UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________________________ to __________________
Commission file number: 001-34643
AYRO, INC.
Commission File Number: 001-34643
| Delaware | 98-0204758 | |
(State or other jurisdiction of | ||
incorporation or organization) | (I.R.S. Employer Identification No.) |
900 E. Old Settlers Boulevard, Suite 100 Round Rock, Texas | 78664 | |
| (Address of principal executive offices) | (Zip Code) |
(512) 994-4917
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common | AYRO | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | [ ] | Accelerated filer | ||||
| Non-accelerated filer | [X] | Smaller reporting company | [X] | |||
| Emerging growth company |
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐[ ] No
As of May 11, 2020, there were 6,250,78212, 2021, the registrant had 35,228,048 shares of the registrant’s common stock $0.0001 par value per share, issued and outstanding.
AYRO, Inc., our inability to obtain adequate financing, our inability to expand our business, existing or increased competition, stock volatility and illiquidity, and the failure to implement our business plans or strategies. Most
Quarter Ended March 31, 2021
Table of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this report in its entirety, including but not limited to our financial statements and the notes thereto and the risks described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020, as subsequently amended on April 10, 2020, and other reports we file with the SEC. We advise you to carefully review the reports and documents we file from time to time with the SEC, particularly our quarterly reports on Form 10-Q and our current reports on Form 8-K. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to publicly release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
AYRO, INC. AND SUBSIDIARIES
March 31, | December 31, | |
2020 | 2019 | |
| ASSETS | ||
| CURRENT ASSETS: | ||
| Cash | $3,551,393 | $4,259,091 |
| Prepaid expenses and other current assets | 172,672 | 181,805 |
| Current assets held for sale | 197,902 | 375,186 |
| Total current assets | 3,921,967 | 4,816,082 |
| Noncurrent assets held for sale | 390,832 | 441,395 |
| TOTAL ASSETS | $4,312,799 | $5,257,477 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||
| CURRENT LIABILITIES: | ||
| Accounts payable and accrued expenses | $1,558,909 | $1,348,356 |
| Current liabilities held for sale | 912,472 | 1,040,776 |
| TOTAL LIABILITIES | 2,471,381 | 2,389,132 |
| COMMITMENTS AND CONTINGENCIES | ||
| STOCKHOLDERS' EQUITY: | ||
| Preferred stock, $0.0001 par value, 5,000,000 shares authorized | ||
| Convertible Series H, 8,500 shares designated, 8 shares issued and outstanding; | - | - |
| Convertible Series H-1, 9,488 shares designated, zero shares issued and outstanding; | - | - |
| Convertible Series H-2, 3,500 shares designated, zero shares issued and outstanding; | - | - |
| Convertible Series H-3, 8,461 shares designated, 2,189 shares issued and outstanding; | - | - |
| Convertible Series H-4, 30,000 shares designated, 5,028 shares issued and outstanding; | 1 | 1 |
| Convertible Series H-5, 50,000 shares designated, zero and 34,722 shares issued and outstanding; | - | 3 |
| Convertible Series H-6, 50,000 shares designated, 29,822 and zero shares issued and outstanding as of March 31, 2020 and December 31, 2019; | 3 | - |
| Common stock, $0.0001 par value; 100,000,000 shares authorized, 4,551,882 and 4,061,882 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | 455 | 406 |
| Additional paid in capital | 37,612,600 | 37,581,914 |
| Accumulated deficit | (35,771,641) | (34,713,979) |
| TOTAL STOCKHOLDERS' EQUITY | 1,841,418 | 2,868,345 |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $4,312,799 | $5,257,477 |
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 91,491,161 | $ | 36,537,097 | ||||
| Accounts receivable, net | 1,053,688 | 765,850 | ||||||
| Inventory, net | 836,322 | 1,173,254 | ||||||
| Prepaid expenses and other current assets | 1,788,605 | 1,608,762 | ||||||
| Total current assets | 95,169,776 | 40,084,963 | ||||||
| Property and equipment, net | 671,295 | 611,312 | ||||||
| Intangible assets, net | 130,844 | 143,845 | ||||||
| Operating lease – right-of-use asset | 1,180,025 | 1,098,819 | ||||||
| Deposits and other assets | 41,289 | 22,491 | ||||||
| Total assets | $ | 97,193,229 | $ | 41,961,430 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 941,597 | $ | 767,205 | ||||
| Accrued expenses | 1,048,293 | 665,068 | ||||||
| Contract liability | – | 24,000 | ||||||
| Current portion long-term debt, net | 7,706 | 7,548 | ||||||
| Current portion lease obligation – operating lease | 215,555 | 123,139 | ||||||
| Total current liabilities | 2,213,151 | 1,586,960 | ||||||
| Long-term debt, net | 12,073 | 14,060 | ||||||
| Lease obligation - operating lease, net of current portion | 991,545 | 1,002,794 | ||||||
| Total liabilities | 3,216,769 | 2,603,814 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred Stock, (authorized – 20,000,000 shares) | – | – | ||||||
| Convertible Preferred Stock Series H, ($0.0001 par value; authorized – 8,500 shares; issued and outstanding – 8 shares as of March 31, 2021 and December 31, 2020) | – | – | ||||||
| Convertible Preferred Stock Series H-3, ($.0001 par value; authorized – 8,461 shares; issued and outstanding – 1,234 shares as of March 31, 2021 and December 31, 2020) | – | – | ||||||
| Convertible Preferred Stock Series H-6, ($.0001 par value; authorized – 50,000 shares; issued and outstanding – 50 shares as of March 31, 2021 and December 31, 2020) | – | – | ||||||
| Common Stock, ($0.0001 par value; authorized – 100,000,000 shares; issued and outstanding – 35,213,048 and 27,088,584 shares, respectively) | 3,521 | 2,709 | ||||||
| Additional paid-in capital | 124,761,589 | 64,509,724 | ||||||
| Accumulated deficit | (30,788,650 | ) | (25,154,817 | ) | ||||
| Total stockholders’ equity | 93,976,460 | 39,357,616 | ||||||
| Total liabilities and stockholders’ equity | $ | 97,193,229 | $ | 41,961,430 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO, INC. AND SUBSIDIARIES
For the Three Months Ended March 31, | ||
2020 | 2019 | |
| OPERATING EXPENSES | ||
| General and administrative expenses | $773,118 | $644,072 |
| TOTAL OPERATING EXPENSES | 773,118 | 644,072 |
| OPERATING LOSS | (773,118) | (644,072) |
| LOSS FROM CONTINUING OPERATIONS | (773,118) | (644,072) |
| DISCONTINUED OPERATIONS | ||
| Loss from operations of discontinued component, net of taxes | (284,544) | (1,331,634) |
| LOSS ON DISCONTINUED OPERATIONS | (284,544) | (1,331,634) |
| NET LOSS | $(1,057,662) | $(1,975,706) |
| AMOUNTS ATTRIBUTABLE TO COMMON STOCKHOLDERS | ||
| Loss from continuing operations | $(773,118) | $(644,072) |
| Loss from discontinued operations | (284,544) | (1,331,634) |
| NET LOSS | $(1,057,662) | $(1,975,706) |
| LOSS PER SHARE FROM CONTINUING OPERATIONS: | ||
| Basic | $(0.19) | $(0.30) |
| Diluted | $(0.19) | $(0.30) |
| LOSS PER SHARE FROM DISCONTINUED OPERATIONS: | ||
| Basic | $(0.07) | $(0.63) |
| Diluted | $(0.07) | $(0.63) |
| NET LOSS PER SHARE: | ||
| Basic | $(0.26) | $(0.93) |
| Diluted | $(0.26) | $(0.93) |
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||
| Basic | 4,132,212 | 2,117,688 |
| Diluted | 4,132,212 | 2,117,688 |
(UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 788,869 | $ | 146,816 | ||||
| Cost of goods sold | 644,503 | 113,155 | ||||||
| Gross profit | 144,366 | 33,661 | ||||||
| Operating expenses: | ||||||||
| Research and development | 1,927,561 | 154,699 | ||||||
| Sales and marketing | 558,404 | 319,454 | ||||||
| General and administrative | 3,301,309 | 1,249,052 | ||||||
| Total operating expenses | 5,787,274 | 1,723,205 | ||||||
| Loss from operations | (5,642,908 | ) | (1,689,544 | ) | ||||
| Other income (expense): | ||||||||
| Other income, net | 9,926 | 16 | ||||||
| Interest expense | (851 | ) | (105,625 | ) | ||||
| Other income (expense), net | 9,075 | (105,609 | ) | |||||
| Net loss | $ | (5,633,833 | ) | $ | (1,795,153 | ) | ||
| Net loss per share, basic and diluted | $ | (0.18 | ) | $ | (0.45 | ) | ||
| Basic and diluted weighted average Common Stock outstanding | 32,007,002 | 3,948,078 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-2 |
AYRO, INC. AND SUBSIDIARIES
(UNAUDITED)
Series H | Series H-3 | Series H-4 | Series H-5 | Series H-6 | Additional | ||||||||||
Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | ||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | |
| Balance, January 1, 2020 | 8 | - | 2,189 | - | 5,028 | 1 | 34,722 | 3 | - | - | 4,061,882 | 406 | 37,581,914 | (34,713,979) | 2,868,345 |
| Issuance of H-6 preferred stock in exchange for H-5 preferred stock | - | - | - | - | - | - | (34,722) | (3) | 34,722 | 3 | - | - | - | - | - |
| Conversion of Series H-6 preferred stock into common stock | - | - | - | - | - | - | - | - | (4,900) | - | 490,000 | 49 | (49) | - | - |
| Stock based compensation for options issued to employees | - | - | - | - | - | - | - | - | - | - | - | - | 30,735 | - | 30,735 |
| Net Loss | - | - | - | - | - | - | - | - | - | - | - | - | - | (1,057,662) | (1,057,662) |
| Balance, March 31, 2020 | 8 | $- | 2,189 | $- | 5,028 | $1 | - | $- | 29,822 | $3 | 4,551,882 | $455 | $37,612,600 | $(35,771,641) | $1,841,418 |
| Balance, January 1, 2019 | 8 | - | 2,189 | - | 26,619 | 3 | - | - | - | - | 1,633,394 | 163 | 32,791,951 | (29,753,721) | 3,038,396 |
| Issuance of common stock for cash net of costs of $15,000 | - | - | - | - | - | - | - | - | - | - | 478,469 | 48 | 1,984,953 | - | 1,985,001 |
| Exercise of warrants | - | - | - | - | - | - | - | - | - | - | 277,778 | 28 | 16,639 | - | 16,667 |
| Conversion of Series H-4 preferred stock into common stock | - | - | - | - | (21,591) | (2) | - | - | - | - | 1,412,420 | 141 | (139) | - | - |
| Stock based compensation for options issued to employees | - | - | - | - | - | - | - | - | - | - | - | - | (19,361) | - | (19,361) |
| Stock based compensation for restricted stock units issued to employees | - | - | - | - | - | - | - | - | - | - | - | - | 289,842 | - | 289,842 |
| Stock based compensation for common stock issued to service providers | - | - | - | - | - | - | - | - | - | - | 116,666 | 12 | 222,188 | - | 222,200 |
| Net Loss | - | - | - | - | - | - | - | - | - | - | - | - | - | (1,975,706) | (1,975,706) |
| Balance, March 31, 2019 | 8 | $- | 2,189 | $- | 5,028 | $1 | - | $- | - | $- | 3,918,727 | $392 | $35,286,073 | $(31,729,427) | $3,557,039 |
| Three Months Period Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Series H | Series H-3 | Series H-6 | Additional | |||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 8 | $ | – | 1,234 | $ | – | 50 | $ | – | 27,088,584 | $ | 2,709 | $ | 64,509,724 | $ | (25,154,817 | ) | $ | 39,357,616 | |||||||||||||||||||||||||
| Stock Based Compensation | 1,699,423 | 1,699,423 | ||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock, net of fees | 8,035,835 | 804 | 58,269,025 | 58,269,829 | ||||||||||||||||||||||||||||||||||||||||
| Exercise Warrants | 13,642 | 1 | 99,999 | 100,000 | ||||||||||||||||||||||||||||||||||||||||
| Exercise Options | 74,987 | 7 | 183,418 | 183,425 | ||||||||||||||||||||||||||||||||||||||||
| Net Loss | (5,633,833 | ) | (5,633,833 | ) | ||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | 8 | $ | – | 1,234 | $ | – | 50 | $ | – | 35,213,048 | $ | 3,521 | $ | 124,761,589 | $ | (30,788,650 | ) | $ | 93,976,460 | |||||||||||||||||||||||||
| Three Months Period Ended March 31, 2020 | ||||||||||||||||||||||||||||
| AYRO Series Seed | Additional Paid-in | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Capital | Accumulated | Total | ||||||||||||||||||||||||
| Balance, December 31, 2019 | 7,360,985 | $ | 9,025,245 | 3,948,078 | $ | 395 | $ | 5,001,947 | $ | (13,958,644 | ) | $ | 68,943 | |||||||||||||||
| Stock Based Compensation | 156,459 | 156,459 | ||||||||||||||||||||||||||
| Net Loss | (1,795,153 | ) | (1,795,153 | ) | ||||||||||||||||||||||||
| 7,360,985 | $ | 9,025,245 | 3,948,078 | $ | 395 | $ | 5,158,406 | $ | (15,753,797 | ) | $ | (1,569,751 | ) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AYRO, INC. AND SUBSIDIARIES
For the Three Months Ended March 31, | ||
2020 | 2019 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||
| Net loss | $(1,057,662) | $(1,975,706) |
| Loss from discontinued operations | 284,544 | 1,331,634 |
| Loss from continuing operations | (773,118) | (644,072) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Stock based compensation | - | 24,510 |
| Changes in operating assets and liabilities: | ||
| Prepaid expenses and other assets | 9,133 | (1,920) |
| Accounts payable and accrued expenses | 210,552 | (331,834) |
| NET CASH USED IN OPERATING ACTIVITIES - CONTINUING OPERATIONS | (553,433) | (953,316) |
| NET CASH USED IN OPERATING ACTIVITIES - DISCONTINUED OPERATIONS | (124,182) | (919,138) |
| NET CASH USED IN OPERATING ACTIVITIES | (677,615) | (1,872,454) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||
| NET CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS | - | - |
| NET CASH USED IN INVESTING ACTIVITIES - DISCONTINUED OPERATIONS | (30,083) | (74,061) |
| NET CASH USED IN INVESTING ACTIVITIES | (30,083) | (74,061) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||
| Proceeds from the sale of common stock | - | 2,000,001 |
| Financing fees in connection with the sale of common stock | - | (15,000) |
| Proceeds from issuance of common stock in connection with exercise of H-4 warrants | - | 16,667 |
| NET CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING OPERATIONS | - | 2,001,668 |
| NET CASH PROVIDED BY FINANCING ACTIVITIES - DISCONTINUED OPERATIONS | - | - |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | - | 2,001,668 |
| Net (decrease) increase in cash, including cash classified within current assets held for sale | (707,698) | 55,153 |
| Less: Net increase in cash classified within current assets held for sale | - | 239,821 |
| Net (decrease) increase in cash | (707,698) | 294,974 |
| Cash, beginning of period | 4,259,091 | 3,887,910 |
| Cash, end of period | $3,551,393 | $4,182,884 |
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||
| Cash paid for interest | $- | $- |
| Cash paid for taxes | $- | $- |
| Issuance of common stock for accrued stock based compensation | $- | $4,724 |
(UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (5,633,833 | ) | $ | (1,795,153 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 124,198 | 114,275 | ||||||
