Exhibit 99.1
AYRO
MD&A AND BUSINESS
AYRO
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis of
AYRO’s financial condition and operating results together
with AYRO’s financial statements and related notes included
elsewhere in the exhibits to this Current Report on Form 8-K (the
"Form 8-K"). This discussion and analysis and other parts of this
section contain forward-looking statements based upon current
beliefs, plans and expectations that involve risks, uncertainties
and assumptions. See “ Forward-Looking
Statements” under Item 8.01 of this Form 8-K.
AYRO’s actual results may differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including those set forth under “Risk
Factors” or in other parts of this
Form
8-K .
Overview
AYRO
designs, manufactures and markets three- and four-wheeled
purpose-built electric vehicles primarily to commercial customers.
These vehicles allow the end user an environmentally friendly
alternative to internal combustion engines for light duty uses,
including logistics, maintenance and cargo services, at a lower
total cost of ownership. AYRO’s four-wheeled vehicles are
classified as low-speed vehicles (LSVs) based on federal and state
regulations and are ideal for both college and corporate campuses.
AYRO’s three-wheeled vehicle is classified as a motorcycle
for federal purposes and an autocycle in states that have passed
certain autocycle laws, allowing the user to operate the vehicle
with a standard automobile driver’s license. AYRO’s
three-wheeled vehicle is not an LSV and is ideal for urban
transport. The majority of AYRO’s sales are comprised of
sales of its four-wheeled vehicle to Club Car through a strategic
arrangement entered in early 2019. AYRO plans to continue growing
its business through its experienced management team by leveraging
its supply chain, allowing it to scale production without a large
capital investment.
AYRO
has also developed a strategic partnership with Autonomic, a
division of Ford. Pursuant to AYRO’s agreement with
Autonomic, AYRO received a license to use Autonomic’s
transportation mobility cloud and has agreed to jointly develop the
monetization of cloud-based vehicle applications.
Manufacturing
Agreement with Cenntro
In
April 2017, AYRO entered into a Manufacturing Licensing Agreement
with Cenntro Automotive Group, Ltd., or Cenntro, one of
AYRO’s equityholders, that provides for its four-wheel
sub-assemblies to be licensed and sold to AYRO for final
manufacturing and sale in the United States.
Master
Procurement Agreement with Club Car
In
March 2019, AYRO entered into a five-year Master Procurement
Agreement, or the MPA, with Club Car, a division of Ingersoll Rand
Inc., for the sale of AYRO’s four-wheeled vehicle. The MPA
grants Club Car the exclusive right to sell AYRO’s
four-wheeled vehicle in North America, provided that Club Car
orders at least 500 vehicles per year. Under the terms of the MPA,
AYRO receives orders from Club Car dealers for vehicles of specific
configurations, and AYRO invoices Club Car once the vehicle has
shipped. The MPA has an initial term of five (5) years commencing
January 1, 2019 and may be renewed by Club Car for successive
one-year periods upon 60 days’ prior written notice. Pursuant
to the MPA, AYRO granted Club Car a right of first refusal for
sales of 51% or more of AYRO’s assets or equity interests,
which right of first refusal is exercisable for a period of 45 days
following AYRO’s delivery of an acquisition notice to Club
Car. AYRO also agreed to collaborate with Club Car on new products
similar to its four-wheeled vehicle and improvements to existing
products and granted Club Car a right of first refusal to purchase
similar commercial utility vehicles AYRO develops during the term
of the MPA. AYRO is currently engaged in discussions with Club Car
to develop additional products to be sold by Club Car in Europe and
Asia but there can be no assurance that these discussions will be
successful.
Recent
Developments
During
the calendar year 2019, AYRO continued to develop its products,
establishing channel relationships and filling out the management
team. To support AYRO’s growth, AYRO raised operating funds
with the following debt and equity initiatives:
●
In the first
quarter of 2019, AYRO sold convertible promissory notes to seven
individual lenders for an aggregate of $800,000. The notes have a
maturity date of 60 days, subject to AYRO’s right to extend
the notes for one period of 60 days in AYRO’s discretion. The
notes accrued interest at the rate of 12% per annum for the first
60 days and at 15% for the 60-day extension. The lenders had the
option to convert the notes and accrued interest into Series Seed 2
Preferred Stock at $1.75 per share before the 60-day extension
period expired. In May 2019, four lenders converted $350,000 of
principal and $9,062 of accrued interest into 205,178 of
AYRO’s Series Seed 2 Preferred Stock. In September 2019, one
lender converted $100,000 of convertible notes to a twelve-month
term loan. Additionally, two lenders redeemed an aggregate of
$60,000 in principal from their outstanding note. In December 2019,
the remaining $290,000 in principal and associated accrued interest
was converted to preferred stock as identified below. Warrants to
purchase up to 97,500 of AYRO’s common stock at a price of
$2.00 per share were issued in connection with the notes. A
discount on debt related to the common stock issuance of $69,174
was recorded and is being amortized over the life of the
notes.
●
In the third
quarter of 2019, AYRO received cash in exchange for term loans from
six individual lenders, totaling $350,000. The notes have a term of
12 months and bear interest at the rate of 12% per annum, which is
payable quarterly. AYRO issued 1.056 shares of its common stock to
the lenders for each dollar borrowed, for an aggregate of 369,600
shares of common stock. A discount on debt related to the common
stock issuance of $185,675 was recorded and is being amortized over
the life of the notes.
●
During the first
half of 2019, AYRO issued 1,092,215 shares of Series Seed 2
Preferred Stock for $1.75 per share, for aggregate cash proceeds of
$1,911,375. During the second quarter of 2019, AYRO sold 238,500
shares of Series Seed 3 Preferred Stock for $2.00 per share for
aggregate cash proceeds of $477,000. During the third quarter of
2019, AYRO issued 65,000 shares of Series Seed 3 Preferred Stock
for $2.00 per share for aggregate cash proceeds of
$130,000.
●
In October 2019,
AYRO received $500,000 under a 120-day bridge term loan bearing
interest at the rate of 14% per annum, payable quarterly, from Mark
Adams, a founding board member. As an inducement for the bridge
loan, AYRO granted Mr. Adams 528,000 shares of common stock. On
December 13, 2019, Mr. Adams agreed to extend the maturity date for
this loan until April 30, 2021 in exchange for AYRO’s
issuance of 500,000 shares of common stock.
●
In October 2019,
Sustainability Initiatives, LLC (“SI”), a company owned
by Christian Okonsky and Mark Adams, AYRO’s founders and
board members, agreed to terminate the revenue royalty-based
contract with AYRO in exchange for 850,000 shares of common
stock.
●
In November 2019,
AYRO received cash in exchange for a term loan from an individual
lender of $75,000. The note has a term of 12 months and bears
interest at the rate of 12% per annum, payable quarterly. AYRO
issued 1.056 shares of its common stock to the lenders for each
dollar borrowed, for an aggregate of 79,200 shares of common
stock.
●
In December 2019,
AYRO, SI, Christian Okonsky and Mark Adams agreed to cancel options
to purchase an aggregate of 1,750,000 shares of common stock in
exchange for AYRO’s issuance of 1,593,550 shares of common
stock.
●
In December 2019,
AYRO issued Sustainability Consultants, LLC (“SCLLC”),
an entity that is controlled by Mark Adams, Will Steakley and John
Constantine, who are principal stockholders of AYRO, 247,500 shares
of common stock for services rendered under AYRO’s consulting
agreement with SCLLC.
●
In December 2019,
Cenntro agreed to convert $1,100,000 of the accounts payable due to
Cenntro into 1,100,000 shares of AYRO’s Series Seed 3
Preferred Stock.
●
In December 2019, a
local marketing firm agreed to convert 90% of the amount AYRO owed
that company to a term loan with a principal amount of $137,729.03
and bearing interest at the rate of 15% per annum, payable
quarterly, with a maturity date of May 31, 2021. AYRO also issued
the marketing firm 66,000 shares of common stock in conjunction
with this term loan.
●
In December 2019,
notes payable to eight individual lenders in the total amount of
$715,000 plus accrued interest were converted into 777,301 shares
of AYRO’s Series Seed 3 Preferred Stock.
Merger
Agreement with DropCar and Related Transactions
On
December 19, 2019, AYRO entered into an Agreement and Plan of
Merger and Reorganization (the “Merger Agreement”) with
DropCar, Inc. (“DropCar”), pursuant to which, among
other matters, and subject to the satisfaction or waiver of the
conditions set forth in the Merger Agreement, a wholly owned
subsidiary of DropCar will merge with and into AYRO, with AYRO
continuing as a wholly owned subsidiary of DropCar and the
surviving corporation of the merger (the “Merger”). The
Merger is intended to qualify for federal income tax purposes as a
tax-free reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended. Subject to the terms
and conditions of the Merger Agreement, at the closing of the
Merger, (a) each outstanding share of AYRO common stock and
preferred stock will be converted into the right to receive shares
of DropCar common stock at the Exchange Ratio described below; and
(b) each of AYRO’s outstanding stock options and warrants
that have not previously been exercised prior to the closing of the
Merger will be assumed by DropCar.
