promote safer driving
among pedestrians, the vehicles are also street legal with on-road
safety features, enabling drivers to drive on roads and free up
pedestrian space along sidewalks and smaller pathways.
Additionally, the significantly reduced carbon imprint of LSEVs
compared to internal combustion engine vehicles appeal to
environmentally aware students and professors looking to promote
environmental sustainability on campus. By transitioning from
internal combustion engine vehicles to LSEVs, campuses should be
able to reduce significantly the costs spent on fuel, oil, parts,
and maintenance. AYRO’s vehicles, particularly the AYRO 411
Fleet, provide all of these benefits to university and college
campuses. AYRO estimates that in the U.S., there are over 1,800
higher education campuses with over 10,000 students each with over
400 on-campus vehicles that are ideal targets for the AYRO 411
Fleet as campuses transition from fossil-fueled campus fleet
vehicles to EVs.
32
Food Delivery Services. As the
millennial generation assumes a more substantial portion of the
consumer population, customers increasingly favor convenience and
timeliness, spurring dramatic growth in online ordering and
delivery services across a wide swath of industries, including food
delivery and restaurant ordering services. Food delivery sales are
anticipated to increase over 20% per year, culminating in an
expected $365 billion worldwide by 2030, according to Upserve.
Upserve further estimates that approximately 60% of U.S. consumers
report that they order delivery or takeout at least once a week.
Within the next decade, potentially over 40% of restaurant sales
will be attributable to delivery services, according to Morgan
Stanley.
In its
market research, AYRO has determined that delivery services,
including restaurants using the AYRO 311 as a delivery vehicle
rather than outsourcing delivery to third party services have
reduced their delivery costs by up to 50%. Delivery service
companies using the AYRO 311 as an in-house delivery vehicle rather
than outsourcing delivery are also better equipped to manage the
customer experience and maintain customer relationships and
data.
Last Mile Delivery Service. Retail
focus on last mile delivery—the movement of goods from a
transportation hub to the final delivery destination—has
grown exponentially over the past few years due to the rise in
online ordering and e-commerce. Consumers’ ability to pick
and choose products based on delivery speed and availability makes
last mile delivery a key differentiator among retailers. Last mile
delivery provides retailers timelier and more convenient delivery
options not offered by the main three shipping services in the U.S.
(the U.S. Postal Service, FedEx, and UPS). Additionally, given the
increasing designation of low emission zones in urban centers,
retailers will need to continue to deploy eco-friendly vehicles.
Retailers will likely expand the use of LSEV fleets to make
deliveries in low emission zones due to their zero gas emissions
and lower price than competing electric vehicles. AYRO expects that
the AYRO 411 Fleet, with its variety of cargo bed options ideal for
hauling and delivery and its low price point, should stand out
among the competition. Additionally, the AYRO 311 autocycle is
ideal for short point-destination deliveries for smaller packages
and urgent urban courier-style deliveries.
Municipalities. As more city
governments adopt regulations geared toward reducing pollution from
vehicles, cities are increasingly looking to replace their
municipal vehicles with zero-emission fleets. Such fleet overhauls,
however, can be costly. LSEVs are a cheaper and more practical
option for cities daunted by the cost of standard electronic
vehicles. AYRO’s LSEVs have both on and off-road
capabilities, making them particularly versatile for
municipalities.
On-Road and Personal Transportation.
LSEVs offer a feasible and practical method of transportation,
especially in urban centers. Because AYRO’s LSEVs are
street-legal, they offer city dwellers a more sustainable,
cost-efficient, easily maneuverable, compact and light weight
option compared to internal combustion engine vehicles. AYRO LSEVs
also offer a variety of specifications and equipment, meaning that
consumers do not have to sacrifice comfort or
convenience.
Market
Considerations
AYRO
primarily focuses on the LSEV North American market, which is
highly competitive and constitutes 28% of the global LSEV market
according to Wise Guy Reports. AYRO has examined various
considerations with regard to the AYRO’s market impact,
including cost comparisons to existing vehicles in the market,
market validation and target commercial markets.
33
Competition
The
worldwide automotive market, particularly for economy and
alternative fuel vehicles, is highly competitive, and AYRO expects
it will become even more so in the future. Other manufacturers have
entered the three-wheeled vehicle market, and AYRO expects
additional competitors to enter this market within the next several
years. As the LSEV market grows increasingly saturated, AYRO
expects to experience significant competition. The most competitive
companies in the global LSEV market include HDK Electric Vehicles,
Bradshaw Electric Vehicles, Textron Inc., Polaris Industries,
Yamaha Motors Co. Ltd., Ingersoll Rand, Inc., Speedway Electric,
AGT Electric Cars, Bintelli Electric Vehicles and Ligier Group.
