AYRO, INC. The following management's discussion and analysis should be read in conjunction
with our historical financial statements and the related notes thereto. This
management's discussion and analysis contains forward-looking statements, such
as statements of our plans, objectives, expectations and intentions. Any
statements that are not statements of historical fact are forward-looking
statements. When used, the words "believe," "plan," "intend," "anticipate,"
"target," "estimate," "expect" and the like, and/or future tense or conditional
constructions ("will," "may," "could," "should," etc.), or similar expressions,
identify certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those under "Risk
Factors" in our filings with the
References in this management's discussion and analysis to "we," "us," "our,"
"the Company," "our Company" or "AYRO" refer to
Overview Business
We design and manufacture compact, sustainable electric vehicles for closed campus mobility, low speed urban and community transport, local on-demand and last mile delivery and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers, including universities, business and medical campuses, last mile delivery services and food service providers.
Products
Strategic Review
Following the hiring of our current Chief Executive Officer in the third quarter of 2021, we initiated a strategic review of our product development strategy as we focus on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets. In connection with the strategic review, we canceled development of our planned next-generation three-wheeled high-speed vehicle.
For the past several years, our primary supplier has been
We began design and development on the Vanish in
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Nasdaq Minimum Bid Price Requirement
On
In order to regain compliance with Nasdaq's minimum bid price requirement, our
common stock must maintain a minimum closing bid price of
Manufacturing Agreement with Linamar
On
In the event we terminate the Linamar MLA prior to its expiration, whether
following a change in control or otherwise, we must purchase any remaining raw
material inventory, finished goods inventory and work in progress and any
unamortized capital equipment used in production and testing of the Products and
pay a termination fee of
Under the Linamar MLA, we must commit to certain minimum purchases, to be
determined by
We import the Products from Linamar in
Manufacturing Agreement with Cenntro
In 2017,
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Under our Manufacturing License Agreement with Cenntro (the "Cenntro MLA"), in order for us to maintain our exclusive territorial rights pursuant to the Cenntro MLA, we must meet certain minimum purchase requirements.
We imported semi-knocked-down vehicle kits from Cenntro for the
On
The new Vanish utilizes assemblies and products that will largely eliminate our
dependency on Chinese imports and optimize the supply chain to rely primarily
upon North American and European sources. Final assembly of the Vanish is
expected to occur in our
Master Procurement Agreement with Club Car
In
Although Club Car did not meet the volume threshold for 2020 or 2021, we have
not sold our model year 2022 411x vehicles commercially other than through Club
Car. Under the terms of the MPA, we receive orders from Club Car dealers for
vehicles of specific configurations, and we invoice Club Car once the vehicle
has shipped. The MPA has an initial term of five (5) years commencing
In connection with the forthcoming introduction of the Vanish, we are reevaluating our channel strategy with an eye towards distributing our next-generation platform and payloads in a manner that maximizes visibility, moderates channel costs and creates value. Accordingly, we are seeking additional business partners and channel partners to sell our products beginning with the Vanish. We do not expect Club Car to remain a customer going forward. The anticipated loss of Club Car as a customer, or any significant reduction in purchases by Club Car, could have a material adverse effect on our sales, financial condition and results of operations.
41
Manufacturing Services Agreement with Karma
On
On
In late
Supply Agreement with Gallery Carts
During 2020, we entered into a supply agreement with Gallery Carts ("Gallery"),
a leading provider of food and beverage kiosks, carts, and mobile storefront
solutions. Joint development efforts have led to the launch of the parties'
first all-electric configurable mobile hospitality vehicle for "on-the-go"
venues across
The configurable Powered Vendor Box, in the rear of the vehicle, features
long-life lithium batteries that power the preconfigured hot/cold beverage and
food equipment and is directly integrated with the
Gallery, a premier distributor of
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Factors Affecting Results of Operations
Master Procurement Agreement
In
COVID-19 Pandemic
Our business, results of operations and financial condition have been adversely
impacted by the coronavirus outbreak both in
Tariffs
Countervailing tariffs on certain goods from
Shipping Costs and Delays
A majority of our raw materials have historically been shipped via container
from overseas vendors in
A port worker strike, work slow-down or other transportation disruption in
domestic ports could significantly disrupt our business or that of our vendors.
This has materially and adversely affected our business and financial results
for the fiscal year ended
The global shipping industry is also experiencing unprecedented increases in shipping rates from the trans-Pacific ocean carriers due to various factors, including limited availability of shipping capacity. Additionally, if further increases in fuel prices occur, our transportation costs would likely further increase.