Under the
exchange ratio formula in the Merger Agreement (the “Exchange
Ratio”), upon the closing of the Merger, on a pro forma basis
and based upon the number of shares of DropCar common stock to be
issued in the Merger, current DropCar stockholders (along with
DropCar’s financial advisor) will own approximately 20% of
the combined company and current AYRO investors will own
approximately 80% of the combined company (including the additional
financing transaction referenced below). For purposes of
calculating the Exchange Ratio, the number of outstanding shares of
DropCar common stock immediately prior to the Merger does not take
into account the dilutive effect of shares of DropCar common stock
underlying options, warrants or certain classes of preferred stock
outstanding as of the date of the Merger Agreement.
Simultaneous with
the signing of the Merger Agreement, accredited investors,
including certain investors in DropCar, purchased $1.0 million of
AYRO’s convertible bridge notes bearing interest at the rate
of 5% per annum (the “Bridge Notes”). The Bridge Notes
automatically convert into shares of AYRO common stock immediately
prior to the consummation of the Merger representing an aggregate
of 7.45% of the outstanding common stock of the combined company
after giving effect to the Merger. In addition, immediately prior
to the execution and delivery of the Merger Agreement, AYRO entered
into agreements with accredited investors, including certain
stockholders of DropCar, pursuant to which such investors agreed to
purchase, prior to the consummation of the Merger, shares of AYRO
common stock (or common stock equivalents) representing an
aggregate of 16.55% of the outstanding common stock of the combined
company after giving effect to the Merger and warrants to purchase
an equivalent number of shares of AYRO common stock for an
aggregate purchase price of $2.0 million (the “AYRO Private
Placement”). As additional consideration to the lead investor
in the AYRO Private Placement, AYRO also entered into a stock
subscription agreement with the lead investor, pursuant to which,
immediately prior to the Merger, AYRO will issue up to an aggregate
of 1,750,000 shares of AYRO common stock for the nominal per share
purchase price of $0.001 per share, or, if applicable, pre-funded
warrants to purchase AYRO common stock, in lieu of AYRO common
stock (the “Nominal Stock Subscription”). The
consummation of the transactions contemplated by the Nominal Stock
Subscription is conditioned upon the satisfaction or waiver of the
conditions set forth in the Merger Agreement.
On
December 19, 2019, AYRO entered into a letter agreement with ALS
Investment, LLC (“ALS”), which provides that if the
merger is consummated by June 19, 2020, upon consummation of the
merger, AYRO shall issue ALS shares of common stock of the combined
company, which shall be equal to 4.5% of the outstanding shares of
common stock of the combined company giving effect to the merger.
In addition to introducing AYRO and DropCar, ALS will provide, as
an independent contractor, consulting services to AYRO relating to
financial, capital market and investor relations for twelve months
following the closing of the merger.
Factors
Affecting Results of Operations
Master Procurement Agreement.
In March 2019, AYRO entered into the MPA with Club Car. In
partnership with Club Car and its interaction with its substantial
dealer network, AYRO has redirected its business development
resources towards supporting Club Car’s enterprise and fleet
sales function as Club Car proceeds in its new product introduction
initiatives.
Devirra Transaction. In the
first half of 2018, AYRO engaged in a one-time sale of automotive
parts from AYRO’s China-based supplier to one of its
customers in New Jersey (the “Devirra Transaction”).
Pursuant to the Devirra Transaction, AYRO purchased the products
which were then drop-shipped directly from the supplier to the end
customer. Total revenue for the Devirra Transaction was $4,065,000.
The cost of goods sold related to the Devirra Transaction was
$4,003,068. The total gross margin for the one-time Devirra
Transaction for the six months ended June 30, 2018 was 1.45%. This
one-time transaction should be taken into account when making
comparisons between 2018 and 2019.
Components
of Results of Operations
Revenue
AYRO
derives revenue from the sale of its three- and four-wheeled
electric vehicles, rental revenue from vehicle revenue sharing
agreements with AYRO’s tourist destination fleet operators,
or DFOs, and, to a lesser extent, shipping, parts and service fees.
Provided that all other revenue recognition criteria have been met,
AYRO typically recognizes revenue upon shipment, as title and risk
of loss are transferred to customers and channel partners at that
time. Products are typically shipped to dealers or directly to end
customers, or in some cases to AYRO’s international
distributors. These international distributors assist with import
regulations, currency conversions and local language. AYRO’s
vehicle product sales revenues vary from period to period based on,
among other things, the customer orders received and AYRO’s
ability to produce and deliver the ordered products. Customers
often specify requested delivery dates that coincide with their
need for AYRO’s vehicles.
Because
these customers may use AYRO’s products in connection with a
variety of projects of different sizes and durations, a
customer’s orders for one reporting period generally do not
indicate a trend for future orders by that customer. Additionally,
order patterns do not necessarily correlate amongst customers. AYRO
has observed limited seasonality trends in the sales of its
vehicles, depending on model.
Cost of Revenue
Cost of
revenue primarily consists of costs of materials and personnel
costs associated with manufacturing operations, and an accrual for
post-sale warranty claims. Personnel costs consist of wages and
associated taxes and benefits. Cost of revenue also includes
freight and changes to AYRO’s warranty reserves. Allocated
overhead costs consist of certain facilities and utility costs.
AYRO expects cost of revenue to increase in absolute dollars, as
product revenue increases.
Operating Expenses
AYRO’s
operating expenses consist of general and administrative, sales and
marketing and research and development expenses. Salaries and
personnel-related costs, benefits, and stock-based compensation
expense, are the most significant components of each category of
operating expenses. Operating expenses also include allocated
overhead costs for facilities and utility costs.
General and Administrative Expense
General
and administrative expense consists primarily of employee
compensation and related expenses for administrative functions
including finance, legal, human resources and fees for third-party
professional services, and allocated overhead. AYRO expects its
general and administrative expense to increase in absolute dollars
as it continues to invest in growing the business.
Sales and Marketing Expense
Sales
and marketing expense consists primarily of employee compensation
and related expenses, sales commissions, marketing programs, travel
and entertainment expenses and allocated overhead. Marketing
programs consist of advertising, tradeshows, events, corporate
communications and brand-building activities. AYRO expects sales
and marketing expenses to increase in absolute dollars as AYRO
expands its sales force, expands its product lines, increases
marketing resources, and further develops sales
channels.
Research and Development Expense
Research and
development expense consists primarily of employee compensation and
related expenses, prototype expenses, depreciation associated with
assets acquired for research and development, amortization of
product development costs, product strategic advisory fees,
third-party engineering and contractor support costs, and allocated
overhead. AYRO expects its research and development expenses to
increase in absolute dollars as it continues to invest in new and
existing products.
Other Income (Expense), Net
Other
income (expense) consists of income received or expenses incurred
for activities outside of AYRO’s core business. Other expense
consists primarily of interest expense.
Provision for Income Taxes
Provision for
income taxes consists of estimated income taxes due to the United
States government and to the state tax authorities in jurisdictions
in which AYRO conducts business.
Results of Operations
Comparison of the Nine-Month Periods Ended September 30, 2019 and
2018
Results
of operations for the nine-month period ended September 30, 2018
includes operating results for a single transaction for
AYRO’s supply chain. For this single, non-repeatable
transaction, AYRO recognized $4,065,000 of revenue in the first
half of 2018 at a gross margin of approximately 1.45%. The
following tables set forth AYRO’s results of operations for
the nine-month periods ended September 30, 2019 and 2018,
respectively.
|
|
For the nine months ended
|
|
|
|
|
|
|
|
|
Revenue
|
$745,530
|
$5,239,429
|
|
Cost
of Goods Sold
|
577,539
|
4,965,204
|
|
Gross
Profit
|
167,991
|
274,225
|
|
Operating
Expenses:
|
|
|
|
Research
and Development
|
780,605
|
565,372
|
|
Sales
and Marketing
|
932,902
|
684,239
|
|
General
and Administrative
|
3,437,176
|
1,809,754
|
|
Total
Operating Expenses
|
5,150,683
|
3,059,365
|
|
Loss
from Operations
|
(4,982,692)
|
(2,785,140)
|
|
Other
Income and Expense:
|
|
|
|
Other
Income
|
1,198
|
18
|
|
Interest
Expense
|
(233,084)
|
(38,448)
|
|
Net Loss
|
$(5,214,578)
|
$(2,823,570)
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
$10,263,192
|
$10,241,866
|
|
|
|
|
|
Net
Loss per common share
|
$(0.51)
|
$(0.28)
|
Non-GAAP Financial Measure
AYRO
presents Adjusted EBITDA because AYRO considers it to be an
important supplemental measure of AYRO’s operating
performance and AYRO believes it may be used by certain investors
as a measure of AYRO’s operating performance. Adjusted EBITDA
is defined as income (loss) from operations before interest income
and expense, income taxes, depreciation, amortization of intangible
assets, impairment of long-lived assets, acquisition and financing
costs, stock-based compensation expense and certain non-recurring
expenses.