| Stock-based compensation | 1,699,423 | 156,458 | ||||||
| Amortization of debt discount | – | 63,744 | ||||||
| Amortization of right-of-use asset | 39,234 | 19,717 | ||||||
| Provision for bad debt expense | 29,032 | 2,694 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | (316,870 | ) | (98,228 | ) | ||||
| Inventory | 313,046 | 50,328 | ||||||
| Prepaid expenses and other current assets | (179,843 | ) | (114,157 | ) | ||||
| Deposits | (18,798 | ) | – | |||||
| Accounts payable | 174,392 | 122,024 | ||||||
| Accrued expenses | 383,225 | 427,875 | ||||||
| Contract liability | (24,000 | ) | 71,404 | |||||
| Lease obligations - operating leases | (39,273 | ) | (4,096 | ) | ||||
| Net cash used in operating activities | (3,450,067 | ) | (983,115 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (131,111 | ) | (87,547 | ) | ||||
| Purchase of intangible assets | (16,183 | ) | (538 | ) | ||||
| Net cash used in investing activities | (147,294 | ) | (88,085 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance debt | – | 500,000 | ||||||
| Repayments of debt | (1,829 | ) | (1,682 | ) | ||||
| Proceeds from exercise of warrants | 100,000 | – | ||||||
| Proceeds from exercise of stock options | 183,425 | – | ||||||
| Proceeds from issuance of Common Stock, net of fees and expenses | 58,269,829 | – | ||||||
| Net cash provided by financing activities | 58,551,425 | 498,318 | ||||||
| Net change in cash | 54,954,064 | (572,882 | ) | |||||
| Cash, beginning of period | 36,537,097 | 641,822 | ||||||
| Cash, end of period | $ | 91,491,161 | $ | 68,940 | ||||
| Supplemental disclosure of cash and non-cash transactions: | ||||||||
| Cash paid for interest | $ | 851 | $ | 28,436 | ||||
| Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets | $ | 120,440 | $ | 1,210,680 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| F-4 |
AYRO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS
AYRO, Inc. (“AYRO” or the “Company”), a Delaware corporation formerly known as DropCar, Inc. (“DropCar”), a corporation headquartered outside Austin, Texas, is the merger successor discussed below of AYRO Operating Company, Inc., which was formed under the laws of the State of Texas on May 17, 2016 as Austin PRT Vehicle, Inc. and Subsidiaries
Merger
On May 28, 2020, pursuant to the best parking garages at the best rates via the Company’s mobile application (“App”).
The Merger was treated as a reverse stock split with respect to its issuedrecapitalization effected by a share exchange for financial accounting and outstanding common stock. The reverse stock split will increase the Company’s stock price to at least $5.00 per share.
On December 19, 2019, and concurrently upon entering in the AYRO Merger Agreement, the CompanyDropCar entered into an asset purchase agreement (the “Asset Purchase Agreement”) by and among the Company,
On May 28, 2020, the Company’s operations, and therefore, is presented as discontinued operations in the consolidated statement of operations and consolidated statement of cash flows.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liquidity and Other Uncertainties
The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the Listing Rule. On March 5, 2020,United States (“GAAP”), which contemplates continuation of the Company received notification from the Listing Qualification Department of Nasdaq that it had not regained compliance with the Listing Rule.as a going concern. The notification indicated that the Company’s common stock would be delisted from the Nasdaq Capital Market unless the Company requested an appeal of this determination. On March 12, 2020, the Company requested a hearing to appeal the determination with the Nasdaq Hearings Panel (the “Panel”), which stayed the delisting of the Company’s securities pending the Panel’s decision. The hearing occurred on April 16, 2020. The Company’s appeal to the Panel included a plan that set forth a commitment to consider all available options to regain compliance with the Listing Rule, including the option to effectuate a reverse stock split upon receipt of stockholder approval, which the Company intends to seek in connection with the joint proxy statement and consent solicitation statement/prospectus in connection with the AYRO Merger, which was declared effective by the Securities and Exchange Commission on April 24, 2020, in order to bring the Company’s stock price over the $1.00 bid price requirement and to meet the $4.00 bid price initial listing requirement. On April 27, 2020, the Company received notice from Nasdaq that the Panel had granted the Company’s request for continued listing,is subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and products, the requirements that on or before May 29, 2020,difficulties inherent in the Company shall have completeddevelopment of a commercial market, the AYRO Mergerpotential need to obtain additional capital, competition from larger companies, other technology companies and established compliance with all initial listing criteria outlined in Listing Rule 5505. While the Company intends to complete the AYRO Merger and establish compliance prior to such date, there can be no assurance that DropCar will be successful in regaining compliance with the Listing Rule.
Since early 2020, when the filing of this Form 10-Q.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements werehave been prepared using generally accepted accounting principles for interim financial informationin accordance with GAAP and in conformity with the instructions toon Form 10-Q and Article 8Rule 8-03 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statementsS-X and should be read in conjunction with the Company’s annual consolidated financial statements included withinrelated rules and regulations of the Company’s Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on March 30, 2020Securities and subsequently amended on April 10, 2020.
| F-6 |
Use of Estimates
The preparation of the accompanying unaudited condensed consolidated financial statements, in conformity with U.S. generally accepted accounting principles (“US GAAP”)GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the accompanying unaudited condensed consolidated financial statements, and the reported therein. Generally, matters subject to estimationamounts of revenue and judgementexpenses during the reporting period.
The Company’s most significant estimates include amounts related toallowance for doubtful accounts, receivable realization, asset impairments, useful livesvaluation of property and equipment and capitalized software costs,inventory reserve, valuation of deferred tax asset valuation allowances,allowance, and operating expense accruals.the measurement of stock-based compensation expenses. Actual results could differ from thosethese estimates.
Reclassification
Certain reclassifications have been made to the prior period financial statements to conform to the current period financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services.
To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
Nature of goods and services
The following is a description of the Company’s products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:
Product revenue
Product revenue from customer contracts is recognized on the sale of each electric vehicle as vehicles are shipped to customers. The majority of the Company’s vehicle sales orders generally have only one performance obligation: sale of complete vehicles. Ownership and risk of loss transfers to the customer based on FOB shipping point and freight charges are the responsibility of the customer. Revenue is typically recognized at the point control transfers or in accordance with payment terms customary to the business. The Company provides product warranties to assure that the product assembly complies with agreed upon specifications. The Company’s product warranty is identical to the product warranties provided by the Company’s suppliers, therefore minimizing the warranty liability to the standard labor rates associated with the defective part replacement. Customers do not have the option to purchase a warranty separately; as such, warranty is not accounted for as a separate performance obligation. The Company’s policy is to exclude taxes collected from a customer from the transaction price of automotive contracts.
Shipping revenue
Amounts billed to customers related to shipping and handling are classified as shipping revenue. The Company has elected to recognize the cost for freight and shipping when control over vehicles has transferred to the customer as an operating expense. The Company has reported shipping expenses of $50,626 and $14,150 for the three months ended March 31, 2021 and 2020, respectively.
| F-7 |
Subscription revenue
Subscription revenue from revenue sharing with Destination Fleet Operators (“DFO”) and other vehicle rental agreements is recorded in the month the vehicles in the Company’s fleet is rented. The Company established its rental fleet in late March 2019 which is recorded in the property and equipment section of the accompanying unaudited condensed consolidated balance sheets. For the rental fleet, the Company 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. In August 2020, the Company phased-out the production of its 311 line which were the vehicles used in the rental offering as it is working to develop a new line of vehicles. The change in production did not represent a strategic shift that will have a major effect on the Company’s operations or financial results.
Services and other revenue
Services and other revenue consist of non-warranty after-sales vehicle services. Revenue is typically recognized at a point in time when services and replacement parts are provided.
Warrants and Preferred Shares
The accounting treatment of warrants and preferred share series issued is determined pursuant to the guidance provided by ASC 470, Debt, ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, as applicable. Each feature of a freestanding financial instruments including, without limitation, any rights relating to subsequent dilutive issuances, dividend issuances, equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions, dividends and exercise are assessed with determinations made regarding the proper classification in the Company’s financial statements.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). The Company recognizes all employee 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. Stock-based compensation is reversed for forfeitures in the period of forfeiture.
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards UpdateStandard Unit (“ASU”) No. 2014-09, codified as2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the guidance in ASC 606: Revenue from Contracts with Customers, which provides a single comprehensive model718 to include share-based payments for entities to use in accounting for revenue arising from contracts with customers.
Basic and are subject to the revenue constraint. The Company uses an expected value method to estimate variable consideration for minimum performance guarantees and price concessions.
Basic income (loss)and diluted net loss per share is computeddetermined by dividing net loss attributable to common shareholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. In periods when the Company has income, the Company calculates basic earnings per share using the two-class method, if required, pursuant to ASC 260 Earnings Per Share. The two-class method was required effective with the issuance of convertible preferred stock in the past because this class of stock qualified as a participating security, giving the holder the right to receive dividends should dividends be declared on common stock. Under the two-class method, earnings for a period are allocated on a pro rata basis to the common stockholders and to the holders of convertible preferred stock based on the weighted average number of commonordinary shares outstanding during the period. For all periods presented with a net loss, the shares underlying the ordinary share options and number ofwarrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares that could be issued upon conversion. In periods of losses,outstanding used to calculate both basic and diluted loss per share is computed onare the same basis asfor periods with a net loss. “Penny warrants” were included in the calculation of outstanding shares for purposes of basic lossearnings per share asshare.
On May 28, 2020, pursuant to the inclusion of any other potential shares outstanding would be anti-dilutive.
As of March 31, | ||
2020 | 2019 | |
| Common stock equivalents: | ||
| Common stock options | 307,202 | 381,412 |
| Series A, H-1, H-3, H-4, H-5, H-6, I, J, K and Merger common stock purchase warrants | 4,300,560 | 585,306 |
| Series H, H-3, H-4, H-6, Convertible Preferred Stock | 3,410,354 | 338,069 |
| Restricted shares (unvested) | - | 244,643 |
| Totals | 8,018,116 | 1,549,430 |
The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be anti-dilutive:
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Options to purchase common stock | 1,845,282 | 998,814 | ||||||
| Restricted Stock Unvested | 1,244,503 | – | ||||||
| Series H-1, H-3, H-4, H-5, I, J, pre-merger AYRO Merger common stock purchase warrants and post-merger AYRO warrants issued | 7,361,083 | 461,647 | ||||||
| Series H, H-3, H-6, and pre-merger AYRO Seed Preferred Stock | 2,475 | 2,007,193 | ||||||
| Totals | 10,453,343 | 3,467,654 | ||||||
NOTE 3. REVENUES
Disaggregation of Revenue
Revenue by type was as follows:
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue type | ||||||||
| Product revenue | $ | 710,199 | $ | 129,626 | ||||
| Shipping revenue | 41,983 | 15,405 | ||||||
| Subscription revenue | - | 1,785 | ||||||
| Service income | 36,687 | - | ||||||
| $ | 788,869 | $ | 146,816 | |||||
Contract Liabilities
The Company recognizes a contract liability when a consideration is received, or if the Company has the unconditional right to receive consideration, in advance of satisfying the performance obligation. A contract liability is the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration, or an amount of consideration is due from the customer.
The table below details the activity in the Company’s contract liabilities as of March 31, 2021 and December 31, 2020. The balance at the end of each period is reported as contract liability in the Company’s unaudited condensed consolidated balance sheet.