43 Supply Chain
Beginning in the second quarter of 2021, we offered a configuration of our 411x powered by lithium-ion battery technology. Additionally, our powered food box offerings are currently powered by lithium-ion battery technology. Our business depends on the continued supply of battery cells and other parts for our vehicles. During 2021 and 2022, we at times experienced supply chain shortages of both lithium-ion battery cells and other critical components used to produce our vehicles, which has slowed our planned production of vehicles. In addition, we could be impacted by shortages of other products or raw materials, including silicon chips that we or our suppliers use in the production of our vehicles or parts sourced for our vehicles.
We intend for the Vanish to utilize assemblies and products that will eliminate our dependency on Chinese imports and optimize the supply chain to North American and European sources.
Inventory Obsolescence
At
Components of Statements of Operations
Revenue
We derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts and service fees. In the past we also derived rental revenue from vehicle revenue sharing agreements with tourist destination fleet operators, and, to a lesser extent, shipping, parts and service fees. Provided that all other revenue recognition criteria have been met, we typically recognize revenue upon shipment, as title and risk of loss are transferred to customers and channel partners at that time. Products are typically shipped to dealers or directly to end customers, or in some cases to our international distributors. These international distributors assist with import regulations, currency conversions and local language. Our vehicle product sales revenues vary from period to period based on, among other things, the customer orders received and our ability to produce and deliver the ordered products. Customers often specify requested delivery dates that coincide with their need for our vehicles.
Because these customers may use our products in connection with a variety of
projects of different sizes and durations, a customer's orders for one reporting
period generally do not indicate a trend for future orders by that customer.
Additionally, order patterns do not necessarily correlate amongst customers. In
44 Cost of Goods Sold
Cost of goods sold primarily consists of costs of materials and personnel costs
associated with manufacturing operations, and an accrual for post-sale warranty
claims. Personnel costs consist of wages and associated taxes and benefits. Cost
of goods sold also includes freight and changes to our warranty reserves.
Allocated overhead costs consist of certain facilities and utility costs. We
expect cost of revenue to increase in absolute dollars as product revenue
increases. At
Operating Expenses
Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.
Stock-based compensation
We account for stock-based compensation expense in accordance with Accounting Standards Codification ("ASC") 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for share-based awards based on the estimated fair value on the date of grant.
The fair value of each stock option granted to employees is estimated on the date of the grant using the Black-Scholes option-pricing model, and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award. The fair value of the options granted to non-employees is measured and expensed as the options vest.
Restricted stock grants are stock awards that entitle the holder to receive shares of our common stock as the award vests over time. The fair value of each restricted stock grant is based on the fair market value price of common stock on the date of grant, and it is measured and expensed as it vests.
We estimate the fair value of stock-based and cash unit awards containing a
market condition using a Monte Carlo simulation model. Key inputs and
assumptions used in the Monte Carlo simulation model include the stock price of
the award on the grant date, the expected term, the risk-free interest rate over
the expected term, the expected annual dividend yield and the expected stock
price volatility. The expected volatility is based on a combination of the
historical and implied volatility of our publicly traded, near-the-money stock
options, and the valuation period is based on the vesting period of the awards.
The risk-free interest rate is derived from the
Research and Development Expense
Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, amortization of product development costs, product strategic advisory fees, third-party engineering and contractor support costs, and allocated overhead. We expect our research and development expenses to increase in absolute dollars as we continue to invest in new and existing products.
Sales and Marketing Expense
Sales and marketing expense consists primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications and brand-building activities. We expect sales and marketing expenses to increase modestly in absolute dollars as we expand our market segments addressed, refresh and expand our product lines, provide event support for our channel partners, and further develop potential sales channels.
General and Administrative Expense
General and administrative expense consists primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources and fees for third-party professional services, and allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing our business.
45 Other (Expense) Income
Other (expense) income consists of income received or expenses incurred for activities outside of our core business. Other expense consists primarily of interest expense and unrealized gain/loss on marketable securities.