Adjusted EBITDA is
not a measurement of financial performance under generally accepted
accounting principles in the United States, or GAAP. Because of
varying available valuation methodologies, subjective assumptions
and the variety of equity instruments that can impact AYRO’s
non-cash operating expenses, AYRO believes that providing a
non-GAAP financial measure that excludes non-cash and non-recurring
expenses allows for meaningful comparisons between AYRO’s
core business operating results and those of other companies, as
well as providing AYRO with an important tool for financial and
operational decision making and for evaluating AYRO’s own
core business operating results over different periods of
time.
AYRO’s
Adjusted EBITDA measure may not provide information that is
directly comparable to that provided by other companies in
AYRO’s industry, as other companies in AYRO’s industry
may calculate non-GAAP financial results differently, particularly
related to non-recurring, unusual items. AYRO’s Adjusted
EBITDA is not a measurement of financial performance under GAAP and
should not be considered as an alternative to operating income or
as an indication of operating performance or any other measure of
performance derived in accordance with GAAP. AYRO does not consider
Adjusted EBITDA to be a substitute for, or superior to, the
information provided by GAAP financial results.
Below
is a reconciliation of Adjusted EBITDA to net loss for the nine
months ended September 30, 2019 and 2018.
|
|
For the nine months ended
|
|
|
|
|
|
|
|
|
Net
Loss
|
$(5.214.578)
|
$(2,823,570)
|
|
Depreciation
and Amortization
|
388,686
|
148,390
|
|
Stock-based
compensation expense
|
1,360,623
|
306,320
|
|
Interest
expense
|
233,084
|
38,448
|
|
Settlement
expenses (1)
|
0
|
151,488
|
|
Acquisition
and financing costs
|
0
|
0
|
|
Provision
(benefit) for income taxes
|
3,147
|
0
|
|
Adjusted EBITDA
|
$(3,229,038)
|
$(2,178,924)
|
______________________
(1)
Settlement expenses represent one-time amounts paid in connection
with the departure of AYRO’s former chief executive
officer.
Net revenue
For the
nine-month period ended September 30, 2019, total revenue decreased
$4,493,899, as compared to the same period in 2018. The decrease in
revenue was primarily driven by a one-time sale of automotive parts
from AYRO’s China-based supplier to one of its customers in
New Jersey during 2018, or the Devirra Transaction. The products
purchased by the customer were drop-shipped directly from
AYRO’s supplier to the end customer. Total revenue for the
Devirra Transaction was $4,065,000. AYRO’s revenues in the
first nine months of 2019 were also impacted by the MPA that it
entered with Club Car on March 13, 2019. The MPA provides Club Car
with exclusive distribution rights in North America of AYRO’s
four-wheeled AYRO 411 vehicle. During AYRO’s negotiations
with Club Car throughout the fourth quarter of 2018 and up to March
13, 2019, AYRO gave Club Car and its dealers an unrestricted dealer
channel, which precluded AYRO from signing new AYRO 411 dealers in
the fourth quarter of 2018 and the first quarter of 2019. As a
result, AYRO experienced a decline in AYRO 411 sales during the
first nine months of 2019. Sales during the nine months ended
September 30, 2019 included sales of the AYRO 311 vehicle, which
was deployed in February 2019.
Cost of goods sold and gross margin
Cost of
goods sold decreased by $4,387,665 for the nine months ended
September 30, 2019, as compared to the same period in 2018. The
decrease in cost of goods sold related to the Devirra Transaction
was $4,003,068.
Gross
margin percentage was 23% for the nine months ended September 30,
2019, as compared to 5% for the nine months ended September 30,
2018. The increase in gross margin percentage was primarily driven
by the Devirra Transaction during 2018, which had a gross margin
percentage of 1.5%. Gross margin percentage for product revenue not
including the Devirra Transaction increased from 18% during the
nine-month period ended September 30, 2018 to 23% during the
nine-month period ended September 30, 2019, an increase of 5%. The
increase in gross margin excluding the Devirra Transaction was
predominately attributable to increases in product pricing as well
as efficiency gains in the manufacturing process.
Below
is a reconciliation of gross margin percentage excluding the
Devirra Transaction to gross margin percentage for the nine months
ended September 30, 2018:
|
|
Nine months ended
September 30, 2018
|
|
Revenue
|
$5,239,429
|
|
Less: Devirra
Transaction Revenue
|
4,065,000
|
|
Adjusted
Revenue
|
$1,174,429
|
|
|
|
|
Cost of Goods
Sold
|
$4,965,204
|
|
Less: Costs of Good
Sold related to Devirra Transaction
|
4,003,068
|
|
Adjusted Cost of
Goods Sold
|
$962,136
|
|
|
|
|
Gross Margin
Percentage
|
5%
|
|
Gross Margin
Percentage excluding the Devirra Transaction
|
18%
|
General and administrative expenses
General
and administrative expense increased $1,627,422, or 89.9%, for the
nine months ended September 30, 2019, as compared to same period in
2018. General and administrative expense increased primarily due to
increased headcount resulting in higher employee compensation
related costs and administrative costs, including hiring a chief
financial officer on March 13, 2018 and a manufacturing director on
May 21, 2018. Additionally, AYRO relocated to larger office
facilities in April 2018 and expanded its facilities in July 2019,
both of which resulted in higher rent and utilities expense during
the nine months ended September 30, 2019 versus the same period in
2018. AYRO also expanded its product liability and other insurance
policies in August 2018.
Sales and marketing expense
Sales
and marketing expense increased by $248,663, or 36.3%, for the nine
months ended September 30, 2019, as compared to the same period in
2018. These expenses are mainly comprised of salary and related
costs and consulting services fees. The majority of the increase in
sales and marketing expense was to support and develop industry
standard product management, product marketing and go-to-market
marketing communication strategies, primarily surrounding the new
AYRO 311 vehicle.
Research and development expense
Research and
development expense increased by $215,233, or 38.1%, for the nine
months ended September 30, 2019, as compared to same period in
2018. These expenses were mainly compromised of salary and related
costs, professional services, royalty-based services provided under
the Chief Visionary Officer, or CVO, agreement and prototypes
attributable to continued development of new and enhanced product
offerings. The CVO revenue-based royalty fee decreased by $115,494
during the nine months ended September 30, 2019, as compared to
same period in 2018, which was offset by a year-over-year increase
in headcount-related expenses of $106,374 and $256,037 of
consulting expenses supporting new product
development.
Interest expense
Interest expense
increased $194,636 for the nine months ended September 30, 2019, as
compared to same period in 2018, as a result of issuances of
convertible debt to seven individual angel investors in January and
February 2019, plus finance charges accrued for certain accounts
payable. Interest expense in 2019 also includes noncash
amortization of warrant discounts issued in conjunction with debt
offerings.
Comparison of the Years Ended December 31, 2018 and
2017
The
following tables set forth AYRO’s results of operations for
the years ended December 31, 2018 and 2017, respectively, in both
dollars and a percentage of revenue.
|
|
For the year ended
December 31,
|
|
|
|
|
|
Revenue
|
$5,302,964
|
$39,415
|
|
Cost
of Goods Sold
|
5,008,700
|
38,448
|
|
Gross
Profit
|
294,264
|
967
|
|
Operating
Expenses:
|
|
|
|
Research
and Development
|
768,382
|
171,376
|
|
Sales
and Marketing
|
999,724
|
163,944
|
|
General
and Administrative
|
2,578,078
|
742,002
|
|
Total
Operating Expenses
|
4,346,184
|
1,077,322
|
|
Loss
from Operations
|
(4,051,920)
|
(1,076,355)
|
|
Other
Income and Expense:
|
|
|
|
Other
Income
|
47
|
7,600
|
|
Interest
Expense
|
(144,618)
|
(12,331)
|
|
Net Loss
|
$(4,196,491)
|
$(1,081,086)
|
|
|
|
|
|
Weighted-average
fully diluted shares
|
10,242,650
|
8,888,746
|
|
|
|
|
|
Net
Loss per fully diluted share
|
$(0.41)
|
$(0.12)
|
Non-GAAP Financial Measure
AYRO
presents Adjusted EBITDA because AYRO considers it to be an
important supplemental measure of the company’s operating
performance, and AYRO believes it may be used by certain investors
as a measure of AYRO’s operating performance. Adjusted EBITDA
is defined as income (loss) from operations before interest income
and expense, income taxes, depreciation, amortization of intangible
assets, impairment of long-lived assets, acquisition and financing
costs, stock-based compensation expense and certain non-recurring
expenses.