AYRO’s relationship with Club Car, a division of Ingersoll
Rand, Inc., gives AYRO a strong competitive advantage. Despite this
fact, many of the other competitors listed above have significantly
greater financial, technical, manufacturing, marketing and other
resources than AYRO and may be able to devote greater resources to
the design, development, manufacturing, distribution, promotion,
sale and support of their products. Many of these competitors
modify an existing fossil-fuel powered golf cart to meet utility
and commercial needs for an all-electric commercial utility
vehicle, unlike the AYRO 411 Fleet, which was engineered, designed
and produced as a portfolio of electric, light duty trucks and
van.
When
compared to internal combustion engine vehicles, AYRO’s
vehicles are significantly more attractive based on tax, title and
license fees and CO2 emissions. Compared to a standard Ford F150
(gasoline) pickup truck (2.7 liter), the AYRO 411 Fleet provides an
approximate 49% reduction in operating expenses and an approximate
100% reduction in CO2 emissions (if renewed energy is used to
charge the AYRO vehicles, an increasing trend for most higher
education campuses and government facilities). Compared to a Nissan
Versa (gasoline) four cylinder (1.6 liter) sub-compact car, the
AYRO 311 provides a similarly drastic reduction in operating
expenses and CO2 emissions. Additionally, the AYRO 311’s
starting manufacturer suggested retail price (“MSRP”)
is $9,999. Arcimoto and SOLO market three-wheeled electric vehicles
with starting MSRPs of $19,900 and $15,888,
respectively.
AYRO’s most
closely-matched competitor in the LSEV industry is Polaris Gem
(“Gem”), an LSEV manufacturer that manufactures
products designed for applications similar to AYRO’s. Gem
offers three passenger vehicle models and two utility vehicle
models. Although Gem’s GEM el XD model, which is similar to
vehicles in the AYRO 411 Fleet, has a lower starting MSRP than the
AYRO 411 Fleet, the GEM el XD would need to be highly configured to
match the standard AYRO 411 Fleet features and, with such
configuration, would exceed the base MSRP of each vehicle in the
AYRO 411 Fleet. The AYRO 411 Fleet has a greater pick-up bed and
van box capacity that the GEM el XD, in addition to 13% more
horsepower and a 48% better turning radius, allowing drivers of the
AYRO 411 Fleet to execute maneuvers in tighter spaces than they
would using the GEM el XD.
AYRO
expects competition in its industry to intensify in the future in
light of increased demand for alternative fuel vehicles, continuing
globalization and consolidation in the worldwide automotive
industry. Factors affecting competition include product quality and
features, innovation and development time, pricing, reliability,
safety, customer service and financing terms. Increased competition
may lead to lower vehicle unit sales and increased inventory, which
may result in downward price pressure and may adversely affect
AYRO’s business, financial condition, operating results and
prospects. AYRO’s ability to successfully compete in its
industry will be fundamental to its future success in existing and
new markets and its market share. There can be no assurances that
AYRO will be able to compete successfully in its markets. If
AYRO’s competitors introduce new cars or services that
compete with or surpass the quality, price or performance of
AYRO’s vehicles or services, AYRO may be unable to satisfy
existing customers or attract new customers at the prices and
levels that would allow AYRO to generate attractive rates of return
on its investment. Increased competition could result in price
reductions and revenue shortfalls, loss of customers and loss of
market share, which could harm AYRO’s business, prospects,
financial condition and operating results.
34
AYRO’s
Strategy
AYRO’s
goal is to continue to develop and commercialize, automotive-grade,
sustainable electric transportation solutions for the markets and
use cases that AYRO believes can be well served by AYRO’s
purpose-built, street legal and road-ready electric vehicles.
AYRO’s business strategy includes the following:
|
●
|
Leverage the relationship with Club Car to expand AYRO’s
product portfolio and increase customer base. AYRO is working on and has plans to expand its
current electric transportation solutions portfolio in
collaboration with Club Car. This plan includes next generation
light duty trucks and new purpose-driven electric vehicles.
Additionally, AYRO is collaborating with Club Car’s sales and
marketing teams to expand adoption of its vehicles in the United
States and intends to expand its geographical footprint within Club
Car’s global distribution and channel
network.
|
|
●
|
Rapidly scale up AYRO’s operations to achieve
growth. AYRO intends to direct
resources to scale up AYRO’s operations, which AYRO believes
is needed to increase its revenue, including expanding and
optimizing its automotive component supply chain and AYRO’s
flow-based assembly operations in Round Rock, Texas. Further, AYRO
plans to include expanding sales territories and adding
distribution channels, forming strategic partnerships to build-out
its whole product offering and to access additional sales channels
or to accelerate product adoption for particular vertical markets,
building AYRO’s brand, and increasing manufacturing capacity
to produce higher volumes of electric vehicles.
