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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

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.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   98-0204758
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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 Class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001
per share
  AYRO   The NASDAQ Stock Market LLC

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
       
Non-accelerated filer Smaller reporting company
       
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of November 17, 2023, the registrant had 4,890,137 shares of common stock outstanding.

 

 

 

   

 

AYRO, Inc.

Quarter Ended September 30, 2023

 

Table of Contents

 

    PAGE
PART I FINANCIAL INFORMATION F-1
     
ITEM 1. Financial Statements (Unaudited) F-1
  Condensed Consolidated Balance Sheets as of September 30, 2023, and December 31, 2022 F-1
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023, and 2022 F-2
  Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023, and 2022 F-3
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023, and 2022 F-4
  Notes to the Condensed Consolidated Financial Statements (Unaudited) F-5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 16
ITEM 4. Controls and Procedures 16
     
PART II OTHER INFORMATION 17
     
ITEM 1. Legal Proceedings 17
ITEM 1A. Risk Factors 17
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Mine Safety Disclosures 18
ITEM 5. Other Information 18
ITEM 6. Exhibits 19
     
SIGNATURES 21

 

i

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

   September 30,   December 31, 
   2023   2022 
ASSETS        
Current assets:          
Cash and cash equivalents  $3,287,902   $39,096,562 
Restricted Cash   10,000,000    - 
Marketable securities   34,627,782    9,848,804 
Accounts receivable, net   143,990    510,071 
Inventory, net   4,346,610    970,381 
Prepaid expenses and other current assets   3,085,303    1,478,845 
Total current assets   55,491,588    51,904,663 
           
Property and equipment, net   3,499,299    2,192,337 
Operating lease – right-of-use asset   716,957    819,401 
Deposits and other assets   90,642    73,683 
Total assets  $59,798,486   $54,990,084 
           
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $826,924   $1,107,215 
Accrued expenses   992,966    964,937 
Current portion lease obligation – operating lease   192,170    165,767 
Total current liabilities   2,012,060    2,237,919 
           
Derivative liability   1,931,000    - 
Warrant liability   20,065,440    - 
Lease obligation - operating lease, net of current portion   552,728    693,776 
Total liabilities   24,561,228    2,931,695 
           
Commitments and contingencies   -     -  
MEZZANINE EQUITY          
Series H-7 Convertible redeemable preferred stock, ($0.0001 par value and $1,000 face value, 22,000 shares authorized; 22,000 shares issued and outstanding at September 30, 2023, and 0 shares at December 31, 2022, respectively). Liquidation preference of $22,244,000 as of September 30, 2023   7,925,309    - 
           
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 September 30, 2023, and December 31, 2022, respectively)   -    - 
Convertible Preferred Stock Series H-3, ($0.0001 par value; authorized – 8,461 shares; issued and outstanding – 1,234 shares as of September 30, 2023, and December 31, 2022, respectively)   -    - 
Convertible Preferred Stock Series H-6, ($0.0001 par value; authorized – 50,000 shares; issued and outstanding – 50 shares as of September 30, 2023, and December 31, 2022, respectively)   -    - 
Common Stock, $0.0001 par value; authorized – 200,000,000 shares; issued and outstanding – 4,890,137 and 4,655,205 as of September 30, 2023 and December 31, 2022, respectively)   489    466 
Additional paid-in capital   132,549,618    133,227,507 
Accumulated deficit   (105,238,158)   (81,169,584)
Total stockholders’ equity   27,311,949    52,058,389 
Total liabilities, mezzanine equity and stockholders’ equity  $59,798,486   $54,990,084 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-1
 

 

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   2023   2022   2023   2022 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Revenue  $88,395   $373,186   $341,023   $2,381,592 
Cost of goods sold   231,837    955,003    783,656    4,959,660 
Gross loss   (143,441)   (581,817)   (442,633)   (2,578,068)
                     
Operating expenses:                    
Research and development   1,335,167    1,837,510    5,870,555    3,749,714 
Sales and marketing   390,684    384,748    1,529,637    1,566,790 
General and administrative   4,370,684    3,000,156    10,461,733    8,446,785 
Total operating expenses   6,096,535    5,222,414    17,861,925    13,763,289 
                     
Loss from operations   (6,239,976)   (5,804,231)   (18,304,558)   (16,341,357)
                     