Below
is a reconciliation of Adjusted EBITDA to net loss for the year
ended December 31, 2018 and 2017.
|
|
For the year ended
December 31,
|
|
|
|
|
|
Net
Loss
|
$(4,196,491)
|
$(1,081,086)
|
|
Depreciation
and Amortization
|
288,549
|
35,184
|
|
Stock-based
compensation expense
|
586,371
|
86,010
|
|
Interest
expense
|
144,618
|
12,331
|
|
Settlement
expenses(1)
|
162,488
|
49,168
|
|
Acquisition
and financing costs
|
0
|
0
|
|
Provision
(benefit) for income taxes
|
742
|
50
|
|
Adjusted EBITDA
|
$(3,013,723)
|
$(898,343)
|
_________________
(1)
Settlement expenses represent one-time amounts paid in connection
with the departure of a former executive officer of the
Company.
Net Revenue
Total
revenue increased overall by $5,263,549 during the year ended
December 31, 2018 as compared to the year ended December 31, 2017.
The increase in revenue was primarily driven by the fact that 2018
was AYRO’s first full year of operations and during the
period prior to January 2018, there was no salesforce.
Additionally, the one-time Devirra Transaction occurred in the
first half of 2018, which contributed $4,065,000 of the revenue
variance.
Cost of goods sold and gross margin
Cost of
goods sold increased by $4,970,252 for the year ended December 31,
2018, as compared to the year ended December 31, 2017. The increase
in revenue was primarily driven by the fact that 2018 was
AYRO’s first full year of operations and the prior to January
2018, there was no salesforce. Additionally, the one-time Devirra
Transaction occurred in the first half of 2018, which contributed
$4,003,068 of the cost of goods sold variance.
AYRO’s gross
margin percentage was 6% during the year ended December 31, 2018
and negligible for the year ended December 31, 2017.
General and administrative expense
General
and administrative expense increased $1,836,076, or 247%, for the
year ended December 31, 2018 (AYRO’s first full year of
operations), as compared to the year ended December 31, 2017. AYRO
began hiring its core employee base in November 2017. The increase
was primarily driven by employee compensation expenses and related
costs, office rent, travel and consulting services.
Marketing and selling expense
Marketing and
selling expense increased by $835,780, or 510% for the year ended
December 31, 2018 (AYRO’s first full year of operations), as
compared to the year ended December 31, 2017. AYRO began hiring its
core employee base in November 2017 through March 2018. The
increase was primarily driven by employee compensation expenses and
related costs, commissions, tradeshows and
advertising.
Research and development expense
Research and
development expense increased by approximately $597,005, or 348%,
for the year ended December 31, 2018 (AYRO’s first full year
of operations) as compared to the year ended December 31, 2017.
AYRO began hiring its core employee base in November 2017 through
March 2018. The increase was primarily driven by employee
compensation expenses and related costs, professional services,
royalty-based services provided under the CVO agreement and
prototypes attributable to continued development of new and
enhanced product offerings.
Interest expense
Interest expense
increased $132,287 for the year ended December 31, 2018 compared to
year ended December 31, 2017 as a result of finance charges accrued
for certain accounts payable in 2018.
Liquidity
and Capital Resources
As of
September 30, 2019, AYRO had approximately $60,000 in cash and cash
equivalents and working capital deficit of approximately
$(1,654,063). As of December 31, 2018, AYRO had approximately
$39,243 in cash and cash equivalents and working capital deficit of
approximately $(980,213). The deficit increase was primarily due to
an increase in accounts payable with Cenntro, AYRO’s primary
supply chain and largest single stockholder.
AYRO’s
sources of cash since AYRO’s inception in 2017 have been
predominantly from the sale of equity and debt.
In
December 2019, Cenntro agreed to convert $1,100,000 in accounts
payable to 1,100,000 of AYRO’s Series Seed 3 Preferred Stock.
Additionally, a service provider agreed to convert $137,729 in
accounts payable to a long-term promissory note.
In
October 2019, AYRO raised $500,000 in a 120-day short-term loan
from Mark Adams, one of AYRO’s founding board members. This
loan has a 14% interest rate per annum, payable quarterly and an
equity incentive of 528,000 shares of AYRO common stock. In
December 2019, this loan term was extended to April 30, 2021 in
exchange for the issuance of 500,000 shares of AYRO common
stock.
In
November 2019, AYRO received cash in exchange for term loans from
an individual lender of $75,000. The note has a term of for twelve
months and bears interest at the rate of 12% per annum, payable
quarterly. AYRO issued 79,200 shares of AYRO common stock to the
lender in connection with this loan.
In
December 2019, AYRO converted notes payable to eight individual
lenders in the total amount of $715,000 plus accrued interest into
777,301 shares of AYRO’s Series Seed 3 Preferred Stock, thus
reducing the amount of outstanding debt.
On
December 19, 2019, AYRO entered into the Merger Agreement with
DropCar, pursuant to which a subsidiary of DropCar will merge with
and into AYRO, with AYRO continuing as a wholly owned subsidiary of
DropCar. Simultaneously with the signing of the Merger Agreement,
certain accredited investors, including certain stockholders of
DropCar, purchased $1.0 million of AYRO’s convertible Bridge
Notes and agreed to purchase, prior to the Merger, shares of AYRO
common stock and warrants for $2.0 million in the AYRO Private
Placement and 1,750,000 shares of AYRO common stock for nominal
consideration in the Nominal Stock Subscription.
During
the nine months ended September 30, 2019, AYRO’s primary
sources of liquidity came from existing cash, cash generated from
operations, proceeds of $1,911,375 from the sales of 1,092,515
shares of AYRO’s Series Seed 2 Preferred Stock, $607,000 from
the sales of 303,500 shares of AYRO’s Series Seed 3 Preferred
Stock, issuance of $800,000 of promissory notes to seven individual
investors convertible into AYRO’s Series Seed 2 Preferred
Stock and the issuance of $350,000 of promissory notes to six
individual investors as term loans.
The
terms of the convertible promissory notes issued include interest
accrued at twelve percent (12%) per annum for the first sixty (60)
days and fifteen percent (15%) per annum thereafter. The holder can
convert the notes and accrued interest at $1.75 per share into
AYRO’s Series Seed 2 Preferred Stock.
The
terms of the promissory notes issued as term loans include interest
accrued at twelve percent (12%) per annum and the holders were
issued shares of common stock calculated by multiplying the
principal amount of the note by 1.056.
During
2018, AYRO’s primary sources of liquidity were from cash
generated from the sale of $3,298,007 of Series Seed 1 Preferred
Stock and Series Seed 2 Preferred Stock.
AYRO’s
business is capital intensive, and future capital requirements will
depend on many factors including AYRO’s growth rate, the
timing and extent of spending to support development efforts, the
expansion of AYRO’s sales and marketing teams, the timing of
new product introductions and the continuing market acceptance of
AYRO’s products and services.
Based
on AYRO’s current operating and funding plans and business
conditions, AYRO believes that existing cash, together with
DropCar’s cash on hand upon consummation of the merger and
the cash AYRO will receive pursuant to the AYRO Private Placement,
and cash generated from operations, will be sufficient to satisfy
AYRO’s anticipated cash requirements for the next twelve
months but that AYRO will be required to seek additional equity or
debt financing in the next 15 months. In the event that additional
financing is required from outside sources, AYRO may not be able to
raise monies on terms acceptable to it or at all. If AYRO is unable
to raise additional capital when desired, AYRO’s business,
operating results and financial condition would be adversely
affected.
AYRO’s
financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The financial
statements do not include any adjustments that might be necessary
should AYRO be unable to continue as a going concern.
Management’s plan includes raising capital through additional
funding sources, growing its dealer channel base to increase
product sales revenue, and expanding its product portfolio
offerings. If AYRO cannot achieve its operating plan, AYRO may find
it necessary to dispose of assets or undertake other actions, as
may be appropriate.