Provision for Income Taxes
Provision for income taxes consists of estimated income taxes due to
Results of Operations
Year Ended
The following table sets forth our results of operations for each of the periods
set forth below:
For the Years ended December 31,
2022 2021 Change
Revenue $ 2,990,497 $ 2,683,597 $ 306,900
Cost of goods sold 6,043,506 4,774,784 1,268,722
Gross loss (3,053,009 ) (2,091,187 ) (961,822 )
Operating expenses:
Research and development 6,845,451 11,449,617 (4,604,166 )
Sales and marketing 1,874,658 2,419,168 (544,510 )
General and administrative 11,503,788 17,168,898 (5,665,110 )
Total operating expenses 20,223,897 31,037,683 (10,813,786 )
Loss from operations (23,276,906 ) (33,128,870 ) 9,851,964
Other income and (expense):
Interest Income 182,276 51,768 130,508
Interest expense - (2,312 ) 2,312
Realized gain on marketable
securities 160,990 - 160,990
Unrealized loss on marketable
securities (1,713 ) - (1,713 )
Net loss $ (22,935,353 ) $ (33,079,414 ) $ 10,144,061
Revenue
Revenue was
Cost of goods sold and gross loss
Cost of goods sold increased by
Gross margin percentage was (102.1)% for the year ended
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Research and development expenses
Research and development expense was
Sales and marketing expense
Sales and marketing expense decreased by
General and administrative expenses
The majority of our operating losses from continuing operations resulted from
general and administrative expenses. General and administrative expenses consist
primarily of costs associated with our overall operations and with being a
public company. These costs include personnel, legal and financial professional
services, insurance, investor relations, and compliance-related fees. General
and administrative expense was
47 Other income and expense
We recorded
Liquidity and Capital Resources
As of
Our business is capital-intensive, and future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the results of our strategic review, the expansion of our sales and marketing teams, the timing of new product introductions and the continuing market acceptance of our products and services. We are working to control expenses and deploy our capital in the most efficient manner.
We are evaluating other options for the strategic deployment of capital beyond our ongoing strategic initiatives, including potentially entering other segments of the electric vehicle market. We anticipate being opportunistic with our capital, and we intend to explore potential partnerships and acquisitions that could be synergistic with our competitive stance in the market.
We are subject to a number of risks similar to those of earlier stage commercial
companies, including dependence on key individuals and products, the
difficulties inherent in the development of a commercial market, the potential
need to obtain additional capital, competition from larger companies, other
technology companies and other technologies. Based on the foregoing, management
believes that the existing cash at
As discussed above under "Strategic Review," we suspended all material research and development activity and expenditures, including expenses associated with our planned next-generation three-wheeled vehicle, while we conducted a strategic review of our product development strategy. In December of 2022 we completed pre-production on the new 411 fleet vehicle model refresh, the Vanish.
48 Summary of Cash Flows
The following table summarizes our cash flows:
Years Ended December 31,
2022 2021
Cash Flows:
Net cash used in operating activities
- $ 59,855,217
Operating Activities
During the year ended
Our ability to generate cash from operations in future periods will depend in large part on profitability, the rate and timing of collections of our accounts receivable, inventory turns and our ability to manage other areas of working capital.
Investing Activities
During the year ended
Financing Activities
During the year ended
During the year ended
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Critical Accounting Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with
We have identified certain accounting estimates which involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial conditions or results of operations.
We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results. There have been no changes to estimates during the periods presented in the filing. Historically, changes in management estimates have not been material.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Our most significant estimates include inventory valuation and the measurement of stock-based compensation expenses. Actual results could differ from these estimates.
Inventory Valuation
The accounting of inventory in accordance with GAAP recognizes the value of inventory at the lower of cost or net realizable value based upon assumptions about future demand and market conditions. Inventories are assessed regularly for impairment, and valuation reserves are established, when necessary, based upon a number of factors. The determination of events and assumptions utilized in our inventory valuation requires judgment. Transportation costs are included in net realizable value.
Revenue Recognition
We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to performance obligations in the contract; and (v) recognize revenue when or as we satisfy a performance obligation.
50 Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation ("ASC 718"). The Company recognizes all employee share-based compensation as an expense in the financial statements on a straight-line basis over the requisite service period, based on the terms of the awards. Equity-classified awards principally related to stock options, restricted stock awards ("RSAs") and equity-based compensation, are measured at the grant date fair value of the award. The Company determines grant date fair value of stock option awards using the Black-Scholes option-pricing model. The fair value of RSAs is determined using the closing price of the Company's common stock on the grant date. For service based vesting grants, expense is recognized ratably over the requisite service period based on the number of options or shares. For value-based vesting grants, expense is recognized via straight line expense over the expected period per grant as determined by outside valuation experts. Stock-based compensation is reversed for forfeitures in the period of forfeiture.
We estimate the fair value of stock-based and cash unit awards containing a
market condition using a Monte Carlo simulation model. Key inputs and
assumptions used in the Monte Carlo simulation model include the stock price of
the award on the grant date, the expected term, the risk-free interest rate over
the expected term, the expected annual dividend yield and the expected stock
price volatility. The expected volatility is based on a combination of the
historical and implied volatility of the Company's publicly traded,
near-the-money stock options, and the valuation period is based on the vesting
period of the awards. The risk-free interest rate is derived from the
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