Other income(expense):                    
Interest Income   35,557    51,792    370,387    71,389 
Change in FV-Warrant Liability   (10,095,960)   -    (10,095,960)   - 
Change in FV-Derivative Liability   3,216,000    -    3,216,000    - 
Unrealized gain (loss) on marketable securities   403,996    (32,135)   602,211    (75,204)
Realized gain on marketable securities   90,812    103,000    143,344    110,490 
Other income (expense), net   (6,349,596)   122,657    (5,764,018)   106,675 
                     
Net loss   (12,589,572)   (5,681,574)   (24,068,576)   (16,234,682)
                     
Preferred stock dividends   (244,000)   -    (244,000)   - 
Accretion of discounts to redemption value of H-7 convertible preferred stock   

(1,165,635

)   -    

(1,165,635

)   - 
Deemed Dividend (Series H-5 warrants)   

(199,000

)   -    

(199,000

)   - 
                     
Net loss attributable to Common Stockholders  $(14,198,207)  $(5,681,574)  $(25,677,211)  $(16,234,682)
                     
Net loss per share, basic and diluted  $(2.99)  $(1.23)  $(5.47)  $(3.51)
                     
Basic and diluted weighted average Common Stock outstanding   4,744,229    4,636,829    4,698,104    4,624,437 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-2
 

 

AYRO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

 

Three and Nine Months Ended September 30, 2023

 

                                                     
   Series H-7   Series H   Series H-3   Series H-6           Additional         
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   (Deficit)   Total 
Balance, January 1, 2023   -   $-    8   $-    1,234   $-    50   $-    4,655,205   $466   $133,227,507   $(81,169,584)  $52,058,389 
Stock based compensation        -          -          -          -               20,116         20,116 
Vested Restricted Stock       -         -         -         -     13,858    1    246,624         246,625 
Net Loss       -         -         -     -     -                    (5,475,769)   (5,475,769)
Balance, March 31, 2023   -    -    8    -    1,234    -    50    -    4,669,063    467    133,494,247    (86,645,353)   46,849,361 
Stock based compensation        -          -          -          -               11,417         11,417 
Vested Restricted Stock        -          -          -          -     23,568    2    230,711         230,713 
Net Loss        -          -          -          -                    (6,003,233)   (6,003,233)
Balance, June 30, 2023   -    -    8    -    1,234    -    50    -    4,692,632    469    133,736,375    (92,648,586)   41,088,258 
Sale of preferred shares                  -          -          -                           
Issuance of convertible preferred stock, net of discounts and transaction costs   22,000    6,515,674                                                      - 
Issuance of rounded shares as a result of the reverse stock split.                                           173,530    17    (17)        - 
Dividends (Accrued Series H-7 Preferred)        244,000                                                 (244,000)   (244,000)
Deemed Dividend (Series H-5 warrants)                                                     -       - 
Accretion of discounts to redemption value of H-7 convertible preferred stock        1,165,635                                                 (1,165,635)   (1,165,635)
Stock based compensation                                                     15,165         15,165 
Vested Restricted Stock                                           23,975    3    207,730         207,733 
Net Loss        -          -          -          -                    (12,589,572)   (12,589,572)
Balance, September 30, 2023   22,000   $7,925,309    8   $-    1,234   $-    50   $-    4,890,137   $489   $132,549,618   $(105,238,158)  $27,311,949 

 

Three and Nine Months Ended September 30, 2022

 

   Series H-7   Series H   Series H-3   Series H-6           Additional         
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Paid-in   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   (Deficit)   Total 
Balance, January 1, 2022   -   $-    8   $-    1,234   $-    50   $-    4,608,370   $461   $131,658,002   $(58,234,231)  $73,424,232 
Stock based compensation        -          -          -          -               288,110         288,110 
Vested Restricted Stock        -          -          -          -     5,375    1    329,380         329,381 
Net Loss   -     -     -     -     -     -     -     -                    (4,578,660)   (4,578,660)
Balance at March 31, 2022   -    -    8    -    1,234    -    50    -    4,613,745    462    132,275,492    (62,812,891)   69,463,063 
Stock based compensation        -          -          -          -               303,553         303,553 
Vested Restricted Stock        -          -          -          -     13,820    1    (1)        - 
Net Loss   -     -     -     -          -          -                    (5,974,448)   (5,974,448)
Balance, June 30, 2022   -    -    8    -    1,234    -    50    -    4,627,565    463    132,579,044    (68,787,339)   63,792,168 
Stock based compensation        -          -          -          -               332,181         332,181 
Vested Restricted Stock        -          -          -          -     13,858    1    (1)        - 
Net Loss        -          -     -     -          -                    (5,681,574)   (5,681,574)
Balance, September 30, 2022   -   $-    8   $-    1,234   $-    50   $-    4,641,423   $464   $132,911,224   $(74,468,913)  $58,442,775 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-3
 