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Balance, beginning of period | $ | 24,000 | $ | - | ||||
| Additions | - | 183,319 | ||||||
| Transfer to revenue | (24,000 | ) | (159,319 | ) | ||||
| Balance, end of period | $ | - | $ | 24,000 | ||||
Warranty Reserve
The Company records a reserve for warranty repairs upon the initial delivery of vehicles to its dealer network. The Company provides a product warranty on each vehicle including powertrain, battery pack and electronics package. Such warranty matches the product warranty provided by its supply chain for warranty parts for all unaltered vehicles and is not considered a separate performance obligation. The supply chain warranty does not cover warranty-based labor needed to replace a part under warranty. Warranty reserves include management’s best estimate of the projected cost of labor to repair/replace all items under warranty. The Company reserves a percentage of all dealer-based sales to cover an industry-standard warranty fund to support dealer labor warranty repairs.
Such percentage is recorded as a component of cost of revenues in the statement of operations. As of March 31, 2021 and December 31, 2020, warranty reserves were recorded within accrued expenses of $54,254 and $43,278, respectively.
NOTE 4. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consists of amounts due from invoiced customers and product deliveries and were as follows:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Trade receivables | $ | 1,156,549 | $ | 839,679 | ||||
| Less: Allowance for doubtful accounts | (102,861 | ) | (73,829 | ) | ||||
| $ | 1,053,688 | $ | 765,850 | |||||
NOTE 5. INVENTORY, NET
Inventory consisted of the following:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | 367,289 | $ | 634,085 | ||||
| Work-in-progress | 9,939 | - | ||||||
| Finished goods | 459,094 | 539,169 | ||||||
| $ | 836,322 | $ | 1,173,254 | |||||
For the three months ended March 31, 2021 and 2020, depreciation recorded for fleet inventory was $23,886 and $0, respectively. Management has determined that no reserve for inventory obsolescence was required as of March 31, 2021 and December 31, 2020.
NOTE 6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Prepaid final assembly services | $ | 506,213 | $ | 520,000 | ||||
| Prepayments for inventory | 1,093,572 | 976,512 | ||||||
| Prepaid other | 188,820 | 112,250 | ||||||
| $ | 1,788,605 | $ | 1,608,762 | |||||
NOTE 7. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Computer and equipment | $ | 829,486 | $ | 815,704 | ||||
| Furniture and fixtures | 128,596 | 127,401 | ||||||
| Lease improvements | 236,738 | 221,802 | ||||||
| Prototypes | 300,376 | 300,376 | ||||||
| Computer software | 163,275 | 62,077 | ||||||
| 1,658,471 | 1,527,360 | |||||||
| Less: Accumulated depreciation | (987,176 | ) | (916,048 | ) | ||||
| $ | 671,295 | $ | 611,312 | |||||
Depreciation expense for the three months ended March 31, 2021 and 2020 was $71,128 and 2019 for the DropCar Operating business are presented as discontinued operations and the$86,058, respectively.
NOTE 8. INTANGIBLE ASSETS, NET
Intangible assets and liabilities classified as held for sale are presented separately in the balance sheet.
For the Three Months Ended March 31, | ||
2020 | 2019 | |
| SERVICE REVENUES | $1,012,261 | $1,099,443 |
| COST OF REVENUE | 842,642 | 1,127,045 |
| GROSS PROFIT (LOSS) | 169,619 | (27,602) |
| OPERATING EXPENSES | ||
| Research and development | 42,634 | 68,982 |
| General and administrative | 333,069 | 1,129,025 |
| Depreciation and amortization | 78,760 | 107,749 |
TOTAL OPERATING EXPENSES | 454,463 | 1,305,756 |
OPERATING LOSS | (284,844) | (1,333,358) |
| Other income, net | 300 | 1,724 |
| LOSS FROM DISCONTINUED OPERATIONS | $(284,544) | $(1,331,634) |
March 31, 2020 | December 31, 2019 | |
| Cash | $65,807 | $81,457 |
| Accounts receivable, net | 96,665 | 210,671 |
| Prepaid expenses and other current assets | 35,430 | 83,058 |
| Current assets held for sale | $197,902 | $375,186 |
| Property and equipment, net | $23,191 | $25,723 |
| Capitalized software costs, net | 364,116 | 410,261 |
| Operating lease right-of-use asset | - | 1,886 |
| Other assets | 3,525 | 3,525 |
| Noncurrent assets held for sale | $390,832 | $441,395 |
| Accounts payable and accrued expenses | 671,856 | 737,862 |
| Deferred revenue | 240,616 | 302,914 |
| Current liabilities held for sale | $912,472 | $1,040,776 |
March 31, 2020 | December 31, 2019 | |
| Software | $1,498,757 | $1,467,008 |
| Accumulated amortization | (1,134,641) | (1,056,747) |
| Total | $364,116 | $410,261 |
| March 31, 2021 | ||||||||||||||||
| Weighted- | ||||||||||||||||
| Net | Average | |||||||||||||||
| Gross | Accumulated | Carrying | Amortization | |||||||||||||
| Amount | Amortization | Amount | Period | |||||||||||||
| Supply chain development | $ | 395,248 | $ | (316,640 | ) | $ | 78,608 | 0.80 yrs. | ||||||||
| Patents and trademarks | 86,618 | (34,382 | ) | 52,236 | 2.41 yrs. | |||||||||||
| $ | 481,866 | $ | (351,022 | ) | $ | 130,844 | ||||||||||
| December 31, 2020 | ||||||||||||||||
| Weighted- | ||||||||||||||||
| Net | Average | |||||||||||||||
| Gross | Accumulated | Carrying | Amortization | |||||||||||||
| Amount | Amortization | Amount | Period | |||||||||||||
| Supply chain development | $ | 395,248 | $ | (291,937 | ) | $ | 103,311 | 1.05 yrs. | ||||||||
| Patents | 70,435 | (29,901 | ) | 40,534 | 2.45 yrs. | |||||||||||
| $ | 465,683 | $ | (321,838 | ) | $ | 143,845 | ||||||||||
Amortization expense for the three months ended March 31, 2021 and 2020 was $29,184 and 2019 is $77,894 and $106,829, respectively and included in loss from discontinued operations.
NOTE 9. STOCKHOLDERS’ EQUITY
Common Stock
In addition, the DOL is conducting its audit to determine whether the Company owes spread of hours pay (an hour’s pay for each day an employee worked or was scheduled for a period over ten hours in a day). If the DOL determines that monies are owed, the DOL will seek a backpay order, which management believes will not, either individually or in the aggregate, have a material adverse effect on DropCar’s business, consolidated financial position, results of operations or cash flows. During the three months ended March 31, 2020 and 2019, the Company expensed as loss from operations of discontinued component approximately $0 in relation to these matters. As of March 31, 2020 and December 31, 2019, the Company has accrued as accounts payable and accrued expenses approximately $333,000 in relation to these matters.
On March 26, 2019,June 17, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the Company sold, in a registered public offering by the Company directly to the investors an aggregate of 478,4692,200,000 shares of common stock, par value $0.0001 per share, at an offering price of $4.18$2.50 per share for gross proceeds of $1,985,001 net of$5,500,000 before offering expenses of $15,000.
On July 6, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the Company sold, in a registered public offering by the Company directly to the investors an aggregate of 3,157,895 shares of common stock, par value $0.0001 per share, at an offering price of $4.75 per share for gross proceeds of $15,000,000 before offering expenses of $1,249,200.
On July 21, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the Company sold, in a registered public offering by the Company directly to the investors an aggregate of 1,850,000 shares of common stock, par value $0.0001 per share, at an offering price of $5.00 per share for gross proceeds of $9,250,000 before offering expenses of $740,000. Each purchaser also had the right to purchase, on or before October 19, 2020, additional shares of common stock (the “Additional Shares”) equal to the full amount of 75% of the common stock it purchased at the initial closing, or an aggregate of 1,387,500 shares, at price of $5.00 per share. On October 16, 2020, the Company entered into an addendum to the Agreement (the “Addendum”), which extended the deadline for each purchaser to exercise the right to purchase the Additional Shares by one year, to October 19, 2021. As of December 31, 2020, investors had elected to purchase 420,000 of the Additional Shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $5.00 per share, for gross proceeds of approximately $2,100,000 before offering expenses of $168,000.
On November 22, 2020, the Company entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which such stockholders agreed to purchase an aggregate of 1,650,164 shares of AYRO common stock, par value $0.0001 per share, at an offering price of $6.06 per share, for gross proceeds of approximately $10,000,000 before the deduction of fees and offering expenses of $847,619.
During the periodyear ended MarchDecember 31, 2019,2020, the Company issued 1,412,4205,074,645 shares of common stock from the exercise of 5,092,806 warrants and received net cash proceeds of $3,926,818.
During the year ended December 31, 2020, the Company issued 1,030,585 shares of common stock from the conversion of 21,591 shares of Series H-4the 2019 $1,000,000 Convertible Preferred stock.
During the periodyear ended MarchDecember 31, 2019,2020, the Company issued 116,6662,337,663 shares of common stock from the closing of the Merger in consideration for $3,060,740 of cash and equity of Merger Sub.
During the year ended December 31, 2020, the Company issued 1,573,218 shares of common stock, par value $0.0001 per share, for proceeds of $2,000,000 net of offering fees and expenses of $609,010, pursuant to Stock Purchase Agreements entered into on December 19, 2019 as a component of the Merger Agreement and contingent upon closing of the Merger.
During the year ended December 31, 2020, the Company issued 1,037,496 shares of common stock to a service provider and recorded $222,200advisors in connection with the Merger.
In December 2020, based on its contract, the Company agreed to issue 15,000 shares of common stock based compensation as a part of general and administrative expense into COR Prominence LLC, the Company’s consolidated statementsinvestor relations firm. The shares were immediately vested and were issued in April 2021. An expense of operations.
During the periodyear ended MarchDecember 31, 2019,2020, the Company issued 277,7782,007,193 shares of the common stock from the conversion of 7,360,985 shares of AYRO Seed Preferred Stock.
During the year ended December 31, 2020, the Company issued 6,817 shares of common stock from the exercise of Series K warrantsstock options and received cash proceeds of $16,667.
During the periodyear ended MarchDecember 31, 2020, the Company issued 490,000795 shares of common stock from the conversion of 4,900955 shares of H-3 Preferred Stock.
During July 2020, the Company issued 225,590 shares of common stock from the conversion of 7,833 shares of Series H-6 Convertible Preferred Stock.
On January 25, 2021, AYRO entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which AYRO agreed to issue and sell in a registered direct offering (the “January 2021 Offering”) an aggregate of 3,333,334 shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $6.00 per share, for gross proceeds of $20,000,004 before the Certificatededuction of Incorporation, there are 5,000,000 authorized preferredfees and offering expenses of $1,648,608.
On February 11, 2021, AYRO entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which AYRO agreed to issue and sell in a registered direct offering (the “February 2021 Offering”) an aggregate of 4,400,001 shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $9.50 per share, for gross proceeds of $41,800,008 before the deduction of fees and offering expenses of $3,394,054. Each purchaser was also granted an option to purchase, on or before February 16, 2022, additional shares of common stock equal to the full amount of 75% of the common stock it purchased at the initial closing, or an aggregate of 3,300,001 shares, at an exercise price of $11.50 per share.
On March 17, 2021, in connection with that certain Agreement and Plan of Merger dated December 19, 2019, whereby certain former stockholders of AYRO Operating entered into lock-up agreements (collectively, the “May Lock-Up Agreements”) pursuant to which they agreed to certain restrictions on the transfer or sale of shares of the Company’s common stock for the one-year period following the Merger, AYRO modified the May Lock-Up Agreements to allow each stockholder party to a May Lock-Up Agreement to (i) sell up to 5% of such stockholder’s holdings in the Company’s common stock on any trading day (with such 5% limitation to be measured as of the date of each sale) and (ii) allow for unlimited sales of the Company’s common stock for any sales made at $10.00 per share or greater.
Pursuant to the Securities Purchase Agreement dated July 21, 2020, during the three months ended March 31, 2021, investors purchased 302,500 of the Additional Shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $ 0.0001. $5.00 per share, for gross proceeds of $1,512,500.
During February 2021, the Company issued 74,987 shares of common stock from the exercise of stock options and received cash proceeds of $183,425.
During February 2021, the Company issued 13,642 shares of common stock from the exercise of warrants and received cash proceeds of $100,000.
Restricted Stock
During the year ended December 31, 2020, the Company issued 1,087,618 shares of restricted common stock valued based on the stock price at the date of issuance with a weighted average price of $5.27 per share, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, See Note 10. Of which 15,115 shares were vested during the year ended December 31, 2020 and no additional shares vested during the three months ended March 31, 2021. The Company recognized stock based compensation expense during the three months ended March 31, 2021 of $1,246,539.
| F-13 |
Preferred Stock
Upon closing of the Merger, the Company assumed the Series H, H-3 and H-6 preferred stock of DropCar, Inc., which respective conversion prices have been adjusted to reflect the May 2020 one-for-five reverse split.
Series H Convertible Preferred Stock
Under the terms of the Series H Certificate of Designation, each share of the Company’s Series H Convertible Preferred Stock (the “Series H Preferred Stock”) has a stated value of $154 and is convertible into shares of the Company’s common stock,Common Stock, equal to the stated value divided by the conversion price of $36.96$184.80 per share (subject to adjustment in the event of stock splits or dividends). The Company is prohibited from effecting the conversion of the Series H Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own more than 9.99%, in the aggregate, of the issued and outstanding shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock upon such conversion.