|
|
●
|
Identify defined markets and use cases which are currently
under-served but represent sizable market opportunity sub-sets of
the electric vehicle market and focus development efforts on
road-ready autocycles and other purpose-built electric vehicles to
address such markets. AYRO is currently developing a new series of
automotive-grade autocycles, engineered and optimized to meet
targeted use cases such as last mile and urban delivery. AYRO is
also working on Club Car’s next generation, electric light
duty trucks and developing a new purpose-built vehicle with Club
Car. AYRO intends to direct resources to advance the development of
such purpose-built transportation solutions which AYRO believes
will allow the company to address currently underserved, yet growth
markets, that are application specific. AYRO believes that
AYRO’s all electric transportation solutions, such as its
compact, lightweight and maneuverable campus and urban vehicles,
can benefit targeted geographical and vertical customers by
offering lower annual/lifetime total cost of ownership for zero
emissions/zero carbon footprint vehicles.
|
|
●
|
Invest in research and development and qualification of sensors,
cameras, software and mobility services seeking to enhance the
value of using AYRO’s electric vehicles and to derive
incremental potential revenue streams for AYRO and its partner
ecosystem. AYRO intends to
integrate radio frequency-enabled hardware and develop data
collection, communication processes and mobility services in
collaboration with Autonomic. AYRO and Autonomic plan to develop a
technology platform that collects vehicle health, use and location
information (telematics) into its transportation mobility cloud and
produces purpose-built information back to AYRO, customers and
fleet operators, the subscription to which can be offered to the
end customers which AYRO believes will enhance the value of using
AYRO’s electric vehicles and provide additional revenue
stream.
|
35
Intellectual
Property
Patents
AYRO
has submitted two design patent applications covering their
vehicles.
1.
United
States Application No. 29/653,522.
●
This
application covers one of the designs for a three-wheel vehicle for
AYRO. The following is a diagram of the vehicle from the
application:
●
This
first application has been approved by the USPTO and the issue fee
has been paid. AYRO will have a registration number from the USPTO
once the number has been assigned.
36
2.
United
States Application No. 29/653,523.
●
This
application covers a different design for a three-wheel vehicle for
AYRO. The following is a diagram for this vehicle from the
application:
●
This
application has also been approved by the USPTO and the issue fee
has been paid. AYRO will have a registration number from the USPTO
once the number has been assigned.
37
Trademark and Trade Name
AYRO
has applied for the registration of the following with the United
States Patent and Trademark Office:
●
“AYRO”
– Applied for on May 15, 2019, serial
number 88431321.
●
AYRO LOGO” (
) – Applied for on October 11, 2019, serial
number 88651927
) – Applied for on October 11, 2019, serial
number 88651927
AYRO
has also filed international applications for the AYRO word mark in
the EU, Mexico, and Canada.
Governmental
Programs, Incentives and Regulations
Many
governmental standards and regulations relating to safety, fuel
economy, emissions control, noise control, vehicle recycling,
substances of concern, vehicle damage, and theft prevention are
applicable to new motor vehicles, engines, and equipment
manufactured for sale in the United States, Europe, and elsewhere.
In addition, manufacturing and other automotive assembly facilities
in the United States, Europe, and elsewhere are subject to
stringent standards regulating air emissions, water discharges, and
the handling and disposal of hazardous substances. The most
significant of the standards and regulations affecting AYRO are
discussed below.
Mobile Source Emissions Control
The
federal Clean Air Act imposes stringent limits on the amount of
regulated pollutants that lawfully may be emitted by new vehicles
and engines produced for sale in the United States. The current
(“Tier 2”) emissions regulations promulgated by
the Environmental Protection Agency, or EPA, set standards for
motorcycles. Tier 2 emissions standards also establish
durability requirements for emissions components to 5 years
or 30,000 kilometers.
California has
received a waiver from the EPA to establish its own unique
emissions control standards for certain regulated pollutants. New
vehicles and engines sold in California must be certified by the
California Air Resources Board (“CARB”). CARB’s
emissions standards for motorcycles are in line with those of the
EPA. AYRO currently expect that its vehicles will meet and exceed
both the EPA’s and CARB’s standards.
Motor Vehicle Safety
The
National Highway Traffic Safety Administration
(“NHTSA”) defines a motorcycle as “a motor
vehicle with motive power having a seat or saddle for the use of
the rider and designed to travel on not more than three wheels in
contact with the ground.” In order for a manufacturer to sell
motorcycles in the U.S., the manufacturer has to self-certify to
meet a certain set of regulatory requirements promulgated by the
NHTSA in its FMVSS.
38
AYRO’s FMVSS
strategy is designed to meet both federal motorcycle and
state-specific autocycle requirements, as applicable, and conform
as much as possible to automotive FMVSS requirements while not
violating the motorcycle requirements that AYRO must
meet.