 

AYRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

   2023   2022 
   Nine Months Ended 
   September 30, 
   2023   2022 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(24,068,576)  $(16,234,682)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   781,852    442,890 
Stock-based compensation   731,768    923,844 
Change in FV-Derivative Liability   (3,216,000)   - 
Change in FV-Warrant Liability   10,095,960    - 
Amortization of right-of-use asset   123,885    155,308 
Bad debt expense   292,010    2,136 
Unrealized gain on marketable securities   (602,211)   75,204 
Realized gain on marketable securities   (143,344)   (110,490)
Impairment of inventory and prepaid   -    2,351,947 
Change in operating assets and liabilities:          
Accounts receivable   74,072    510,922 
Inventory   (3,376,229)   462,025 
Prepaid expenses and other current assets   (1,606,457)   (1,430,565)
Deposits and other assets   (500)   18,798 
Accounts payable   (280,291)   516,347 
Accrued expenses   28,029    (473,953)
Lease obligations - operating leases   (136,086)   (168,935)
Net cash used in operating activities   (21,302,119)   (12,959,204)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (2,076,070)   (970,557)
Change in marketable securities   (24,033,422)   (15,755,310)
Purchase of intangible assets   (29,204)   (46,546)
Net cash used in by investing activities   (26,138,696)   (16,772,413)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from private placement of preferred stock, net of transaction costs   21,632,156    - 
Net cash provided by financing activities   21,632,156    - 
           
Net change in cash, cash equivalents and restricted cash   (25,808,660)   (29,731,616)
           
Cash, cash equivalents and restricted cash, beginning of period   39,096,562    69,160,466 
           
Cash, cash equivalents and restricted cash, end of period  $13,287,902   $39,428,850 
           
Supplemental disclosure of cash and non-cash transactions:          
Accrual of Series H-7 Convertible Preferred Stock Dividends  $244,000   $- 
Restricted Stock issued previously accrued  $-   $329,381 
Initial fair value of warrant liability  $

9,969,480

   $- 
Initial fair value of derivative liability  $

5,147,000

   $- 
Deemed Dividend H-5 Warrants  $

199,000

   $- 
Accretion of discounts to redemption value of H-7 convertible preferred stock  $

1,165,635

   $- 
Accrued fixed assets  $-   $

193,053

 
           
Supplemental disclosure of restricted cash:          
Cash and cash equivalents  $3,287,902   $39,428,850 
Restricted Cash  $10,000,000   $- 
Total cash, cash equivalents and restricted cash  $13,287,902   $39,428,850 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

F-4
 

 

AYRO, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

 

AYRO, Inc. (“AYRO” or the “Company”), a Delaware corporation formerly known as DropCar, Inc. (“DropCar”), a corporation headquartered outside Austin, Texas, is the merger successor discussed below of AYRO Operating Company, Inc. (“AYRO Operating”), which was formed under the laws of the State of Texas on May 17, 2016 as Austin PRT Vehicle, Inc. and subsequently changed its name to Austin EV, Inc. under an Amended and Restated Certificate of Formation filed with the State of Texas on March 9, 2017. On July 24, 2019, the Company changed its name to AYRO, Inc. and converted its corporate domicile to Delaware. The Company was founded on the basis of promoting resource sustainability. The Company, and its wholly owned subsidiaries, are principally engaged in manufacturing and sales of environmentally conscious, minimal-footprint electric vehicles. The all-electric vehicles are typically sold both directly to customers and to dealers in the United States.

 

Reverse Stock Split

 

On September 15, 2023, the Company effected a one-for-eight reverse stock split of the Company’s common stock (the “Reverse Stock Split”). All share and per share information in this quarterly report have been retroactively adjusted to reflect the Reverse Stock Split.

 

Strategic Review

 

Following the hiring of the Company’s current Chief Executive Officer in the third quarter of 2021, AYRO initiated a strategic review of its product development strategy, as AYRO focused on creating value within the electric vehicle, last-mile delivery, smart payload and enabling infrastructure markets. In connection with the strategic review by the Company, AYRO cancelled development of its planned next-generation three-wheeled high-speed vehicle.