Cash Flow Analysis
For the Nine Month Periods Ended September 30, 2019 and
2018
The
following table summarizes AYRO’s cash flows for the
nine-month periods ended September 30, 2019 and 2018.
|
|
For the nine months ended
|
|
|
|
|
Cash Flows:
|
|
|
|
Net
cash used in operating activities
|
$(3,168,709)
|
$(1,789,842)
|
|
Net
cash used in investing activities
|
$(322,773)
|
$(586,977)
|
|
Net
cash provided by financing activities
|
$3,513,063
|
$2,870,750
|
Operating Activities
During
the nine months ended September 30, 2019, AYRO used $3,168,709 in
cash from operating activities, an increased use of $1,378,867 when
compared to the cash used in operating activities of $1,789,842
during the same period in 2018. The increase in cash used by
operating activities was primarily a result of an increase in net
loss as AYRO continued to invest in the infrastructure of the
company as AYRO plans for growth. Additionally, working capital
requirements decreased $343,108 attributable to accounts
receivable, inventory, prepaid expenses, accounts payable and
accrued expenses used over the same period in 2018.
AYRO’s
ability to generate cash from operations in future periods will
depend in large part on profitability, the rate and timing of
collections of AYRO’s accounts receivable, inventory turns
and AYRO’s ability to manage other areas of working
capital.
Investing Activities
During
the nine months ended September 30, 2019, AYRO used cash of
$322,773 in investing activities as compared to $586,977 used
during the same period in 2018, a reduction of $264,204. The net
decrease was primarily due to $364,000 of tooling purchased for the
AYRO 311 vehicle in June 2018, combined with an increase in capital
expenditures of equipment purchased in the normal course of
business.
Financing Activities
During
the nine months ended September 30, 2019, AYRO generated a net
$3,512,063 from financing activities, as compared to the cash
generated of $2,870,750 during the same period in 2018. During the
nine months ended September 30, 2019, cash was generated through
the sale of 1,092,215 shares of AYRO’s Series Seed 2
Preferred Stock for total proceeds of $1,911,375 and 303,500 shares
of AYRO’s Series Seed 3 Preferred Stock for total proceeds of
$607,000. Additionally, $800,000 in proceeds were received from the
sale of promissory notes convertible into AYRO’s Series Seed
2 Preferred Stock and 300,000 in proceeds were received from the
sale of promissory notes recorded as short term loans during the
nine months ended September 30, 2019. In the second quarter of
2019, $350,000 of principal and $9,062 of accrued interest from the
convertible notes were exchanged into 205,178 shares of
AYRO’s Series Seed 2 Preferred Stock. During the nine months
ended September 30, 2018, cash was generated through the sale
2,300,000 shares of AYRO’s Series Seed 1 Preferred Stock for
total proceeds of $2,300,000 and 469,219 shares of AYRO’s
Series Seed 2 Preferred Stock for total proceeds of $771,133. In
March 2018, AYRO repurchased 250,000 shares of its Series Seed 1
Preferred Stock from certain early investors for
$250,000.
For the Years Ended December 31, 2018 and 2017
The
following table summarizes AYRO’s cash flows for the years
ended December 31, 2018 and 2017:
|
|
For the years ended December 31,
|
|
Cash Flows:
|
|
|
|
Net
cash used in operating activities
|
$(2,364,957)
|
$(863,203)
|
|
Net
cash used in investing activities
|
$(760,922)
|
$(336,577)
|
|
Net
cash provided by financing activities
|
$3,082,578
|
$1,282,324
|
Operating Activities
During
the year ended December 31, 2018, AYRO used $2,364,957 in cash from
operating activities, an increase of $1,501,754 when compared to
the $863,203 in cash used in operating activities during the year
ended December 31, 2017. The increase in cash used by operating
activities was primarily a result of growing the infrastructure of
the business. The 2018 fiscal year was AYRO’s first full year
of operations which required an increase in investment in
additional personnel, additional office and warehouse space and
other costs associated with developing a high-quality manufacturing
business. Additionally, cash used in operations for 2018 was
supported by increases in working capital of $956,614, composed of:
reductions in inventories, prepaid expenses combined with increases
in accrued expenses and related party payables (sources of cash) of
$2,259,376; offset by an increase in accounts receivable and
deposits combined with reductions in accounts payable and deferred
revenue (uses of cash) of $1,302,762. The increase in working
capital requirements was predominately offset by an increase in net
loss of $3,115,405 during the year ended December 31, 2018, as
compared to December 31, 2017, and a net increase in non-cash
operating expenses of $753,726, as compared to the prior year.
Non-cash expenditures include allowances for bad debt, depreciation
and amortization and stock-based compensation expense.
AYRO’s
ability to generate cash from operations in future periods will
depend in large part on AYRO’s profitability, the rate and
timing of collections of its accounts receivable, its inventory
turns and its ability to manage other areas of working
capital.
Investing Activities
During
the year ended December 31, 2018, AYRO used cash of $760,922 in
investing activities as compared to $336,577 used during the
comparative period in 2017, an increase in cash used of $424,345.
The net increase is primarily due to cash used in the purchase of
capital equipment including tooling for the AYRO 311 vehicle. Other
than capital expense needed to develop new products, AYRO does not
anticipate any significant purchases of equipment beyond that which
is anticipated for use in the normal course of AYRO’s core
business activity.
Financing Activities
During
the year ended December 31, 2018, AYRO raised $3,298,007 through
non-institutional sales of Series Seed 1 and Series Seed 2
Preferred Stock, as compared to $1,222,500 in the year ended
December 31, 2017. Additionally, in 2018, AYRO redeemed $250,000 of
preferred stock and $375 of common stock to certain early
investors.
In
2018, AYRO financed a delivery truck for $34,946 under a standard
purchase finance agreement.
Contractual
Obligations and Commitments
AYRO
has made certain indemnities, under which it may be required to
make payments to an indemnified party, in relation to certain
transactions. AYRO indemnifies its directors and officers, to the
maximum extent permitted under the laws of the State of Delaware.
In connection with AYRO’s facility leases, AYRO has
indemnified its lessors for certain claims arising from the use of
the facilities. The duration of the indemnities varies and, in many
cases, is indefinite. These indemnities do not provide for any
limitation of the maximum potential future payments AYRO could be
obligated to make. Historically, AYRO has not been obligated to
make any payments for these obligations and no liabilities have
been recorded for these indemnities.
Off-Balance
Sheet Arrangements
Other
than lease commitments incurred in the normal course of business
and certain indemnification provisions, AYRO does not have any
off-balance sheet financing arrangements or liabilities, guarantee
contracts, retained or contingent interests in transferred assets,
or any obligation arising out of a material variable interest in an
unconsolidated entity. AYRO does not have any subsidiaries to
include or otherwise consolidate into the financial statements.
Additionally, AYRO does not have interests in, nor relationships
with, any special purpose entities.
Related
Party Transactions
Royalty Agreement
On
March 1, 2017, AYRO entered into the Outsourced CVO Services
Agreement with SI that is controlled by Mr. Okonsky and Mr. Adams,
each a founder of AYRO and a current AYRO board member, in its
effort to accelerate the start-up of AYRO’s operations. In
return for acceleration assistance and SI providing services of the
Chief Visionary Officer role, pursuant to the agreement, AYRO paid
a monthly retainer of $6,000 per month. On a quarterly basis, AYRO
also remitted to SI a royalty of a percentage (see table below) of
its revenues less the retainer amounts for the measurement quarter
paid. In connection with this agreement, AYRO granted 350,000
options to purchase shares of AYRO common stock at an exercise
price of $0.667 per share under the AYRO Equity Plan, which was
subsequently cancelled in December 2019.
|
|
|
|
$0 - $25,000,000
|
3.0%
|
|
$25,000,000 -
$50,000,000
|
2.0%
|
|
$50,000,000 -
$100,000,000
|
1.0%
|
|
|
0.5%
|
SI was
also granted a right to nominate up to two members of AYRO’s
board of directors.
In
addition, on April 1, 2017, AYRO and SI entered into a
fee-for-service agreement, pursuant to which SI agreed to provide
accounting and financial, graphics and marketing services to AYRO,
based on the market-standard hourly rates as set forth in the
agreement.
Effective as of
January 1, 2019, AYRO agreed to an amendment to the Outsourced CVO
Services Agreement to reduce the royalty percentage to a flat 0.5%
for all revenue levels. In connection to this amendment, AYRO
granted each of Mr. Okonsky and Mr. Adams an additional 700,000
options to purchase $0.95 per share, pursuant to the AYRO Equity
Plan, which options were fully vested as of September 30, 2019 and
subsequently cancelled in December 2019.
Effective as of
October 14, 2019, AYRO and SI terminated the Outsourced CVO
Services Agreement, and as consideration for SI to terminate the
agreement, AYRO issued 850,000 shares of AYRO common stock to SI
(or its designees).
In
December 2019, the Company, SI, Christian Okonsky and Mark Adams
agreed to cancel (i) the options to purchase 350,000 shares of AYRO
common stock previously granted to SI in March 2017, and (ii) the
options to purchase an aggregate of 1,400,000 shares of AYRO common
stock previously granted to Mr. Okonsky and Mr. Adams in connection
with the amendment to the Outsourced CVO Services Agreement to
reduce the royalty percentages, in exchange for 1,593,550 shares of
AYRO common stock.