As of March 31, 2020,2021, such payment would be calculated as follows:
| Number of Series H Preferred Stock outstanding as of March 31, 2021 | 8 | |||
| Multiplied by the stated value | $ | 154.00 | ||
| Equals the gross stated value | $ | 1,232 | ||
| Divided by the conversion price | $ | 184.80 | ||
| Equals the convertible shares of Company Common Stock | 7 | |||
| Multiplied by the fair market value of Company Common Stock as of March 31, 2021 | $ | 6.48 | ||
| Equals the payment | $ | 45 |
Series H-3 Convertible Preferred Stock
Pursuant to the Series H-3 Certificate of Designation (as defined below), the holders of the Company’s Series H-3 Convertible Preferred Stock (the “Series H-3 Preferred Stock”) are entitled to elect up to two members of a seven memberseven-member Board, subject to certain step downs; pursuant to the Series H-3 securities purchase agreement, the Company agreed to effectuate the appointment of the designees specified by the Series H-3 investors as directors of the Company.
Under the terms of the Series H-3 Certificate of Designation, each share of the Series H-3 Preferred Stock has a stated value of $138 and is convertible into shares of common stock, equal to the stated value divided by the conversion price of $33.12$165.60 per share (subject to adjustment in the event of stock splits and dividends). The Company is prohibited from effecting the conversion of the Series H-3 Preferred Stock to the extent that, as a result of such conversion, the holder or any of its affiliates would beneficially own more than 9.99%, in the aggregate, of the issued and outstanding shares of common stock calculated immediately after giving effect to the issuance of shares of common stock upon the conversion of the Series H-3 Preferred Stock.
In the event of liquidation, the holders of the Series H-3 Preferred Stock are entitled, pari passu with the holders of common stock, to receive a payment in the amount the holder would receive if such holder converted the Series H-3 Preferred Stock into common stock immediately prior to the date of such payment.
As of March 31, 2020,2021, such payment would be calculated as follows:
| Number of Series H-3 Preferred Stock outstanding as of March 31, 2021 | 1,234 | |||
| Multiplied by the stated value | $ | 138 | ||
| Equals the gross stated value | $ | 170,292 | ||
| Divided by the conversion price | $ | 165.60 | ||
| Equals the convertible shares of Company Common Stock | 1,028 | |||
| Multiplied by the fair market value of Company Common Stock as of March 31, 2021 | $ | 6.48 | ||
| Equals the payment | $ | 6,661 |
| F-14 |
On February 5, 2020, the Company filed the Certificate of Designations, Preferences and Rights of the Series H-6 Preferred Stock (the “Series H-6 Certificate of Designation”) with the Secretary of State of the State of Delaware, establishing and designating the rights, powers and preferences of the Series H-6 Preferred Stock. The Company designated up to 50,000 shares of Series H-6 Preferred Stock and each share has a stated value of $72.00 (the “H-6 Stated Value”). Each share of Series H-6 Preferred Stock is convertible at any time at the option of the holder thereof, into a number of shares of common stock of the Company determined by dividing the H-6 Stated Value by the initial conversion price of $0.72$3.60 per share, which was then further reduced to $2.50 under the anti-dilution adjustment provision, subject to a 9.99% blocker provision. The Series H-6 Preferred Stock has the same dividend rights as the common stock, except as provided for in the Series H-6 Certificate of Designation or as otherwise required by law. The Series H-6 Preferred Stock also has the same voting rights as the common stock, except that in no event shall a holder of Series H-6 Preferred Stock be permitted to exercise a greater number of votes than such holder would have been entitled to cast if the Series H-6 Preferred Stock had immediately been converted into shares of common stock at a conversion price equal to $0.78 (subject to adjustment).$3.60. In addition, a holder (together with its affiliates) may not be permitted to vote Series H-6 Preferred Stock held by such holder to the extent that such holder would beneficially own more than 9.99% of our common stock. In the event of any liquidation or dissolution, the Series H-6 Preferred Stock ranks senior to the common stock in the distribution of assets, to the extent legally available for distribution.
The holders of Series H-6 Preferred Stock are entitled to certain anti-dilution adjustments if the Company issues shares of its common stock at a lower price per share than the applicable conversion price of the Series H-6 Preferred Stock. If any such dilutive issuance occurs prior to the conversion of the Series H-6 Preferred Stock, the conversion price will be adjusted downward to a price that cannot be less than 20% of the exercise price or $0.1584.
In the event of liquidation, the holders of the Series H-6 Preferred Stock are entitled, pari passu with the holders of common stock, to receive a payment in the amount the holder would receive if such holder converted the Series H-6 Preferred Stock into common stock immediately prior to the date of such payment.
As of March 31, 2020,2021, such payment would be calculated as follows:
| Number of Series H-6 Preferred Stock outstanding as of March 31, 2021 | 50 | |||
| Multiplied by the stated value | $ | 72.00 | ||
| Equals the gross stated value | $ | 3,600 | ||
| Divided by the conversion price | $ | 2.50 | ||
| Equals the convertible shares of Company Common Stock | 1,440 | |||
| Multiplied by the fair market value of Company Common Stock as of March 31, 2021 | $ | 6.48 | ||
| Equals the payment | $ | 9,331 |
Warrants
AYRO Seed Warrants
Prior to the Merger, the Company issued 461,647 warrants (the “AYRO Seed Warrants”) with an exercise price $7.33. The AYRO Seed Warrants terminate five years from the grant date. During February 2021, AYRO Seed Warrants were exercised for proceeds of $100,000 and Restated 2014 Equity Incentive Plan
Series I, J, H, H-1, H-3, H-4 and 2019 in relationH-5 warrants transferred to AYRO common stock pursuant to the consulting agreement. The Company paid the cash upon entering the agreement and issued the shares of common stock upon completionMerger.
Series I Warrants
As a result of the contract in February 2019.
Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2019 | 380,396 | $14.43 | 6.84 | - |
| Expired | (73,194) | 35.53 | - | |
| Outstanding at March 31, 2020 | 307,202 | $9.39 | 8.20 | - |
Three Months ended March 31, | ||
2020 | 2019 | |
| Research and development | 3,758 | 3,717 |
| Selling, general and administrative | 45,586 | 484,240 |
| Total $ | 49,344 | $487,957 |
Series H-3 Warrants
As a result of the Merger, 2,800 Series H-3 Warrants transferred to AYRO and have an exercise price of $165.60 per share, subject to adjustments (the “Series H-3 Warrants”). Subject to certain ownership limitations, the Series H-3 Warrants are immediately exercisable from the issuance date and will be exercisable for a period of five (5) years from the issuance date. As of March 31, 2021, there were 2,800 Series H-3 Warrants outstanding.
Exercise of Series H-4 Warrants and Issuance of Series J Warrants
Series H-4 Warrants
As a result of the Company issued warrantsMerger, 37,453 Series H-4 Warrants transferred to purchaseAYRO and have an aggregateexercise price of 447,383 shares of common stock (the “Series H-4 Warrants”).$15.60. The Series H-4 Warrants were initially exercisable atcontain an exerciseanti-dilution price equal toprotection, and the warrants cannot be less than $15.60 per share. On AugustAs of March 31, 2018, the Company offered (the “Repricing Offer Letter”) to the holders (the “Holders”) of2021, there were 37,453 Series H-4 Warrants outstanding.
As a result of the opportunityMerger, 52,023 Series J Warrants transferred to exercise such Series H-4 Warrants for cash at a reduced exercise price of $3.60 per share (the “Reduced Exercise Price”) provided such Series H-4 Warrants were exercised for cash on or before September 4, 2018 (the “End Date”). In addition, the Company issued a “reload” warrant (the “Series J Warrants”) to each Holder who exercised their Series H-4 Warrants prior to the End Date, covering one share for each Series H-4 Warrant exercised during that period.AYRO. The terms of the Series J Warrants are substantially identical to the terms of the Series H-4 Warrants except that (i) the exercise price is equal to $6.00,$30.00 per share, (ii) the Series J Warrants may be exercised at all times beginning on the 6-month anniversary of the issuance date on a cash basis and also on a cashless basis, (iii) the Series J Warrants do not contain any provisions for anti-dilution adjustment and (iv) the Company has the right to require the Holders to exercise all or any portion of the Series J Warrants still unexercised for a cash exercise if the volume-weighted average price (VWAP) (as defined in the Series J Warrant) for the Company’s common stock equals or exceeds $9.00$45.00 for not less than ten consecutive trading days.
If at any time (i) the VWAP of the Common Stock exceeds $9.00 for not less than the Mandatory Exercise Measuring Period;mandatory exercise measuring period; (ii) the daily average number of shares of Common Stock traded during the Mandatory Exercise Measuring Periodmandatory exercise measuring period equals or exceeds 25,000; and (iii) no equity conditions failure has occurred as of such date, then the Company shall have the right to require the holder to exercise all or any portion of the Series J Warrants still unexercised for a cash exercise.
Series H-5 Warrants
As a result of the Company’s common stock.
The H-5 Warrants will beare entitled to certain anti-dilution adjustments if the Company issues shares of its common stock at a lower price per share than the applicable exercise price (subject to a floor of $0.1584$0.792 per share).
The Company considers the holder from exercisingchange in exercise price due to the anti-dilution trigger related to the Series H-5 Warrants to be of an equity nature, as the issuance allowed the warrant holders to exercise warrants if such exercise will resultin exchange for common stock, which represents an equity for equity exchange. Therefore, the change in the beneficial ownership byfair value before and after the holdereffect of more than 9.99%the anti-dilution triggering event and the fair value of the Series H-5 warrants will be treated as a deemed dividend in the amount of $432,727. Cash received upon exercise in excess of par value is accounted for through additional paid in capital. The Company valued the deemed dividend as the difference between: (a) the modified fair value of the Series H-5 Warrants in the amount of $967,143 and (b) the fair value of the original award prior to the modification of $534,416.
The warrants were valued using the Black-Scholes option pricing model on the date of the modification and issuance using the following assumptions: (a) fair value of common stock of $2.77 per share, (b) expected volatility of 89.96%, (c) dividend yield of 0%, (d) risk-free interest rate of 0.24%, and (e) expected life of 5 years. The Series H-5 Warrants were exercisable beginning June 6, 2020.
The Series I, H-1, H-3, H-4, J and H-5 Warrants expire through the years 2021-2024.
Other AYRO Warrants
On June 19, 2020, the Company agreed to issue finder warrants (the “June Finder Warrants”) to purchase 27,273 shares of the Company’s common stock at an exercise price of $2.75 per share to a finder or its designees, and the Company agreed to issue warrants to Palladium (the “June Placement Agent Warrants”) to purchase 126,000 shares of the Company’s common stock at an exercise price of $2.875 per share. The June Finder Warrants and June Placement Agent Warrants terminate after a period of 5 years on June 19, 2020. As of December 31, 2020, 126,000 of the June Placement Agent Warrants had been exercised. As of March 31, 2021, the 27,273 June Finder Warrants were outstanding.
On July 8, 2020, the Company agreed to issue finder warrants (the “July 8 Finder Warrants”) to purchase 71,770 shares of the Company’s common stock at an exercise price of $5.225 per share to a finder or its designees, and the Company agreed to issue warrants to Palladium (the “July 8 Placement Agent Warrants”) to purchase 147,368 shares of the Company’s common stock at an exercise price of $5.4625 per share.
The July 8 Finder Warrants and July 8 Placement Agent Warrants terminate after a period of 5 years on July 8, 2020. As of March 31, 2021, there were 71,770 July 8 Finder Warrants and 147,368 July 8 Placement Agent Warrants were outstanding.
On July 22, 2020, the Company agreed to issue warrants to Palladium (the “July 22 Placement Agent Warrants”) to purchase 129,500 shares of the Company’s common stock at an exercise price of $5.750 per share. The July 22 Placement Agent Warrants terminate after a period of 5 years on July 22, 2020. As of March 31, 2021, there were 129,500 July 22 Placement Agent Warrants outstanding.
On September 25, 2020, the Company issued a warrant (the “September Warrant”) to purchase 31,348 shares of the Company’s common stock at an exercise price of $3.19 per share to a vendor for facilitating a manufacturing agreement. The September Warrant is immediately exercisable and expires on September 25, 2025. The September Warrant was classified as equity and the estimated fair value of $2.13 per share was computed as of September 25, 2020 using the Black-Scholes model. The Company recorded $66,845 as stock-based compensation expense during the fourth quarter in 2020 for the total fair value of the September Warrant. As of March 31, 2021, there were 31,348 September Warrants outstanding.
The following assumptions were used to determine the fair value of the September Warrants:
| As of September 25, 2020 | ||||
| Dividend | - | % | ||
| Risk Free Rate | 0.30 | % | ||
| Exercise Price | $ | 2.90 | ||
| Strike Price | $ | 3.19 | ||
| Term | 5.00 | |||
| Volatility | 102 | % | ||
On November 22, 2020, the Company entered into a Securities Purchase Agreement with new and current stockholders of the Company, pursuant to which such stockholders agreed to purchase shares of AYRO’s Common Stock, Series A Warrants and Series B Warrants to purchase AYRO’s Common Stock for an aggregate purchase price of $9,999,997. Each purchaser additionally purchased and received Series A Warrants and Series B Warrants equal to 75% and 50% of the purchased shares, for a total of 1,237,624 Series A Warrants and 825,084 Series B Warrants. The Series A Warrants are immediately exercisable, in whole or in part at a strike price of $8.09 and terminate six months from the date of issuance on May 24, 2021. The Series B Warrants are immediately exercisable, in whole or in part, at a strike price of $8.90, and terminate five years from the date issuance on November 24, 2025. As of March 31, 2021, there were 1,237,624 Series A Warrants and 825,084 Series B Warrants outstanding shares..