 

For the past several years, AYRO’s primary supplier has been Cenntro Automotive Group, Ltd. (“Cenntro”), which operates a large electric vehicle factory in the automotive district in Hangzhou, China. As a result of rising shipping costs, quality issues with certain components and persistent delays, the Company ceased production of the AYRO 411x from Cenntro in September 2022 in order to focus its resources on the development and launch of the new 411 fleet vehicle model year 2023 refresh (the “Vanish”).

 

In December of 2021, the Company began research and development on the Vanish, including updates on its supply chain evolution, offshoring/onshoring mix, manufacturing strategy, and annual model year refresh program. The Company commenced low-rate initial production of the Vanish in the second quarter of 2023 and commenced initial sales and delivery of the Vanish in the third quarter of 2023.

 

F-5
 

 

NOTE 2. LIQUIDITY AND OTHER UNCERTAINTIES

 

Liquidity and Other Uncertainties

 

The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”), which contemplates continuation of the Company as a going concern. The Company is subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, competition from larger companies, other technology companies and other technologies. The Company has a limited operating history and the sales and income potential of its business and market are unproven. The Company incurred net losses of $24,068,576 for the nine months ended September 30, 2023, and negative cash flows from operations of $21,302,119 for the nine months ended September 30, 2023. On September 30, 2023, the Company had cash and cash equivalents totaling $3,287,902 marketable securities of $34,627,782 and restricted cash of $10,000,000. In addition, overall working capital increased by $3,812,783 during the nine months ended September 30, 2023. Management believes that the existing cash, cash equivalents and marketable securities as of September 30, 2023, will be sufficient to fund operations for at least the next twelve months following the issuance of these unaudited condensed consolidated financial statements.

 

On August 7, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”), pursuant to which it agreed to sell to certain existing investors (the “Investors”) in a private placement (the “Private Placement”) (i) an aggregate of 22,000 shares of the Company’s newly designated Series H-7 convertible preferred stock, par value $0.0001 per share, with a stated value of $1,000 per share (“Series H-7 Preferred Shares”), and (ii) warrants (the “Warrants”) initially exercisable for up to an aggregate of 2,750,000 shares of common stock. The Company raised gross proceeds of $22 million from the sale, which closed on August 10, 2023.

 

The certificate of designations for the Series H-7 Preferred Shares (the “Certificate of Designations”) contains certain restrictive provisions, including (i) a requirement to maintain unencumbered, unrestricted cash and cash equivalents on hand in an amount equal to (a) until December 31, 2023, at least $20,000,000 plus the net proceeds from the sale of the Series H-7 Preferred Shares pursuant to the Purchase Agreement, and (b) from January 1, 2024 and until an aggregate of eighty percent (80%) of the Series H-7 Preferred Shares have been converted into shares of common stock, at least $21,000,000, and (ii) a requirement to deposit an amount equal to $10,000,000 from the Private Placement proceeds into a newly established segregated deposit account of the Company (“Segregated Cash”), and to use such Segregated Cash solely for the purpose of performing the Company’s monetary obligations to the holders of the Series H-7 Preferred Shares, provided, however, that the Company may use the Segregated Cash for any purpose, including general corporate purposes, with the prior written consent of holders of at least 75% of the outstanding Series H-7 Preferred Shares. As of September 30, 2023, the Company was not in compliance with the restrictive provisions discussed above. The Company has regained compliance subsequent to September 30, 2023.

 

The Purchase Agreement contains certain representations and warranties, covenants, and indemnities customary for similar transactions. The representations, warranties and covenants contained in the Purchase Agreement were made solely for the benefit of the parties to the Purchase Agreement and may be subject to limitations agreed upon by the contracting parties. Among other covenants, the Purchase Agreement requires the Company to hold a meeting of its stockholders no later than November 5, 2023, to seek approval under Nasdaq Stock Market Rule 5635(d) (the “Stockholder Approval”) for the issuance of shares of common stock at prices below the “Minimum Price” (as defined in Rule 5635 of the Rules of the Nasdaq Stock Market) on the date of the Purchase Agreement pursuant to the terms of the Preferred Stock and the Warrants. Such Stockholder Approval was obtained at a Special Meeting held on September 14, 2023.

 

F-6
 

 

The Company may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials, including lithium-ion battery cells, semiconductors, and integrated circuits. Any such increase or supply interruption could materially and negatively impact the Company’s business, prospects, financial condition, and operating results. Currently, the Company is experiencing supply chain shortages, including with respect to lithium-ion battery cells, integrated circuits, vehicle control chips, and displays. Certain production-ready components may be delayed in shipment to Company facilities which has and may continue to cause delays in validation and testing for these components, which would in turn create a delay in the availability of saleable vehicles.