For the
years ended 2017, 2018, and 2019 prior to termination, AYRO paid SI
$60,000, $187,494 and $60,000, respectively, pursuant to the
Outsourced CVO Services Agreement, and $123,538, $36,694 and
$1,275, respectively, pursuant to the fee-for service agreement for
accounting and financial, graphics and marketing
services.
Consulting Agreement
On
January 15, 2019, AYRO entered into a fee-for-service-based
agreement with SCLLC, an entity that is controlled by Mr. Adams,
John Constantine and Will Steakley, who are principal stockholders
of AYRO, in an effort to support the strategic direction of AYRO.
The duties of SCLLC include (a) participating in strategic advisory
conference calls with management; (b) making introductions to
interested parties of strategic value; (c) advising AYRO on capital
structure; and (d) acting as ambassadors to promote the company
within the Central Texas community. In 2019, SCLLC received
five-year warrants to purchase an aggregate of 652,500 shares of
AYRO common stock at a $2.00 exercise price and 247,500 shares of
the AYRO common stock in connection with the services rendered.
Payments accrued for services rendered for the year ended December
31, 2019 were $249,938.
Loan from SI
In
January 2019, AYRO received $50,000 in a short-term loan from SI.
The short-term loan did not bear any interest. The amount was
repaid in March 2019.
Adams Note, Amendment and Lock-Up Agreement
On
October 14, 2019, Mr. Adams, a current member of the board of
directors of AYRO, was issued a secured promissory note in the
aggregate principal amount of $500,000, in exchange for funding
$100,000 to AYRO on or before October 15, 2019, and $400,000 on or
before October 24, 2019. The note is secured by a first lien
security interest in all of the assets of AYRO and accrues interest
at 14% per annum, until the promissory note is repaid. The note was
to mature on the earlier of March 12, 2020, or the date that is
three business days following the closing of a reverse merger
transaction involving AYRO.
On
December 13, 2019, AYRO and Mr. Adams entered into an amendment to
the promissory note, extending the maturity date of the note to
April 30, 2021. As consideration, AYRO issued 500,000 shares of
common stock to Mr. Adams. Such shares are subject to a six-month
lock-up period.
AYRO
has not paid any principal or interest accrued on the promissory
note. As of December 31, 2019, the aggregate principal amount of
$500,000 is outstanding and $13,386 of interest is accrued and
payable.
Cenntro Agreement
In
April 2017, AYRO entered into a Manufacturing Licensing Agreement
with Cenntro, that provides for its four-wheel sub-assemblies to be
licensed and sold to AYRO for final manufacturing and sale in the
United States.
In
2017, AYRO executed a Stock Purchase Agreement with Cenntro for
three million (3,000,000) shares of AYRO’s common stock. As
consideration, Cenntro contributed cash of $50,000, raw material
inventory items valued at $92,061 and supply chain tooling and
assembly line development and ramp-up valued at $307,939. As of
December 31, 2019, Cenntro owned approximately 13.73% of
AYRO’s outstanding common stock on a fully-diluted
basis.
In
2017, AYRO executed a supply chain contract with Cenntro.
Currently, AYRO purchases 100% of its four-wheel vehicle chassis,
cabs and wheels through this supply chain relationship with
Cenntro. Contract terms are industry-standard and reflect
arms-length market pricing and other relevant terms.
In
2018, AYRO purchased supply-chain tooling to be placed in
Cenntro’s facility with a promissory note to Cenntro for the
cost. The tooling note was repaid in March 2019. As of December 31,
2019 and 2018, the amounts outstanding to Cenntro for factory
tooling were $0 and $324,202, respectively.
In
December 2019, Cenntro agreed to convert $1,100,000 of its accounts
receivable due from AYRO into 1,100,000 shares of AYRO’s
Series Seed 3 Preferred Stock. As of December 31, 2019, and 2018,
the amounts outstanding to Cenntro for trade accounts payable were
$133,117 and $2,149,295, respectively.
Critical
Accounting Policies and Estimates
AYRO’s
accounting policies are fundamental to understanding its
management’s discussion and analysis. AYRO’s
significant accounting policies are presented in Note 1 to its
consolidated financial statements, which are included elsewhere in
the exhibits to this Form 8-K. AYRO has identified certain
significant accounting policies which involve a higher degree of
judgment and complexity in making certain estimates and assumptions
that affect amounts reported in its consolidated financial
statements, as summarized below.
Revenue Recognition
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
(“ASU 2014-09”). ASU 2014-09 amends the guidance for
revenue recognition to replace numerous industry-specific
requirements and converges areas under this topic with those of the
International Financial Reporting Standards. AYRO adopted the ASU
No. 2014-09 for the year ended December 31, 2018.
Product
revenue from customer contracts is recognized on the sale of each
electric vehicle as vehicles are shipped to customers. Ownership
and risk of loss transfers to the customer based on FOB shipping
point and freight charges are the responsibility of the customer.
Payments are typically received at the point control transfers or
in accordance with payment terms customary to the
business.
Subscription
revenue from revenue sharing with Destination Fleet Operators
(“DFO”) is recorded in the month the vehicles in
AYRO’s fleet is rented. AYRO established its rental fleet in
late March 2019. For the rental fleet, AYRO retains title and
ownership to the vehicles and places them in DFO’s in resort
communities that typically rent golf cars for use in those
communities. Subscription revenue from revenue sharing activities
for the nine-months ended September 30, 2019 and 2018 were $9,941
and $0, respectively.
Amounts
billed to customers related to shipping and handling are classified
as shipping revenue, and AYRO has elected to recognize the cost for
freight and shipping when control over vehicles has transferred to
the customer as an operating expense. AYRO’s policy is to
exclude taxes collected from a customer from the transaction price
of automotive contracts. Shipping revenue for the nine-months ended
September 30, 2019 and 2018 were $67,168 and $38,049,
respectively.
Services and other
revenue consist of non-warranty after-sales vehicle services.
Service revenue for the nine-months ended September 30, 2019 and
2018 were $5,459 and $0, respectively.
Payments received
in advance of the delivery of vehicles or performance of services
are reported in the accompanying balance sheets as deferred
income.
Stock-Based Compensation
AYRO
accounts for stock-based compensation in accordance with the
guidance of FASB Accounting Standards Codification
(“ASC”) Topic 718, Compensation – Stock
Compensation. Under the fair value recognition provisions of
FASB ASC Topic 718, which requires all stock-based compensation
costs to be measured at the grant date based on the fair value of
the award and is recognized as compensation expense ratably over
the period the services are rendered, which is generally the option
vesting period. AYRO uses the Black-Scholes option pricing method
to determine the fair value of stock options and thus determining
compensation expense associated with the grant. AYRO measures
stock-based compensation expense for its non-employees and
consultants under FASB ASC 505-50, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring or in Conjunction with
Selling Goods and Services. In accordance with ASC Topic
505-50, these stock options and warrants issued as compensation for
services provided to AYRO are accounted for based upon the fair
value of the services provided. The fair value of the equity
instrument is charged directly to compensation expense and
additional-paid-in capital over the period during which services
are rendered.
Net Earnings or Loss Per Share
AYRO’s
computation of earnings (loss) per share (“EPS”)
includes basic and diluted EPS. Basic EPS is measured as the income
(loss) available to common stockholders divided by the weighted
average number of common shares outstanding for the period. Diluted
EPS is similar to basic EPS but presents the dilutive effect on a
per share basis of potential common shares (e.g., common stock
warrants and common stock options) as if they had been converted at
the beginning of the periods presented, or issuance date, if later.
Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the
respective periods. Basic and diluted loss per common share is the
same for all periods presented because all common stock warrants
and common stock options outstanding were
anti-dilutive.
At
September 30, 2019 and 2018, AYRO excluded the outstanding warrant
and option securities, which entitle the holders thereof to
ultimately acquire shares of common stock, from its calculation of
earnings per share, as their effect would have been
anti-dilutive.
Use of Accounting Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Management makes these estimates using the
best information available at the time the estimates are made;
however, actual results could differ from those
estimates.
Fair Value Measurements
AYRO
follows FASB ASC 820-10, Fair
Value Measurements and Disclosures, which defines fair
value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The standard
provides a consistent definition of fair value which focuses on an
exit price that would be received upon sale of an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date.
The
standard also prioritizes, within the measurement of fair value,
the use of market-based information over entity specific
information and establishes a three-level hierarchy for fair value
measurements based on the nature of inputs used in the valuation of
an asset or liability as of the measurement date.
The
three-level hierarchy for fair value measurements is defined as
follows:
●
Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets.