On November 22, 2020, the Company agreed to issue finder warrants (the “November Finder Warrants”) to purchase 56,256 shares of the Company’s common stock at an exercise price of $6.6660 per share to a finder or its designees, and the Company agreed to issue warrants to Palladium (the “November Placement Agent Warrants”) to purchase 57,756 shares of the Company’s common stock at an exercise price of $6.9690 per share.
The November Finder Warrants and November Placement Agent Warrants terminate after a period of 5 years on November 22, 2025. As of March 31, 2021, there were 56,256 November Finder Warrants and 57,756 November Placement Agent Warrants were outstanding.
On January 25, 2021, AYRO entered into a Securities Purchase Agreement with certain institutional and accredited investors, pursuant to which AYRO agreed to issue and sell in a registered direct offering (the “January 2021 Offering”) an aggregate of 3,333,334 shares of common stock of AYRO, par value $0.0001 per share, at an offering price of $6.00 per share, for gross proceeds of approximately $20.0 million before the deduction of fees and offering expenses.
Each purchaser was also granted a warrant to purchase, between July 26, 2021 and July 26, 2023, additional shares of common stock equal to the full amount of the common stock it purchased at the initial closing, or an aggregate of 3,333,334 shares at an exercise price of $6.93 per share.
On January 25, 2021, the Company agreed to issue warrants to Palladium, the placement agent for the January 2021 offering to purchase 233,334 shares of the Company’s common stock at an exercise price of $6.93 per share. The warrants are exercisable six months following issuance and terminate on July 23, 2023.
On February 11, 2021, the Company agreed to issue warrants to Spartan Capital Securities, LLC and its affiliates (the “February Finder Warrants”) to purchase 15,574 shares of the Company’s common stock at an exercise price of $10.925 per share and to purchase 35,885 shares of the Company’s common stock at an exercise price of $10.45 per share to a finder or its designees. In addition, the Company agreed to issue warrants to Palladium (the “February Placement Agent Warrants”) to purchase 255,584 shares of the Company’s common stock at an exercise price of $10.925 per share. The February Finder Warrants and February Placement Agent Warrants terminate after a period of 5 years on February 26, 2026. As of March 31, 2021, there were 51,459 February Finder Warrants and 255,584 February Placement Agent Warrants were outstanding.
A summary of the Company’s warrants to purchase common stock activity is as follows:
Shares Underlying Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | |
| Outstanding at December 31, 2019 | 4,300,560 | $1.77 | 5.06 | - |
| Granted | - | - | - | - |
| Exercised/Forfeited | - | - | - | - |
| Outstanding at March 31, 2020 | 4,300,560 | $1.77 | 4.81 | - |
| Shares Underlying Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (in years) | ||||||||||
| Outstanding at December 31, 2020 | 3,501,014 | $ | 8.03 | 2.87 | ||||||||
| Granted | 3,873,711 | $ | 7.24 | |||||||||
| Exercised | (13,642 | ) | $ | 7.33 | ||||||||
| Outstanding at March 31, 2021 | 7,361,083 | $ | 7.62 | 2.57 | ||||||||
NOTE 10. STOCK-BASED COMPENSATION
AYRO 2020 Long Term Incentive Plan
On May 28, 2020, the Company’s shareholders approved the AYRO, Inc. 2020 Long Term Incentive Plan for future grants of incentive stock options, nonqualified stock, stock appreciation rights, restricted stock, restricted stock units, performance and other awards. The Series H-5Company has reserved a total of 4,089,650 shares of its common stock pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, including shares of restricted stock that have been issued. The Company has 1,879,537 stock options, restricted stock and warrants remaining under this plan as of March 31, 2021.
AYRO 2017 Long Term Incentive Plan
Prior to the Merger, the Company granted stock options and warrants pursuant to the 2017 Long Term Incentive Plan effective January 1, 2017. As of March 31, 2021, the 2017 Long Term Incentive Plan remains active, but no additional awards may be granted.
DropCar Amended and Restated 2014 Equity Incentive Plan
The DropCar Amended and Restated 2014 Equity Incentive Plan was amended in 2018 to increase the number of shares of Company common stock available for issuance. Pursuant to the 2014 Equity Incentive Plan (the “2014 Plan”), 141,326 shares of common stock were reserved for issuance and there are options to purchase 61,440 shares outstanding as of March 31, 2021. As of March 31, 2021, there were zero shares available for grant under the 2014 Plan.
Stock-based compensation, including restricted stock awards, stock options and warrants is included in the unaudited condensed consolidated statement of operations as follows:
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Research and development | $ | 23,486 | $ | 15,872 | ||||
| Sales and marketing | 63,449 | 34,584 | ||||||
| General and administrative | 1,612,488 | 106,002 | ||||||
| Total | $ | 1,699,423 | $ | 156,458 | ||||
Options
The following table reflects the stock option activity:
| Number of Shares | Weighted Average Exercise Price | Contractual Life (Years) | ||||||||||
| Outstanding at December 31, 2020 | 1,920,269 | $ | 4.40 | 8.66 | ||||||||
| Exercised | (74,987 | ) | (2.45 | ) | ||||||||
| Outstanding at March 31, 2021 | 1,845,282 | $ | 4.48 | 8.47 | ||||||||
Of the outstanding options, 971,528 were vested and exercisable beginning June 6, 2020.
The warrants expireCompany recognized $269,895 and $134,402 of stock option expense for the three months ended March 31, 2021 and 2020, respectively. Total compensation cost related to non-vested stock option awards not yet recognized as of March 31, 2021 was $1,708,387 and will be recognized on a straight-line basis through the years 2020-2024, exceptend of the vesting periods through October 2023. The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.
Determining the appropriate fair value of the stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and the expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The Company uses the following inputs when valuing stock-based awards.
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Expected life (years) | 0.0 | 5.0 | ||||||
| Risk-free interest rate | 0 | % | 0.29 | % | ||||
| Expected volatility | 0 | % | 74.4 | % | ||||
| Total grant date fair value | $ | 0.00 | $ | 0.99 | ||||
The expected life of the employee stock options was estimated using the “simplified method,” as the Company has no historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock option grants.
The simplified method is based on the average of the vesting tranches and the contractual life of each grant. The expected life of awards that vest immediately use the contractual maturity since they are vested when issued. For stock price volatility, the Company uses public company compatibles and historical private placement data as a basis for its expected volatility to calculate the fair value of option grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option at the grant-date.
Restricted Stock
The following table reflects the restricted stock activity: | Number of Shares | Weighted Average Grant Price | ||||||
| Outstanding at December 31, 2020 | 1,072,503 | $ | 5.30 | |||||
| Granted | 172,000 | $ | 7.66 | |||||
| Outstanding at March 31, 2021 | 1,244,503 | $ | 5.63 | |||||
In September 2020, the Company issued 436,368 shares of restricted stock to non-executive directors, of which 15,115 immediately vested and the remainder to vest in December 2020, which was subsequently modified to vest in full in May 2021. The Company recognized compensation expense during the three months ended March 31, 2021 of $500,765. Total compensation cost related to non-vested restricted stock not yet recognized as of March 31, 2021 was $333,843 and will be recognized on a straight-line basis through the end of the vesting periods through May 2021.
In December 2020, based on objectives achieved, the Company issued 651,250 shares of restricted stock to Rodney C. Keller, Jr. (“the “Keller Restricted Stock”) that vest according to the following vesting schedule: one-third will vest on May 28, 2021, one-third will vest on December 4, 2021 and one-third will vest on December 4, 2022. Compensation expense for the Series K WarrantKeller Restricted Stock of $745,774 was recognized for the three months ended March 31, 2021. Total compensation cost related to non-vested restricted stock not yet recognized as of March 31, 2021 was $3,380,843 and will be recognized on a straight-line basis through the end of the vesting periods through December 4, 2022.
On February 24, 2021, pursuant to the AYRO, Inc. 2020 Long-Term Incentive Plan, the Company issued 172,000 shares of restricted stock to non-executive directors at a value of $7.66 per share. The shares vest 50% at June 30, 2021, 25% at September 30, 2021 and 25% at December 31, 2021. The Company recognized compensation expense during the three months ended March 31, 2021 of $182,989. Total compensation cost related to non-vested restricted stock not yet recognized as of March 31, 2021 was $1,134,531 and will be recognized on a straight-line basis through the end of the vesting periods through December 31, 2021.
Other Share-Based Payments
The Company grants stock warrants pursuant to the 2017 Long Term Incentive Plan (“LTIP”) effective January 1, 2017. The Company measured consultant stock-based awards at grant-date fair value and recognizes contractor consulting expense for contractor warrants on a straight-line method basis over the vesting period of the award. Grants to consultants are expensed at the earlier of (i) the date at which has no expiration date.
The Company recognized $0 and $22,056 of warrant expense related to Condensed Consolidated Financial Statements
NOTE 11. CONCENTRATIONS AND CREDIT RISK
Revenues
In March 2019, the Company entered into a consulting agreement (the “Consulting Agreement”)five-year Master Procurement Agreement, or the MPA, with Ascentaur, LLC (“Ascentaur”). Sebastian Giordano is the Chief Executive Officer of Ascentaur. Mr. Giordano has served on the board of directors of the Company since February 2013 and served as the Company’s Interim Chief Executive Officer from August 2013 through April 2016 and as the Company’s Chief Executive Officer from April 2016 through January 2018.
Accounts Receivable
As of March 31, 2021 and December 31, 2020, multiple customers business partners, investors and advisors that offer desirable administrative, financing, investment, technical, marketing and/or strategic expertise, and performing such other services pertaining toaccounted for more than 10% of the Company’s businessaccounts receivable. One customer accounted for approximately 72% and 74% as theof March 31, 2021 and December 31, 2020, respectively. A second and third customer accounted for approximately 17% and 10% as of March 31, 2021.
Purchasing
The Company and Ascentaur may from time to time mutually agree. The term of the Consulting Agreement commenced on July 11, 2018 and terminated on April 9, 2019.places orders with various suppliers. During the three months ended March 31, 2019,2021 and 2020, multiple suppliers provided more than 10% of the Company’s raw materials purchases. During the three months ended March 31, 2021, one supplier accounted for approximately 30%, another supplier accounted for 22%, and a third supplier accounted for 16%. During the three months ended March 31, 2020, the Company’s purchases of raw materials from one supplier accounted for approximately 38%, another supplier accounted for 16% and a third supplier accounted for approximately 12%. The Company’s top supplier accounted for approximately 58% and 77% of its bill of materials as included in costs of goods sold for the three months ended March 31, 2021 and 2020, respectively. Any disruption in the operation of this supplier could adversely affect the Company’s operations.
Manufacturing
Cenntro Automotive Group (“Cenntro”), a related party owns the design of the AYRO 411 model and has granted the Company recorded $30,400an exclusive license to manufacture the AYRO 411 model for sale in North America. The Company’s business is dependent on such license, and if it fails to comply with its obligations to maintain that license, the Company’s business will be substantially harmed. Under the Manufacturing License Agreement, dated April 27, 2017, between Cenntro and the Company, the Company is granted an exclusive license to manufacture and sell AYRO 411 in the United States, and the Company required to purchase the minimum volume of product units from Cenntro, among other obligations.
NOTE 12. RELATED PARTY TRANSACTIONS
Supply Chain Agreements
In 2017, the Company executed a supply chain contract with Cenntro, the Company’s primary supplier, a manufacturer located in the People’s Republic of China. Prior to the Merger, Cenntro was a significant shareholder in AYRO Operating. Through the partnership, Cenntro acquired 19% of AYRO Operating’s common stock. Cenntro beneficially owned approximately 3.37% of the Company’s common stock as loss from operations of discontinued component relatedMarch 31, 2021. Cenntro owns the design of the AYRO 411 Fleet vehicles and has granted the Company an exclusive license to purchase the AYRO 411 Fleet vehicles for sale in North America. Currently, the Company purchases 100% of its vehicle chassis, cabs and wheels through this consulting agreement.supply chain relationship with Cenntro. The Company must sell a minimum number of units in order to maintain its exclusive supply chain contract upon availability of the 411x product. As of DecemberMarch 31, 2019,2021 and 2020, the balance inamounts outstanding to Cenntro as a component of accounts payable was $0.
Under a memo of understanding signed between the Company and AYRO, has provided investment banking services toCenntro on March 22, 2020, the Company agreed to purchase 300 units within the following twelve months of signing the memo of understanding, and 500 and 800 in connection witheach of the following respective twelve-month periods. On July 9, 2020, in exchange for certain percentage discounts for raw materials, the Company made a $1.2 million prepayment for inventory. During the three months ended March 31, 2021, the Company made an additional deposit of $100,000, as prepayment for additional inventory for 2021. As of March 31, 2021 and 2020, the prepayment deposits were $1,044,590 and $49,162.