 

The Company uses various raw materials, including aluminum, steel, carbon fiber, non-ferrous metals (such as copper), and cobalt. The prices for these raw materials fluctuate depending on market conditions, and global demand and could adversely affect business and operating results. For instance, the Company is exposed to multiple risks relating to price fluctuations for lithium-ion cells. These risks include:

 

 

the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric vehicle industry as demand for such cells increases;

     
 

disruption in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and

     
  an increase in the cost of raw materials, such as cobalt, used in lithium-ion cells.

 

Any disruption in the supply of lithium-ion battery cells, semiconductors, or integrated circuits could temporarily disrupt production of the Company’s vehicles until a different supplier is fully qualified. Moreover, battery cell manufacturers may refuse to supply electric vehicle manufacturers if they determine that the vehicles are not sufficiently safe. Furthermore, fluctuations or shortages in petroleum and other economic conditions may cause the Company to experience significant increases in freight charges and raw material costs. Substantial increases in the prices for our raw materials would increase operating costs and could reduce our margins if the increased costs cannot be recouped through increased electric vehicle prices. There can be no assurance that the Company will be able to recoup the increasing costs of raw materials by increasing vehicle prices.

 

We have made certain indemnities, under which we may be required to make payments to an indemnified party, in relation to certain transactions. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware. In connection with our facility leases, we have indemnified our lessors for certain claims arising from the use of the facilities. The duration of the indemnities vary and, in many cases, are indefinite. These indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities.

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the unaudited condensed consolidated financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2023, may not be indicative of results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes to those statements for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2023, as amended on May 1, 2023.

 

F-7
 

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.

 

The Company’s most significant estimates include marketable securities, revenue recognition, the measurement of stock-based compensation expenses, fair value measurements of warrant and derivative liabilities and accretion of preferred stock. Actual results could differ from these estimates.

 

Restricted Cash

 

As of September 30, 2023, cash of $10 million was restricted in accordance with the Certificate of Designations. See Note 2, above.

 

Marketable Securities

 

Marketable securities include investment in fixed income bonds and U.S. Treasury securities that are considered to be highly liquid and easily tradeable. The marketable securities are considered trading securities and are measured at fair value and are accounted for in accordance with ASC 320. The marketable securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the Company’s fair value hierarchy. The Company held $34,627,782 and $9,848,804 in marketable securities as of September 30, 2023, and December 31, 2022, respectively.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services.

 

To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

 

Nature of goods and services

 

The following is a description of the Company’s products and services from which the Company generates revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:

 

Product revenue

 

Product revenue from customer contracts is recognized on the sale of each electric vehicle as vehicles are shipped to customers. The majority of the Company’s vehicle sales orders generally have only one performance obligation: sale and delivery of complete vehicles. Ownership and risk of loss transfers to the customer based on FOB shipping point and freight charges are the responsibility of the customer. Revenue is typically recognized at the point control transfers or in accordance with payment terms customary to the business. The Company provides product warranties to assure that the product assembly complies with agreed upon specifications. The Company’s product warranty is similar in all material respects to the product warranties provided by the Company’s suppliers, therefore minimizing the warranty liability to the standard labor rates associated with the defective part replacement. Customers do not have the option to purchase a warranty separately; as such, warranty is not accounted for as a separate performance obligation. The Company’s policy is to exclude taxes collected from a customer from the transaction price of automotive contracts.

 

F-8
 

 

Shipping revenue

 

Amounts billed to customers related to shipping and handling are classified as shipping revenue. The Company has elected to recognize the cost for freight and shipping when control over vehicles has transferred to the customer as an operating expense. The Company has reported shipping expenses of $15,148 and $79,767 for the three months ended September 30, 2023, and 2022 and $56,482 and $335,812 for the nine months ended September 30, 2023, and 2022 respectively, included in General and Administrative Expenses.

 

Services and other revenue

 

Services and other revenue consist of non-warranty after-sales vehicle services. Revenue is typically recognized at a point in time when services and replacement parts are provided.

 

Miscellaneous income

 

Miscellaneous income consists of late fees charged for receivables not paid within the terms of the customer agreement based upon the outstanding customer receivable balance. This revenue is earned when a customer’s receivable balance becomes delinquent, and its collection is reasonably assured and is calculated using a stated late fee rate multiplied by the outstanding balance that is subject to a late fee charge.