●
Level 2 –
inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability other than quoted prices,
either directly or indirectly including inputs in markets that are
not considered to be active.
●
Level 3 –
inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
Categorization
within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. The
carrying amounts reported in the accompanying financial statements
for current assets and current liabilities approximate the fair
value because of the immediate or short-term maturities of the
financial instruments. As of September 30, 2019 and 2018, AYRO did
not have any level 2 or level 3 instruments.
Inventories
Inventories are
reported at the lesser of cost (using the first-in, first-out
method, “FIFO”) or net realizable value. Inventories
consist of purchased chassis, cabs, batteries, truck beds/boxes,
component parts as well as freight, tariffs, duties and other
transport-in costs. Inventories are categorized as raw materials,
work-in-process and finished goods as of September 30, 2019 and
December 31, 2018. Work-in-process and finished goods include labor
and overhead costs.
Intangible Assets
Intangible assets
consist of the cost in registering patents for AYRO’s unique
inventions. Such patent-related expenses are recorded at their
estimated fair value on the date of cost encumbrance and are being
amortized over an estimated life of 5 years. Intangible assets also
include investments made with the supply chain partner, who is also
an investor, for tooling and assembly line configuration.
Amortization expense for the nine months ended September 30, 2019
and 2018 was $87,968 and $65,876, respectively.
AYRO
follows FASB ASC 360, Accounting
for Impairment or Disposal of Long-Lived Assets (“ASC
360”). ASC 360 requires that if events or changes in
circumstances indicate that the cost of long-lived assets or asset
groups may be impaired, an evaluation of recoverability would be
performed by comparing the estimated future undiscounted cash flows
associated with the asset to the asset’s carrying value to
determine if a write-down to market value would be required.
Long-lived assets or asset groups that meet the criteria in ASC 360
as being held for sale are reflected at the lower of their carrying
amount or fair market value, less costs to sell. AYRO’s
management has determined that there is no impairment as of
September 30, 2019.
Income Taxes
AYRO
accounts for income tax using an asset and liability approach,
which allows for the recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The accounting for deferred income tax calculation represents AYRO
management’s best estimate on the most likely future tax
consequences of events that have been recognized in AYRO’s
financial statements or tax returns and related future
anticipation. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire
before AYRO is able to realize their benefits, or that future
realization is uncertain.
AYRO
evaluates uncertainty in income tax positions based on a
more-likely-than-not recognition standard. If that threshold is
met, the tax position is then measured at the largest amount that
is greater than 50% likely of being realized upon ultimate
settlement. If applicable, AYRO records interest and penalties as a
component of income tax expense.
As of
September 30, 2019 and December 31, 2018, there were no accruals
for uncertain tax positions.
Business Combinations
AYRO
utilizes the acquisition method of accounting for business
combinations and allocate the purchase price of an acquisition to
the various tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. AYRO primarily
establishes fair value using the income approach based upon a
discounted cash flow model. The income approach requires the use of
many assumptions and estimates including future revenues and
expenses, as well as discount factors and income tax rates. Other
estimates include:
● Estimated
step-ups or write-downs for fixed assets and
inventory;
● Estimated
fair values of intangible assets; and
● Estimated
income tax assets and liabilities assumed from the
target.
While
AYRO uses its best estimates and assumptions as part of the
purchase price allocation process to accurately value assets
acquired and liabilities assumed at the business acquisition date,
AYRO’s estimates and assumptions are inherently uncertain and
subject to refinement. As a result, during the purchase price
allocation period, which is generally one year from the business
acquisition date, AYRO records adjustments to the assets acquired
and liabilities assumed, with the corresponding offset to goodwill.
For changes in the valuation of intangible assets between
preliminary and final purchase price allocation, the related
amortization is adjusted in the period it occurs. Subsequent to the
purchase price allocation period, any adjustment to assets acquired
or liabilities assumed is included in operating results in the
period in which the adjustment is determined.
From
inception through September 30, 2019, AYRO has not contemplated nor
consummated any acquisitions. However, should AYRO issue shares of
its common stock in an acquisition, it will be required to estimate
the fair market value of the shares issued.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU Topic 2016-02, Leases, (“ASU
842”). The guidance
in this ASU supersedes the leasing guidance in ASU Topic 840,
Leases. Under the new
guidance, lessees are required to recognize lease assets and lease
liabilities on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or
operating, with classification affecting the pattern of expense
recognition in the income statement.
The new
standard is effective for fiscal years beginning after December 15,
2019. Early adoption is permitted. AYRO is currently evaluating the
impact of the pending adoption of the new standard on its financial
statements.
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”). ASU 2014-09 amends the
guidance for revenue recognition to replace numerous
industry-specific requirements and converges areas under this topic
with those of the International Financial Reporting Standards. ASU
2014-09 implements a five-step process for customer contract
revenue recognition that focuses on transfer of control, as opposed
to transfer of risk and rewards. The amendment also requires
enhanced disclosures regarding the nature, amount, timing and
uncertainty of revenues and cash flows from contracts and
customers. Other major provisions include the capitalization and
amortization of certain contract costs, ensuring the time value of
money is considered in the transaction price, and allowing
estimates of variable consideration to be recognized before
contingencies are resolved in certain circumstances. The amendments
in ASU 2014-09 are effective for reporting periods beginning after
December 15, 2017, and early adoption is prohibited. Entities can
transition to the standard either retrospectively or as a
cumulative-effect adjustment as of the date of the adoption. AYRO
adopted ASU 2014-09 for the year ended December 31, 2018. The
adoption of ASU 2014-09 did not have a material effect on
AYRO’s financial statements.
Concentration
of Credit Risk
Financial
instruments that potentially expose AYRO to concentrations of
credit risk consist principally of cash, cash equivalents and
accounts receivable. AYRO places its cash and cash equivalents with
financial institutions with high credit quality. As of September
30, 2019, AYRO had $60,823 of cash and cash equivalents on deposit
or invested with its financial and lending
institutions.
AYRO
provides credit to customers in the normal course of business. AYRO
performs ongoing credit evaluations of its customers’
financial condition and limit the amount of credit extended when
deemed necessary.
Foreign
Currency Risk
From
inception through September 30, 2019, all transactions for AYRO
have been settled in U.S. dollars. Should AYRO begin transacting
business in other currencies, AYRO is subject to exposure from
changes in the exchange rates of local currencies.
AYRO
has not entered into any financial derivative instruments that
expose it to material market risk, including any instruments
designed to hedge the impact of foreign currency exposures. AYRO
may, however, hedge such exposure to foreign currency exchange
fluctuations in the future.
INFORMATION
ABOUT AYRO
The following section describes the business and operations of
AYRO, which will be a substantial portion of the business and
operations of the combined company following the consummation of
the merger. As used in this section, the terms “we,”
“our,” and “us” refer to AYRO.
Business
Overview
AYRO
designs and manufactures compact, sustainable electric vehicles for
closed campus mobility, urban and community transport, local
on-demand and last mile delivery, and government use. AYRO’s
three- and four-wheeled purpose-built electric vehicles are geared
toward commercial customers including universities, last mile
delivery services and food service providers. AYRO was initially
formed as a Texas corporation on May 17, 2016 and converted to a
Delaware corporation on July 24, 2019.
AYRO
Products
AYRO
vehicles provide the end user an environmentally friendly
alternative to internal combustion engine vehicles (cars powered by
gasoline or diesel oil), for light duty uses, including low-speed
logistics, maintenance and cargo services, at a lower total
cost.
AYRO Club Car 411
Target
specifications and features for the AYRO Club Car 411 are as
follows:
|
AYRO
Club Car 411 – Target Vehicle Specifications
Overview
|
|
Chassis
|
|
Body
Options; Chassis:
|
Enclosed Van Box,
Pickup with Sides & Tailgate, Flatbed; chassis of reinforced
steel/coated
|
|
Layout:
|
2-wheel
rear wheel drive, 4-wheel vehicle
|
|
Powertrain
|
|
Motor/Batteries:
|
10 kW,
13.4 HP
72 Volt
System, 8.64 kWh capacity, EV-designed VRLA batteries
|
|
Dimensions
|
|
Length:
|
146 in.
/ 370.8 cm / 12’ 2”
|
|
Width:
|
55 in.
/ 139.7 cm / 4’ 7”
|
|
Height:
|
75 in.