The
National Traffic and Motor Vehicle Safety Act of 1966, or
Safety Act, regulates vehicles and vehicle equipment in two primary
ways. First, the Safety Act prohibits the sale in the United States
of any new vehicle or equipment that does not conform to applicable
vehicle safety standards established by NHTSA. Meeting or exceeding
many safety standards is costly, in part because the standards tend
to conflict with the need to reduce vehicle weight in order to meet
emissions and fuel economy standards. Second, the Safety Act
requires that defects related to motor vehicle safety be remedied
through safety recall campaigns. A manufacturer is obligated to
recall vehicles if it determines the vehicles do not comply with a
safety standard. If AYRO or NHTSA determine that either a safety
defect or noncompliance exists with respect to any of its vehicles,
the cost of such recall campaigns could be
substantial.
Operator’s License and Helmet Requirements
State
regulations regarding operator licensing and occupant helmet
requirements are currently a nationwide patchwork with regard to
certain three-wheeled vehicles that may be classified as
autocycles. While the strong majority of states have some form of
exemption from helmet and motorcycle license requirements for
three-wheeled vehicles qualifying as autocycles, the specific
wording of each state’s statute may or may not include AYRO
311. In addition, for states that have passed specific autocycle
requirements, many require that the vehicle have standard operating
controls (accelerator and brakes) and a standard steering wheel,
plus additional requirements. The AYRO 311 offers standard controls
to meet requirements aligned with these elements. For example, in a
selection of AYRO’s larger market potential states of
California, Texas and Florida, three-wheeled vehicles that are
“fully enclosed” or “enclosed cab” are
exempt from helmet and motorcycle endorsement
requirements.
AYRO’s
advocacy strategy involves creating a plan to work with state
legislatures to advocate the normalization of these rules to reduce
consumer confusion in the marketplace that comes from conflicting
state-by-state regulations.
U.S. Environmental Protection Agency (“EPA”)
Certification
AYRO’s
product programs are built on plug-in electric, zero emissions
platforms. AYRO reports federal and state emissions data
consistent with 10 CFR 474 and California Air Resources Board
requirements for Zero-Emission Vehicle
certification.
Electromagnetic Compatibility
The
Federal Communications Commission (FCC) is the federal agency
responsible for implementing and enforcing the communications law
and regulations, including title 47 of the Code of Federal
Regulations, specifically Part 15, which regulates unlicensed
radio-frequency transmissions, both intentional and unintentional.
With very few exceptions, all electronics devices must be reviewed
to comply with Part 15 before they can be advertised or sold in the
U.S. market.
Motor Vehicle Manufacturer and Dealer Regulation
As
with helmet laws and driver license requirements, state laws that
regulate the manufacture, distribution, and sale of motor vehicles
are a patchwork, nationwide. AYRO’s agreement with Club Car
aims to provide U.S. and targeted countries channel and dealer
coverage. For AYRO’s electric vehicles, outside of
AYRO’s collaboration with Club Car or another third-party
sales/distribution white label partner, AYRO plans on a
multi-faceted approach to sales, including exploring the following:
(i) developing an expanded network of channel partners; (ii)
entering into direct sales via a national leasing company that will
in turn consummate sales with end users in a variety of states;
and/or (iii) opening facilities in high growth states and
delivering the vehicle to the end user via a common
carrier.
AYRO
is registered as a manufacturer in Texas, California, Colorado,
Louisiana, Florida, Arizona, with additional state applications
pending approval.
Pollution Control Costs
AYRO
is required to comply with stationary source air pollution, water
pollution, and hazardous waste control standards that are now in
effect or are scheduled to come into effect with respect to
AYRO’s manufacturing operations.
39
Compliance
with Environmental Laws
Compliance by AYRO
with applicable environmental requirements during the years ended
December 31, 2019 and 2018 and subsequently has not had a material
effect upon its capital expenditures, earnings or competitive
position.
Employees
As of
January 1, 2020, AYRO employed a total of 15 full-time and 2
part-time employees at its principal executive offices in Round
Rock, Texas. None of AYRO’s employees are covered by a
collective bargaining agreement. AYRO considers its relationship
with its employees to be strong.
Properties
AYRO
leases approximately 23,950 square feet of space in Round Rock,
Texas, under a lease that expires in December 2026. AYRO’s
manufacturing model only requires standard light-industrial
warehouse space and is scalable based on orders.
Future
minimum payments under the lease are as follows:
Year
Ending December 31,
2020 – $269,897
2021 – $276,098
2022
– $282,486
2023
– $289,066
2024
– $295,843
2025
– $302,823
2026
– $310,013
Legal
Proceedings
From
time to time, AYRO may be involved in litigation relating to claims
arising out of its operations in the normal course of business.
AYRO is not currently a party to any legal proceedings, the adverse
outcome of which, in its management’s opinion, individually
or in the aggregate, would have a material adverse effect on the
results of its operations or financial position.
40