 

Derivative Financial Instruments

 

The Company evaluates all its financial instruments to determine if such instruments contain features that qualify as embedded derivatives. Embedded derivatives must be separately measured from the host contract if all the requirements for bifurcation are met. The assessment of the conditions surrounding the bifurcation of embedded derivatives depends on the nature of the host contract. Bifurcated embedded derivatives are recognized at fair value, with changes in fair value recognized in the statement of operations each period. Bifurcated embedded derivatives are classified with the related host contract in the Company’s balance sheet. These particular derivatives are assessed under ASC 480 and ASC 815.

 

Fair Value Measurements

 

In accordance with ASC 820 (Topic 820, Fair Value Measurements and Disclosures), the company uses a three-level hierarchy for fair value measurements of certain assets and liabilities for financial reporting purposes that distinguishes between market participant assumptions developed from market data obtained from outside sources (observable inputs) and our own assumptions about market participant assumptions developed from the best information available to us in the circumstances (unobservable inputs). The fair value hierarchy is divided into three levels based on the source of inputs as follows:

 

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active; and
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

F-9
 

 

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation. The Company recognizes all employee and non-employee share-based compensation as an expense in the financial statements on a straight-line basis over the requisite service period, based on the terms of the awards. Equity-classified awards principally related to stock options, restricted stock awards (“RSAs”) and equity-based compensation, are measured at the grant date fair value of the award. The Company determines grant date fair value of stock option awards using the Black-Scholes option-pricing model. The fair value of RSAs is determined using the closing price of the Company’s common stock on the grant date. For service based vesting grants, expense is recognized ratably over the requisite service period based on the number of options or shares. For value-based vesting grants, expense is recognized via straight line expense over the expected period per grant as determined by outside valuation experts. Stock-based compensation is reversed for forfeitures in the period of forfeiture.

 

The Company estimates the fair value of stock-based and cash unit awards containing a market condition using a Monte Carlo simulation model. Key inputs and assumptions used in the Monte Carlo simulation model include the stock price of the award on the grant date, the expected term, the risk-free interest rate over the expected term, the expected annual dividend yield, and the expected stock price volatility. The expected volatility is based on a combination of the historical and implied volatility of the Company’s publicly traded, near-the-money stock options, and the valuation period is based on the vesting period of the awards. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant and, since the Company does not currently pay or plan to pay a dividend on its common stock, the expected dividend yield was zero.

 

Stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the underlying equity instrument. The attribution of the fair value of the equity instrument is charged directly to compensation expense over the period during which services are rendered.

 

Basic and Diluted Loss Per Share

 

Basic and diluted net loss per share is determined by dividing net loss by the weighted average ordinary shares outstanding during the period. For all periods presented with a net loss, the shares underlying the ordinary share options and warrants have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate both basic and diluted loss per share is the same for periods with a net loss.

 

In accordance with ASC 260, warrants that are accounted for as liabilities which are potentially dilutive have not been included in diluted earnings per share as they would have been anti-dilutive during the three and nine months ended September 30, 2023.

 

F-10
 

 

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be anti-dilutive:

 

   2023   2022   2023   2022 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Options to purchase common stock   38,696    98,178    38,696    98,178 
Restricted stock unvested   116,293    96,353    116,293    96,353 
Warrants outstanding   11,605,759    763,253    11,605,759    763,253 
Preferred stock outstanding   11,122,696    309    11,122,696    309 
Totals   22,883,444    958,093    22,883,444    958,093 

 

Recent Accounting Pronouncements

 

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, which reduces the number of accounting models for convertible instruments, amends diluted earnings per share calculations for convertible instruments and allows more contracts to qualify for equity classification. ASU 2020-06 was effective for interim and annual periods beginning after December 15, 2021. The Company adopted ASU 2020-06 as of January 1, 2023. The adoption did not result in a material change to these unaudited condensed consolidated financial statements.

 

Inflation Risk

 

The Company does not believe that inflation has had a material effect on its business, financial condition, or results of operations. If costs were to become subject to significant inflationary pressures, the Company may not be able to fully offset such higher costs through price increases. The Company’s inability or failure to do so could harm the business, financial condition, and results of operations.

 

NOTE 4. REVENUES

 

Disaggregation of Revenue

 

Revenue by type was as follows:

 

   2023   2022   2023   2022 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
Revenue type                    
Product revenue  $80,475   $332,792   $327,863   $2,170,943 
Shipping revenue   7,920    35,507    3,770    165,762 
Miscellaneous income   -    4,887    9,390    44,887 
Total Revenue  $88,395   $373,186   $341,023   $2,381,592 

 

Warranty Reserv