Other
The Company had received short-term expense advances from its founders. As of March 31, 2021 and December 6, 2019 Series H-5 Preferred Stock transaction received $200,00031, 2020, the amounts outstanding were $15,000 for each year and 243,054 H-5 Warrants.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Lease Agreements
In 2019 the Company entered into a placement agentnew lease agreement for office and merger advisorymanufacturing space. The lease commencement date was January 16, 2020. Prior to the commencement date of the new lease agreement, with Palladium whereby the Company shall pay to Palladiumleased other office and manufacturing space on a cash fee equal to 8%short-term basis. The Company determined if an arrangement is a lease at inception of the aggregate gross proceeds raise in closingcontract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of each financing transaction and warrantsidentified asset for a period of time. The contact provides the right to purchase that number of shares of common stocksubstantially all the economic benefits from the use of the Company equalidentified asset and the right to 7%direct use of the aggregate numberidentified asset, as such, the contract is, or contains, a lease. In connection with the adoption of sharesASC 842, Leases, the Company has elected to treat the lease and non-lease components as a single component.
During March 2021, the Company subleased additional office space to support the Company’s expansion plan. The term is for 16 months with a total lease obligation of common stock sold$131,408. In connection with the adoption of ASC 842, Leases, the Company has elected to treat the lease and non-lease components as a single component.
Leases were classified as an operating lease at inception. An operating lease results in each offering. the recognition of a Right-of-Use (“ROU”) assets and lease liability on the balance sheet. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Because the lease does not provide an explicit or implicit rate of return, the Company determines incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis.
The warrants will be identical to any warrants issued to investors at such closing, provideincremental borrowing rate for a cashless exercise,lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an exercise priceamount equal to the offering price per sharelease payments for the asset under similar term, which is 10.41%. Lease expense for the lease is recognized on a straight-line basis over the lease term.
The Company’s leases do not contain any residual value guarantees or material restrictive covenants. Leases with a lease term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. The remaining terms for the Company’s leases as of March 31, 2021 are 6.0 and 1.25 years, respectively. The Company currently has no finance leases.
During the three months ended March 31, 2021 and 2020, cash paid for amounts included in the closing,measurement of lease liabilities- operating cash flows from operating lease was $39,273 and expire on$4,096, respectively.
The components of lease expense consist of the five year anniversary at such closing.following:
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating lease expense | $ | 68,795 | $ | 45,868 | ||||
| Short-term lease expense | 3,533 | 60,836 | ||||||
| Total lease cost | $ | 72,328 | $ | 106,704 | ||||
Balance sheet information related to leases consists of the following:
| March 31, 2021 | December 31, 2020 | |||||||
| Assets | ||||||||
| Operating lease – right-of-use asset | $ | 1,180,025 | $ | 1,098,819 | ||||
| Total lease assets | $ | 1,180,025 | $ | 1,098,819 | ||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Lease obligation – operating lease | $ | 215,555 | $ | 123,139 | ||||
| Noncurrent liabilities: | ||||||||
| Lease obligation - operating lease, net of current portion | 991,545 | 1,002,794 | ||||||
| Total lease liability | $ | 1,207,100 | $ | 1,125,933 | ||||
The weighted-average remaining lease term and discount rate is as follows:
| Weighted average remaining lease term (in years) – operating lease | 6.0 | |||
| Weighted average discount rate – operating lease | 10.41 | % |
Cash flow information related to leases consists of the following:
| March 31, 2021 | March 31, 2021 | |||||||
| Operating cash flows for operating leases | $ | 39,273 | $ | 4,096 | ||||
| Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets | $ | 120,440 | $ | 1,210,680 | ||||
Future minimum lease payment under non-cancellable lease as of March 31, 2021 are as follows:
| As of March 31, 2021 | Operating Leases | |||
| 2021, remaining | $ | 231,501 | ||
| 2022 | 306,691 | |||
| 2023 | 247,533 | |||
| 2024 | 254,277 | |||
| 2025 | 261,223 | |||
| 2026 and thereafter | 313,307 | |||
| Total minimum lease payments | 1,614,532 | |||
| Less effects of discounting | (407,432 | ) | ||
| Present value of future minimum lease payments | $ | 1,207,100 | ||
Manufacturing Agreements
On September 25, 2020, AYRO entered into a Master Manufacturing Services Agreement with Karma Automotive, LLC (the “Karma Agreement”). The term of the contract is for 12 months. Pursuant to the agreement Karma will provide certain manufacturing services, starting in 2021, under an attached statement of work including final assembly, raw material storage and logistical support of our vehicles in return for compensation of $1,160,800.
The Company paid Karma an amount of $440,000 for the first production level builds and $80,000 for setup costs. In addition, the Company shall pay Palladium compensation for advisory services in connectionissued warrants to an advisor to the transaction with a possible business combinationfair value of $66,845 due at signing of the Company with an unaffiliated third party wherebycontract and was expensed in the Company shall issueprior year. The payment was recorded as prepaid expense as of December 31, 2020. On February 24, 2021, a first amendment to the Karma Agreement was made where Parties jointly agree to amend the terms of Exhibit A Statement of Work to Master Services Agreement, in order to allow Karma to assemble a certain number of shares of common stockunits of the post-merger entity immediately after the merger that represents 2.5% of the outstanding shares of common stock in any surviving post-merger entity.
Litigation
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, that it believes are incidental to the operation of its business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations, financial positions or cash flows.
Other
On February 12, 2021, the Company entered into an agreement with Arcimoto, Inc. to settle certain patent infringement claims (the “Arcimoto Settlement”) for a deminimis amount, pursuant to which the Company agreed to cease the production, importation and sale of the AYRO 311, among other things. Accordingly, the Company would not be contractually permitted to resume production of the AYRO 311. The Company is continuing the development of an all-new, three-wheeled electric vehicle, which the Company has intended to replace AYRO 311 as its three-wheeled electric vehicle product offering.
As of January 1, 2019, DropCar Operating, Inc. (“DropCar”) had accrued approximately $232,000 for the settlement of multiple employment disputes. As of March 31, 2020,2021, approximately $5,603 remained accrued as accounts payable and accrued expenses for the settlement of the final remaining employment dispute.
On March 23, 2018, DropCar was made aware of an audit being conducted by the New York State Department of Labor (“DOL”) regarding a claim filed by an employee. The DOL is investigating whether DropCar properly paid overtime for which DropCar has raised several defenses. In addition, the DOL is conducting its audit to determine whether the Company issued 450,000 sharesowes spread of common stock fromhours pay (an hour’s pay for each day an employee worked or was scheduled for a period over ten hours in a day). If the exerciseDOL determines that monies are owed, the DOL will seek a backpay order, which management believes will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, consolidated financial position, results of 450,000 Series H-5 Warrantsoperations or cash flows. Management believes the case has no merit.
DropCar was a defendant in a class action lawsuit which resulted in a judgement entered into whereby the Company is required to pay legal fees in the amount of $45,000 to the plaintiff’s counsel. As of March 31, 2021 and received cash proceedsDecember 31,2020, the balance due remains $45,000. This amount was included in the $186,000 of $356,400.
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. This management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our filings with the Securities and Exchange Commission (“SEC”) that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. See “Cautionary Note Regarding Forward-Looking Statements.”
References in this management’s discussion and analysis to “we,” “us,” “our,” “our Company” or “AYRO” refer to AYRO, Inc. and its subsidiaries.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terms such as “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “guides,” “intends,” “is confident that,” “may,” “plans,” “seeks,” “projects,” “targets,” “would” and “will” or the negative of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, but are not limited to, future financial and operating results, the company’s plans, objectives, expectations and intentions and other statements that are not historical facts. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from our historical experience and our present expectations, or projections described under the sections in this Form 10-Q and our other reports filed with the SEC titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
If any of the following risks occur, our business, financial condition, results of operations, cash flows, cash available for distribution, ability to service our debt obligations and prospects could be materially and adversely affected.’
| ● | we may be acquired by a third party based on preexisting agreements; |
| ● | we have a history of losses and have never been profitable, and we expect to incur additional losses in the future and may never be profitable; |
| ● | the market for our products is developing and may not develop as expected; |
| ● | our business is subject to general economic and market conditions, including trade wars and tariffs; |
| ● | our business, results of operations and financial condition may be adversely impacted by public health epidemics, including the recent COVID-19 outbreak; |
| ● | our limited operating history makes evaluating our business and future prospects difficult and may increase the risk of any investment in our securities; |
| ● | we may experience lower-than-anticipated market acceptance of our vehicles; |
| ● | developments in alternative technologies or improvements in the internal combustion engine may have a materially adverse effect on the demand for our electric vehicles; |
| ● | the markets in which we operate are highly competitive, and we may not be successful in competing in these industries; |
| ● | a significant portion of our revenues are derived from a single customer; |
| ● | we rely on and intend to continue to rely on a single third-party supplier and manufacturer located in the People’s Republic of China for the sub-assemblies in a semi-knocked-down state for our current vehicles; |
| ● | we may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims; |
| ● | the range of our electric vehicles on a single charge declines over time, which may negatively influence potential customers’ decisions whether to purchase our vehicles; |
| ● | increases in costs, disruption of supply or shortage of raw materials, in particular lithium-ion cells, could harm our business; |
| ● | our business may be adversely affected by labor and union activities; |
| ● | we may be required to raise additional capital to fund our operations, and such capital raising may be costly or difficult to obtain and could dilute our stockholders’ ownership interests, and our long-term capital requirements are subject to numerous risks; |
| ● | increased safety, emissions, fuel economy, or other regulations may result in higher costs, cash expenditures, and/or sales restrictions; |
| ● | we may fail to comply with environmental and safety laws and regulations; |
| ● | our proprietary designs are susceptible to reverse engineering by our competitors; |
| ● | if we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us; |
| ● | should we begin transacting business in other currencies, we are subject to exposure from changes in the exchange rates of local currencies; and |
| ● | we are subject to governmental export and import controls that could impair our ability to compete in international market due to licensing requirements and subject us to liability if we are not in compliance with applicable laws. |
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part I, Item 1A of our Annual Report on Form 10-K as filed on March 31, 2021 as amended on April 30, 2021. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise, except as required by law.
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Overview
Merger
On May 28, 2020, pursuant to January 30, 2018,the previously announced Agreement and Plan of Merger, dated December 19, 2019 (the “Merger Agreement”), by and among AYRO, Inc., a Delaware corporation previously known as DropCar, Inc., ABC Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and AYRO Operating Company, a Delaware corporation previously known as AYRO, Inc. (“AYRO Operating”), Merger Sub was merged with and into AYRO Operating, with AYRO Operating continuing after the merger as the surviving entity and a wholly owned subsidiary of the Company (the “Merger”). At the effective time of the Merger, without any action on the part of any stockholder, each issued and outstanding share of AYRO Operating’s common stock, par value $0.001 per share (the “AYRO Operating Common Stock”), including shares underlying AYRO Operating’s outstanding equity awards and warrants, was converted into the right to receive 1.3634 pre-split and pre-stock dividend shares (the “Exchange Ratio”) of the Company’s common stock, par value $0.0001 per share (the “Company Common Stock”). Upon completion of the Merger and the transactions contemplated in the Merger Agreement and assuming the exercise in full of all pre-funded warrants issued pursuant thereto, (i) the former AYRO Operating equity holders (including the investors in a bridge financing and private placements that closed prior to closing of the Merger) owned approximately 79% of the outstanding equity of the Company; (ii) former DropCar stockholders owned approximately 18% of the outstanding equity of the Company; and (iii) a financial advisor to DropCar and AYRO owned approximately 3% of the outstanding equity of the Company.
The Merger was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of DropCar, Inc.’s operations were disposed of as part of the consummation of the Merger and therefore no goodwill or other intangible assets were recorded by the Company as a result of the Merger. AYRO Operating is treated as the accounting acquirer as its stockholders control the Company after the Merger, even though DropCar, Inc. was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in our consolidated financial statements are those of AYRO Operating as if AYRO Operating had always been the reporting company.
Reverse Stock Split and Stock Dividend
On May 28, 2020, immediately following the effective time of the Merger, we effected a reverse stock split of the issued and outstanding shares of our common stock, at a ratio of one share for ten shares (the “Reverse Stock Split”). Immediately following the Reverse Stock Split, we issued a stock dividend of one share of the Company’s common stock for each outstanding share of common stock to all holders of record immediately following the effective time of the Reverse Stock Split (the “Stock Dividend”).
The net result of the Reverse Stock Split and the Stock Dividend was a privately-held provider1-for-5 reverse stock split. We made proportionate adjustments to the per share exercise price and/or the number of automotiveshares issuable upon the exercise or vesting of all stock options, restricted stock units (if any) and warrants outstanding as of the effective times of the Reverse Stock Split and the Stock Dividend in accordance with the terms of each security based on the split or dividend ratio. Also, we reduced the number of shares reserved for issuance under our equity compensation plans proportionately based on the split and dividend ratios. Except for adjustments that resulted from the rounding up of fractional shares to the next whole share, the Reverse Stock Split and Stock Dividend affected all stockholders uniformly and did not change any stockholder’s percentage ownership interest in the Company. The Reverse Stock Split did not alter the par value of Company Common Stock, $0.0001 per share, or modify any voting rights or other terms of the common stock. Except as otherwise set forth herein, share and related option or warrant information presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations have been adjusted to reflect the reduced number of shares outstanding, the increase in share price which resulted from these actions or otherwise to give effect to the Reverse Stock Split and the Stock Dividend.
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Closing of Asset Purchase Agreement
On December 19, 2019, DropCar entered into an asset purchase agreement (the “Asset Purchase Agreement”) with DC Partners Acquisition, LLC (“DC Partners”), Spencer Richardson and David Newman, pursuant to which DropCar agreed to sell substantially all of the assets associated with its business of providing vehicle support, fleet logistics and concierge services for both consumers and the automotive industry. In 2015, we launched our cloud-based Enterprise Vehicle Assistance and Logistics (“VAL”) platform and mobile application (“App”) to assist consumers and automotive-related companies reduce the costs, hassles and inefficiencies of owning a car, or fleet of cars, in urban centers. Our VAL platform is a web-based interface to our core service that coordinates the movements and schedules of trained valets who pickup and drop off cars at dealerships and customer locations. The App tracks progress and provides email and/or text notifications on status to customers, increasing the quality of communication and subsequent satisfaction with the service. To date, we operate primarily in the New York metropolitan area and may expand our territory in the future.
Business
Prior to the Merger, DropCar Operating representedprovided consumer and enterprise solutions to urban automobile-related logistical challenges. Following the Merger, we design and manufacture compact, sustainable electric vehicles for closed campus mobility, urban and community transport, local on-demand and last mile delivery, and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers including universities, business and medical campuses, last mile delivery services and food service providers. We are currently designing our next generation three-wheeled vehicle to support the above-listed markets.
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. The majority of our sales are comprised of sales of our four-wheeled vehicle to Club Car, a division of Ingersoll Rand, Inc. (“Club Car”), through a strategic shift that has hadarrangement entered in early 2019. We plan to continue growing our business through our experienced management team by leveraging our supply chain, allowing us to scale production without a major effect on our operations, and therefore, was presented as discontinued operationslarge capital investment.
Manufacturing Agreement with Cenntro
In 2017, AYRO Operating partnered with Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory in the consolidated statementautomotive district in Hangzhou, China, in a supply chain agreement to provide sub-assembly manufacturing services. Through the partnership, Cenntro initially acquired 19% in 2017 of operationsAYRO Operating’s common stock. Cenntro beneficially owned approximately 4.38% of our common stock as of December 31, 2020 and consolidated statement of cash flows.
Under our Manufacturing License Agreement with Cenntro (the “MLA”), in order for us to maintain our exclusive territorial rights pursuant to the MLA, for the first three years after the effective date of March 22, 2020, were preparedwe must meet the following minimum purchase requirements, which we believe we satisfied for the initial period: (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 90-day time frame will result in the automatic termination of the MLA. Events of default under the assumptionMLA 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. We are dependent on the MLA, and in the event of its termination our manufacturing operations and customer deliveries would be materially impacted.
Master Procurement Agreement with Club Car
In March 2019, AYRO Operating entered into a five-year Master Procurement Agreement, or the MPA, with Club Car for the sale of our 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. Although Club Car did not meet the volume threshold for 2020, we will continue as a going concern. Our financial statements do not include any adjustments that might result fromcurrently have no intention of selling our four-wheeled vehicles other than exclusively through Club Car. Under the outcome of this uncertainty. Our ability to continue as a going concern depends on our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate additional revenue. We cannot assure you, however, that we will be able to achieve anyterms of the foregoing.
Manufacturing Services Agreement with the Listing Rule.
On February 5,September 25, 2020, we entered into separate exchange agreementsa Master Manufacturing Services Agreement (the “Exchange Agreements”“Karma Agreement”) with the holders of existing Series H-5 Convertible Preferred Stock (the “Series H-5 Preferred Stock”Karma Automotive LLC (“Karma”), par value $0.0001 per share,pursuant to exchange an equivalent number of shareswhich Karma agreed to provide certain manufacturing services for the production of our Series H-6 Convertible Preferred Stock (the “Series H-6 Preferred Stock”), par value $0.0001 per share (the “Exchange”).vehicles. The Exchange closed on February 5, 2020. The purposeinitial statement of work provides that Karma will perform assembly of a certain quantity of the exchangeAYRO 411 vehicles and provide testing, materials management and outbound logistics services. For such services in the initial statement of work, we agreed to pay $1.2 million to Karma, of which (i) $0.52 million was to include voting rights.
On February 24, 2021, a first amendment to the Karma Agreement was made where Parties jointly agree to amend the terms of Exhibit A Statement of Work to Master Services Agreement, in order to allow Karma to assemble a certain number of units of the AYRO 411 vehicle.
Supply Agreement with Gallery Carts
During 2020, we entered into a supply agreement with Gallery Carts, 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 United States. This innovative solution permits food, beverage and merchandising operators to bring goods directly to consumers.
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 Club Car 411. The canopy doors, as well as the full vehicle, can be customized with end-user logos and graphics to enhance the brand experience. Gallery, with 40 years of experience delivering custom food kiosk solutions, has expanded into mobile electric vehicles as customers increasingly want food, beverages and merchandise delivered to where they are gathering. For example, a recent study conducted by Technomic found that a large majority of students, 77%, desired alternative mobile and to-go food options on campus.
Gallery Carts, a premier distributor of Club Car 411 low-speed electric vehicles manufactured by AYRO, has a diverse clientele throughout mobile food, beverage and merchandise distribution markets, for key customer applications such as university, corporate and government campuses, major league and amateur-level stadiums and arenas, resorts, airports and event centers. In addition to finding innovative and safe ways to deliver food and beverages to their patrons, reducing and ultimately eliminating their carbon footprint is a top priority for many of these customers.
Recent Developments
On January 25, 2021, we entered into a securities purchase agreement with certain institutional and accredited investors, pursuant to which we agreed to issue and sell in a registered direct offering an aggregate of 3,333,334 shares at an offering price of $6.00 per share, for gross proceeds of $20.0 million before the deduction of fees and offering expenses. In a concurrent private placement, we sold to such investors warrants to purchase, at any time on or after July 26, 2021 and on or before July 26, 2023, additional shares of common stock equal to the full amount of the common stock it purchased at the optioninitial closing, or an aggregate of 3,333,334 shares, at an exercise price of $6.93 per share.
In connection with the January 25, 2021 securities purchase agreement, we issued Palladium Capital Group, LLC (collectively with its affiliates, “Palladium”) a warrant to purchase 233,334 shares of common stock (which equals 7.0% of the holder thereof, into aaggregate number of shares of common stock ofsold in the Company determined by dividing the H-6 Stated Value by the initial conversion price of $0.72 per share, subjectJanuary 2021 registered direct offering). The warrants issued to a 9.99% blocker provision. The Series H-6 Preferred Stock hasPalladium have the same dividend rightsterms as the common stock, except as provided forinvestor warrants issued under the January 25, 2021 concurrent private placement.
On February 11, 2021, we entered into a securities purchase agreement with certain institutional and accredited investors, pursuant to which we agreed to issue and sell in the Series H-6 Certificatea registered direct offering an aggregate of Designation or as otherwise required by law. The Series H-6 Preferred Stock also has the same voting rights as the common stock, except that in no event shall a holder of Series H-6 Preferred Stock be permitted to exercise a greater number of votes than such holder would have been entitled to cast if the Series H-6 Preferred Stock had immediately been converted into4,400,001 shares of common stock at a conversionan offering price of $9.50 per share, for gross proceeds of $41.8 million before the deduction of fees and offering expenses. Each purchaser was also granted an option to purchase, on or before February 16, 2022, additional shares of common stock equal to $0.78 (subjectthe full amount of 75% of the common stock it purchased at the initial closing, or an aggregate of 3,300,001 shares, at an exercise price of $11.50 per share.
Palladium and Spartan Capital Securities, LLC (“Spartan,” or collectively with Palladium, the “Financial Advisors”) were entitled to adjustment for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications, combinations, reverse stock splits or other similar events). In addition, a holder (together with its affiliates) may not be permittedfee equal to vote Series H-6 Preferred Stock held by such holder8% of the gross proceeds raised in the February 2021 registered direct offering and warrants to the extent that such holder would beneficially own more than 9.99%purchase an aggregate of 271,158 shares of our common stock. In the eventstock at an exercise price of any liquidation or dissolution, the Series H-6 Preferred Stock ranks senior$10.925 per share and 35,885 shares of our common stock at an exercise price of $10.45 per share. The warrants are exercisable immediately following issuance and terminate five years following issuance.
Pursuant to the Securities Purchase Agreement dated July 21, 2020, during the three months ended March 31, 2021, investors purchased 302,500 of the Additional Shares of our common stock in the distributionpar value $0.0001 per share, at an offering price of assets, to the extent legally available$5.00 per share, for distribution.gross proceeds of $1.5 million.
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Factors Affecting Results of Operations
On December 19,Master Procurement Agreement
In March 2019, we entered into the Asset Purchase AgreementMPA with DropCar Operating, DC Partners, Spencer Richardson,Club Car. In partnership with Club Car and in interaction with its substantial dealer network, we have redirected our Co-Founderbusiness development resources towards supporting Club Car’s enterprise and Chief Executive Officer,fleet sales function as Club Car proceeds in its new product introduction initiatives.
COVID-19 Pandemic
Our business, results of operations and David Newman,financial condition have been adversely impacted by the recent coronavirus outbreak both in China and the United States. This has delayed our Co-Founderability to timely procure raw materials from our supplier in China, which in turn, has delayed shipments to and Chief Businesscorresponding revenue from customers. The pandemic and social distancing directives have interfered with our ability, and the ability of our employees, workers, contractors, suppliers and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business. The COVID-19 pandemic poses restrictions on our employees’ and other service providers’ ability to travel on pre-sales meetings, customers’ abilities to physically meet with our employees and the ability of our customers to test drive or purchase our vehicles and shutdowns that may be requested or mandated by governmental authorities, and we expect these restrictions to continue at least though the second quarter of 2021. The pandemic adversely impacted our sales and the demand for our products in 2020 and is expected to continue adversely impacting demand for our products in 2021.
Components of Results of Operations
Revenue
We derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts and service fees. In the past we also derived rental revenue from vehicle revenue sharing agreements with our tourist destination fleet operators, or Destination Fleet Operators (“DFOs”), and, to a lesser extent, shipping, parts and service fees. Provided that all other revenue recognition criteria have been met, we typically recognize revenue upon shipment, as title and risk of loss are transferred to customers and channel partners at that time. Products are typically shipped to dealers or directly to end customers, or in some cases to our international distributors. These international distributors assist with import regulations, currency conversions and local language. Our vehicle product sales revenues vary from period to period based on, among other things, the customer orders received and our ability to produce and deliver the ordered products. Customers often specify requested delivery dates that coincide with their need for our vehicles.
Because these customers may use our products in connection with a variety of projects of different sizes and durations, a customer’s orders for one reporting period generally do not indicate a trend for future orders by that customer. Additionally, order patterns do not necessarily correlate amongst customers.
Cost of Goods Sold
Cost of goods sold primarily consists of costs of materials and personnel costs associated with manufacturing operations, and an accrual for post-sale warranty claims. Personnel costs consist of wages and associated taxes and benefits. Cost of goods sold also includes freight and changes to our warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect cost of revenue to increase in absolute dollar, as product revenue increases.
Operating Expenses
Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.
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Research and Development Officer 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 sell substantially allincrease in absolute dollars as we continue to invest in new and existing products.
Sales and Marketing Expense
Sales and marketing expense consist primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses and allocated overhead. Marketing programs consist of advertising, tradeshows, events, corporate communications and brand-building activities. We expect sales and marketing expenses to increase in absolute dollars as we expand our sales force, expand our product lines, increase marketing resources, and further develop 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.
Stock-based compensation
We account for stock-based compensation expense in accordance with 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 assets associated withgrant using the DropCar OperatingBlack-Scholes option-pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the award. The fair value of the options granted to non-employees is measured and expensed as the options vest.
Restricted stock grants are stock awards that entitle the holder to receive shares of our common stock as the award vests over time. The fair value of each restricted stock grant is based on the fair market value price of common stock on the date of grant, and it is measured and expensed as the options vest.
Other (Expense) Income
Other (expense) income consists of income received or expenses incurred for activities outside of our core business. OperatingOther 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 we conduct business. In the case of a tax deferred asset, we reserve the entire value for future periods.
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Results of Operations
Three months ended March 31, 2021 compared to three months ended March 31, 2020
The following table sets forth our results of operations for each of the periods set forth below:
| For the three months ended March 31, | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Revenue | $ | 788,869 | $ | 146,816 | $ | 642,053 | ||||||
| Cost of goods sold | 644,503 | 113,155 | 531,348 | |||||||||
| Gross profit | 144,366 | 33,661 | 110,705 | |||||||||
| Operating expenses: | ||||||||||||
| Research and development | 1,927,561 | 154,699 | 1,772,862 | |||||||||
| Sales and marketing | 558,404 | 319,454 | 238,950 | |||||||||
| General and administrative | 3,301,309 | 1,249,052 | 2,052,257 | |||||||||
| Total operating expenses | 5,787,274 | 1,723,205 | 4,064,069 | |||||||||
| Loss from operations | (5,642,908 | ) | (1,689,544 | ) | (3,953,364 | ) | ||||||
| Other income and expense: | ||||||||||||
| Other income, net | 9,926 | 16 | 9,910 | |||||||||
| Interest expense | (851 | ) | (105,625 | ) | 104,774 | |||||||
| Net loss | $ | (5,633,833 | ) | $ | (1,795,153 | ) | $ | (3,838,680 | ) | |||
Revenue
Revenue was $0.79 million for the three months ended March 31, 2020 and 20192021 as compared to $0.15 million for the DropCar Operating business are presented as discontinued operationssame period in 2020, an increase of 437.3%, or $0.64 million. The increase in revenue was the result of an increase in sales of our vehicles, deriving from our MPA with Club Car, related powered-food box sales and the assetsother vehicle options.
Cost of goods sold and liabilities classified as held for sale are presented separately in the balance sheet.gross profit
Cost of the discontinued operations is presented as follows:
For the Three Months Ended March 31, | ||
2020 | 2019 | |
| SERVICE REVENUES | $1,012,261 | $1,099,443 |
| COST OF REVENUE | 842,642 | 1,127,045 |
| GROSS PROFIT (LOSS) | 169,619 | (27,602) |
| OPERATING EXPENSES | ||
| Research and development | 42,634 | 68,982 |
| General and administrative | 333,069 | 1,129,025 |
| Depreciation and amortization | 78,760 | 107,749 |
TOTAL OPERATING EXPENSES | 454,463 | 1,305,756 |
OPERATING LOSS | (284,844) | (1,333,358) |
| Other income, net | 300 | 1,724 |
| LOSS FROM DISCONTINUED OPERATIONS | $(284,544) | $(1,331,634) |
March 31, 2020 | December 31, 2019 | |
| Cash | $65,807 | $81,457 |
| Accounts receivable, net | 96,665 | 210,671 |
| Prepaid expenses and other current assets | 35,430 | 83,058 |
| Current assets held for sale | $197,902 | $375,186 |
| Property and equipment, net | $23,191 | $25,723 |
| Capitalized software costs, net | 364,116 | 410,261 |
| Operating lease right-of-use asset | - | 1,886 |
| Other assets | 3,525 | 3,525 |
| Noncurrent assets held for sale | $390,832 | $441,395 |
| Accounts payable and accrued expenses | 671,856 | 737,862 |
| Deferred revenue | 240,616 | 302,914 |
| Current liabilities held for sale | $912,472 | $1,040,776 |
Gross margin percentage was 18.3% for the three months ended March 31, 2019. This2021, as compared to 22.9% for the three months ended March 31, 2020. The decrease in gross margin percentage in the core business was primarily attributabledue to an increase in tariffs on raw materials imported from China and an increase in shipping costs due to the global COVID-19 pandemic. Vehicle sales prices were increased in January 2021 to partially offset these cost increases.
Research and development expense
Research and development (“R&D”) expense was $1.93 million for the three months ended March 31, 2021, as compared to $0.15 million for the same period in 2020, an increase of less than $0.1$1.78 million, or 1146.01%. The increase was primarily due to expenses related to personnel costs for our engineering, design, and research teams as we expanded the suite of option packages for our vehicles and initiated development of our next-generation three-wheeled vehicle. We had an increase in salaries and related expenses of $0.29 million, an increase of $1.18 million from R&D contracting for professional service and design costs and an increase in design and testing material of $0.25 million.
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Sales and marketing expense
Sales and marketing expense was $0.56 million for the three months ended March 31, 2021, as compared to $0.32 million for the same period in 2020, as we expanded our sales and marketing staff and marketing-related initiatives surrounding our next generation three-wheeled vehicle. Salaries and wages increased by $0.08 million and stock-based compensation increased by $0.03 million due to the addition of our sales and $0.1marketing resources. Discretionary marketing programs increased by $0.05 million and contracting for professional marketing services increased by $0.05 million. Additionally, depreciation expense for demonstration vehicles assigned to the sales and marketing team increased by $0.02 million as compared to the same period in 2020 due to a reclassification from general and administration expenses to sales and marketing expense for demonstration vehicles assigned to the sales and marketing team.
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 $3.30 million for the three months ended March 31, 2021, compared to $1.25 million for the same period in 2020, an increase of $2.05 million. Contracting for professional services increased by $0.34 million primarily a result of additional audit, legal and investor relations expenses incurred to support public reporting requirements. This amount was offset by the decrease of various expenses, primarily acquisition and financing cost of $0.35 million and a decrease in consulting services of $0.06 million. Board compensation expense increased by $0.12 million. Salaries and related costs increased by $0.28 million due to corporate expansion. Stock-based compensation expense increased by $1.53 million, primarily due to the expense of director and employee equity awards granted in 2020. Other public company-related expenses increased by $0.09 million.
Depreciation decreased by $0.01 million, primarily driven by fully depreciating the tooling for our AYRO 311 product line during 2020 and the reclassification of depreciation expense for demonstration vehicles assigned to the sales and marketing team due to our redirection of our marketing focus in-house. Rent decreased for the three months ended March 31, 2021 as compared to the same period in 2020 due to the accounting in 2020 for $0.02 million expense from contract liabilities and a rent payment towards the prior office space of $0.03 million.
Non-GAAP Financial Measure
We present Adjusted EBITDA because we consider it to be an important supplemental measure of our operating performance, and we believe it may be used by certain investors as a measure of our operating performance. Adjusted EBITDA is defined as income (loss) from operations before interest income and expense, income taxes, depreciation, amortization of intangible assets, amortization of discount on debt, impairment of long-lived assets, 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 our non-cash operating expenses, we believe that providing a non-GAAP financial measure that excludes non-cash and non-recurring expenses allows for meaningful comparisons between our core business operating results and those of other legal, professionalcompanies, as well as providing us with an important tool for financial and public company costs.
Adjusted EBITDA may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items.
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. We do 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 to common stockholders for the three months ended March 31, 2021 and 2020.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net Loss | $ | (5,633,833 | ) | $ | (1,795,153 | ) | ||
| Depreciation and Amortization | 124,198 | 114,275 | ||||||
| Stock-based compensation expense | 1,699,423 | 156,458 | ||||||
| Amortization of Discount on Debt | - | 63,744 | ||||||
| Interest expense | 851 | 28,436 | ||||||
| Adjusted EBITDA | $ | (3,809,361 | ) | $ | (1,432,240 | ) | ||
Liquidity and Capital Resources
As of March 31, 2021, we had $91.49 million in cash and working capital of $92.96 million. As of December 31, 2020, we had $36.54 million in cash and working capital of $38.50 million. The increase in cash and working capital was primarily a result of our capital raising activities during the three months ended March 31, 2021.
Our sources of cash since inception have been predominantly from the sale of equity and debt.
On January 25, 2021, we entered into a securities purchase agreement with certain institutional and accredited investors, pursuant to which we agreed to issue and sell in a registered direct offering an aggregate of 3,333,334 shares at an offering price of $6.00 per share, for gross proceeds of $20.00 million before the deduction of fees and offering expenses. In a concurrent private placement, we sold to such investors warrants to purchase, at any time on or after July 26, 2021 and on or before July 26, 2023, additional shares of common stock equal to the full amount of the common stock it purchased at the initial closing, or an aggregate of 3,333,334 shares, at an exercise price of $6.93 per share.
On February 11, 2021, we entered into a securities purchase agreement with certain institutional and accredited investors, pursuant to which we agreed to issue and sell in a registered direct offering an aggregate of 4,400,001 shares of common stock at an offering price of $9.50 per share, for gross proceeds of $41.80 million before the deduction of fees and offering expenses. Each purchaser was also granted the option to purchase, on or before February 16, 2022, additional shares of common stock equal to the full amount of 75% of the common stock it purchased at the initial closing, or an aggregate of 3,300,001 shares, at a purchase price of $11.50 per share.
Pursuant to the Securities Purchase Agreement dated July 21, 2020, during the three months ended March 31, 2020, investors purchased 302,500 additional shares at an offering price of $5.00 per share, for gross proceeds of $1.5 million.
Our business is capital-intensive, and 2019, we had net lossesfuture capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, 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 may also use capital for strategic acquisitions or transactions.
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 continuing operations of approximately $0.8 millionlarger companies, other technology companies and $0.7 million, respectively. Atother technologies. Based on the foregoing, management believes that the existing cash at March 31, 2020, we had an accumulated deficit of $35.8 million. We anticipate that we2021, will continuebe sufficient to incur net losses intofund operations for at least the foreseeable future and will need to raise additional capital to continue. At March 31, 2020, we had cash and cash equivalents of $3.6 million. At these capital levels, we believe we do not have sufficient funds to continue to operate for a 12 month period fromnext twelve months following the date of this report.
Summary of Cash Flows
The following table summarizes our cash flows:
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows: | ||||||||
| Net cash used in operating activities | $ | (3,450,067 | ) | $ | (983,115 | ) | ||
| Net cash used in investing activities | $ | (147,294 | ) | $ | (88,085 | ) | ||
| Net cash provided by financing activities | $ | 58,551,425 | $ | 498,318 | ||||
Operating Activities
During the financial statements includedthree months ended March 31, 2021, we used $3.45 million in this Form 10-Q, by which point we will need to become profitable, improve cash flow from operations, begin selling property and equipment, or complete a new capital raise. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
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 three months ended March 31, 2021, we used cash of $0.15 million from investing activities as compared to $0.09 million of cash used in investing activities during 2020, an increase of $0.06 million. The net increase was primarily due to purchases of property and equipment to support facilities and capabilities expansion.
Financing Activities
During the three months ended March 31, 2021, we received net proceeds of an aggregate of $58.27 million from the issuance of common stock, net of fees and expenses, $0.18 million from the exercise of options to purchase additional shares of common stock, and $0.10 million from the exercise of warrants for cash. During the three months ended March 31, 2020, we received $0.50 million in debt financing from certain DropCar investors of which the note was approximately $0.6 million,repaid upon closing of the Merger.
Contractual Obligations and Commitments
We have made certain indemnities, under which includes a net loss from continuing operations of approximately $0.8 million, offset by cash provided by a changewe may be required to make payments to an indemnified party, in net working capital items of $0.2 million relatedrelation to certain transactions. We indemnify our directors and officers to the increasemaximum extent permitted under the laws of the State of Delaware. In connection with our facility leases, we have indemnified our lessors for certain claims arising from the use of the facilities. The duration of the indemnities varies and, in accounts payablemany cases, is indefinite. These indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and accrued expensesno liabilities have been recorded for these indemnities.
| 12 |
Off-Balance Sheet Arrangements
As of $0.2 million and the decrease in prepaid expenses and other assets of less than $0.1 million.
Not applicable.
Based on the evaluation of our disclosure controls and procedures as of March 31, 2020. Based on such evaluation,2021, our CEO and CFO concluded the disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting described below.
In its assessment of the criteria established in the COSO Framework including more specifically:
Plan for Remediation of the Company’s limited number of employees.
We have identified and implemented,taken and continue to implement, the actions described belowtake remedial steps to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses. As we continue our evaluation and improve our internal control over financial reporting management may modify the actions described below or identify and take additional measures to address control deficiencies. Until the remediation efforts described below, including any additional measures management identifies as necessary, are completed, the material weaknesses described above will continue to exist.
Changes in Internal Controls over Financial Reporting
Following the fiscal quarter ended March 31, 2020. Other thancompletion of the remediation stepsMerger, our management is still in the process of evaluating any related changes to our internal control over financial reporting as a result of this integration. Except for any changes relating to this integration and as otherwise described above and the appointmentunder “Plan for Remediation of our Chief Financial Officer described above,Material Weakness,” there werehas been no other material changeschange in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2020period covered by this report that has materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
| 13 |
Other than the proceedings identified in Note 13 of the Notes to the Financial Statements in this Form 10-Q, there have been no material changes to the legal proceedings disclosed in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2019.
There have been no material changes to the risk factors containedas identified in our Annual Report on Form 10-K for the fiscal year ended Decemberfiled March 31, 2019,2021, as filed with the SEC on March 30, 2020 and as amended on April 10, 2020.
| None. |
None.
Not applicable.
None.
| 2.2 | Asset Purchase Agreement, by and among DropCar, Inc., DropCar Operating Company, Inc., DC Partners Acquisition, LLC, Spencer Richardson and David Newman, dated December 19, 2019 (incorporated by reference to Exhibit 2.5 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2019) | ||
| 2.3 | Amendment to Asset Purchase Agreement, by and among DropCar, Inc., DropCar Operating Company, Inc., DC Partners Acquisition, LLC, Spencer Richardson and David Newman, dated May 28, 2020 (incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020) | ||
| 3.1 | Certificate of Amendment to the Certificate of Designations, Preferences and Rights of Series H-4 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020) | ||
| 3.2 | Amended and Restated Certificate of Incorporation, effective May 28, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020) | ||
| 3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation, effective May 28, 2020 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020) | ||
| 3.4 | Amended and Restated Bylaws, effective May 28, 2020 (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020) | ||
| 3.5 | First Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 8, 2020) | ||
| 4.1 | Form of Investor Warrant issued in connection with the January 2020 Offering (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2021) | ||
| 4.2 | Form of Palladium Warrant issued in connection with the January 2020 Offering (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2021) | ||
| 4.3 | Form of Placement Agent Common Stock Purchase Warrant issued in connection with the February 2021 Offering (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2021) | ||
| 4.4** | Form of Spartan Common Stock Purchase Warrant issued in connection with the February 2021 Offering | ||
| 10.1 | Form of Securities Purchase Agreement, dated January 25, 2021, by and among the Company and the purchasers thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2021) | ||
| 10.2 | Form of Securities Purchase Agreement, dated February 11, 2021, by and among the Company and the purchasers thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2021) | ||
| ** | Filed herewith. | |
| Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The |
| 16 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| By: | /s/ | |
President, Chief Executive Officer, and Director | ||
| (Principal Executive Officer) | ||
| By: | /s/ | |
Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| 17 |