/ 190.5 cm / 6’ 3”
|
|
Dry
Weight:
|
Flatbed
Dry Weight: 2,300 lbs. / 1043 kg;
Pickup
Dry Weight: 2,350 lbs. / 1066 kg;
Cargo
Box Dry Weight: 2,650 lbs. / 1202 kg
|
|
Wheels
& Tires:
|
14” Alloy
Wheels with 175/65/R14 DOT certified street radial
tires
Upgrade
Lift Kit option to 185/70/R14 certified street radial
tires
|
|
Performance
|
|
Top
Speed:
|
Up to
25 /45 mph (Governed Speed based on state regulations for low speed
vehicle operations on streets with posted speeds of up to 35 mph
(45 mph in Texas)
|
|
Grade:
|
Up to
22%
|
|
Payload
Capacity:
|
1,100
lbs. /498.9 kg / 1/2 ton
|
|
Turning
Radius:
|
157 in.
/3.9 m / 13’ 1”
|
|
Braking
Distance:
|
25 ft.
@ 25 mph /7.6 m @ 40 km/h / Best in Class
|
The
AYRO Club Car 411 (the “AYRO 411 Fleet”) is a family of
electric, four-wheel compact, light-duty utility trucks sold
exclusively through AYRO’s contracted partner, Club Car, as
part of a global multi-year sustainability solution development,
sales and marketing agreement. Each of the AYRO 411 Fleet of
vehicles is classified as a street legal low speed vehicle
(“LSV”), defined as a four-wheeled motor vehicle, other
than an all-terrain vehicle, that is capable of reaching speeds of
at least 20 miles per hour (“mph”) but not greater than
25 mph, with a gross vehicle weight rating of less than 3,000
pounds and meets the safety standards in Title 49 of the U.S. Code
of Federal Regulations, section 571.50.
The
AYRO 411 Fleet has an expected range of up to 50 miles and a
maximum speed range of 25 mph (or 40 kilometers per hour), in line
with the United States Department of Transportation
(“USDOT”) regulations for low-speed vehicles and with
most state statutes, which typically limit the speed of LSVs to 25
mph on 35 mph posted roads. The current AYRO 411 Fleet
includes:
●
the 411 Flatbed
truck, which provides drivers with considerable versatility of
use;
●
the 411 Pickup
truck, which is ideal for hauling; and
●
the 411 Cargo Van
Box, a fully enclosed cargo box.
The
AYRO 411 Fleet has zero gas emissions, a recharge capability of up
to six to eight hours using 120V/20A outlets and has a payload
capacity of up to 1,100 pounds. AYRO estimates that the AYRO 411
Fleet’s operating costs are approximately 50% lower per year
compared to similarly sized gas-powered trucks/vans. Vehicles in
the AYRO 411 Fleet are equipped with:
●
Reinforced steel
(coated) chassis houses the motor, controller and enclosed battery
operating system;
●
Auto-grade
suspension with Transverse Leaf Spring on the front and horizontal
spring with coil-over shock in the rear;
●
Power assisted
steering;
●
Street legal if
registered/licensed per standard vehicles by dealer or
user;
●
Multi-point,
anchored DOT compliant safety harnesses for driver and
passenger;
●
a standard back-up
camera (appears on larger LCD display – see
below);
●
a standard 7-inch
(17.7 centimeter) LCD display;
●
a standard manual
parking break;
●
four-wheel all-disk
braking system and corrosion resistant body panels;
and
●
heating and
ventilation systems in the cabin of the truck.
With
its low speed, zero-emissions, and cost-effectiveness, the AYRO 411
Fleet seeks to satisfy the needs of a variety of customers,
including university and college campuses, retailers, airports and
ports, business parks and campuses, warehouses, production
facilities, resorts and theme parks, apartments and
condos.
AYRO 311 Autocycle
Target
specifications and features for the AYRO 311 are as
follows:
|
AYRO
311 – Target Vehicle Specifications Overview
|
|
Chassis
|
|
Chassis/Body:
|
Reinforced
powder-coated steel; body options include a two-seater, a
two-seater with option windows, and a one-seater with a custom
cargo area
|
|
Layout:
|
Front-wheel drive,
3-wheeled
|
|
Powertrain
|
|
Engine:
|
7.5 kW
/ Permanent Magnet DC, 10.9 horsepower, 85A AC
Controller
|
|
Dimensions
|
|
Wheelbase:
|
89.5
in. / 227.3cm
|
|
Length:
|
126 in.
/ 320 cm / 10’5”
|
|
Width:
|
66 in.
/ 168 cm / 5’ 5”
|
|
Height:
|
64 in.
/ 161.2 cm / 5’3”
|
|
Weight:
|
1,352
lbs. / 613 kg
|
|
Wheels:
|
165/55R
15 (Front) 195/50R 15 (Rear)
|
|
Performance
|
|
Top
Speed:
|
Up to
50 mph / 80 km
|
|
Grade:
|
Up to
25%
|
|
Payload
Capacity:
|
2
passengers (in-line seating) or 1 passenger + cargo
|
|
Turning
Radius:
|
30 ft.
/ 9.1 m
|
|
Braking
Distance:
|
25 ft.
@ 50 mph / 7.6 m @ 80km/h
|
The
AYRO 311 Autocycle (the “AYRO 311”) is a compact,
light-duty street-legal electric vehicle with a maximum speed of up
to 50 mph. Strategically engineered with USDOT-compliant automotive
parts, the AYRO 311 is built to a high-performance standard, has
standard automotive controls and does not require any special
licenses or conditions in order to drive. Like the AYRO 411 Fleet,
it has a range of up to 50 miles, has zero gas emissions and a
recharge capability of up to six to eight hours using 120V/20A and
its operating costs are estimated to be approximately 50% lower per
year compared to gas-powered vehicles.
AYRO
311’s equipment includes:
●
a standard back-up
camera, a standard 7-inch (17.7 centimeter) LCD
display;
●
a standard manual
parking break; enclosed and corrosion resistant body
panels;
●
heating,
ventilation, and fan systems in the cabin of the
vehicle;
●
standard automotive
controls including foot accelerator and brake pedals;
●
a USDOT-approved
windshield, a windshield wiper and washer system;
●
a driver’s
3-point safety belt and a passenger’s 4-point safety belt;
warning flashers;
●
Bluetooth
capabilities;
With
its automotive-style controls (a steering wheel and foot pedals),
the AYRO 311 drives like a regular car and accommodates the average
consumer, is designed for neighborhood food delivery, last mile
delivery, parking enforcement and urban dwellers. More
specifically, this product targets urban dwellers due to its
compact size in dense urban environments. The AYRO 311 also targets
commercial customers, such as neighborhood food and product
delivery fleets, gated communities, country clubs, and colleges and
universities due to its highly customizable appearance with a range
of brand and logo wraps, spot graphics, and color options (glossy
white or athletic red), its compact design and ability to go
virtually anywhere. The AYRO 311 also targets municipalities and
facilities as customers for use in parking enforcement, special
events, and public safety.
AYRO 511 (Concept)
AYRO is
currently investigating and researching the concept vehicle, AYRO
511, a new full-time four-wheel drive electric vehicle. The AYRO
511 is expected to have 13 inches (33 centimeters) of clearance and
enhanced stability in a diverse array of terrains and seasons.
Additionally, the truck will be designed to operate with an
automotive-style drive system, cutting driving noise down to a
minimum.
Additional
Models and Vehicles
AYRO is
currently in discussions with Club Car regarding a variety of new
models and vehicles.
Manufacturing
and Supply Chain
Manufacturing Agreement with Cenntro
In
2017, AYRO partnered with Cenntro Automotive Group, Ltd.
(“Cenntro”), which operates a large electric vehicle
factory in the automotive district in Hangzhou, China, in a supply
chain agreement to provide sub-assembly manufacturing services.
Through the partnership, Cenntro acquired nineteen percent (19%) of
AYRO’s common stock. Cenntro beneficially owned approximately
13.7% as of December 31, 2019. Cenntro owns the design of the AYRO
411 Fleet vehicles and has granted AYRO an exclusive license to
purchase the AYRO 411 Fleet vehicles for sale in North
America.
Under
AYRO’s Manufacturing License Agreement with Cenntro (the
“MLA”), in order for AYRO to maintain its exclusive
territorial rights pursuant to the MLA, for the first three years
after the effective date of April 27, 2017, AYRO must meet the
following minimum sale requirements: (i) a minimum of 300 units
sold by the first anniversary of the effective date of the MLA;
(ii) a minimum of 800 units sold by the second anniversary of the
effective date of the MLA; and (iii) a minimum of 1,300 units sold
by the third anniversary of the effective date of the MLA. Cenntro
will determine the minimum sale requirements for the years
thereafter. Should any event of default occur, the other party may
terminate the MLA by providing written notice to the defaulting
party, who will have 90 days from the effective date of the notice
to cure the default. Unless waived by the party providing notice, a
failure to cure the default(s) within the time 90-day time frame
will result in the automatic termination of the MLA. Events of
default under the MLA include a failure to make a required payment
when due, the insolvency or bankruptcy of either party, the
subjection of either party’s property to any levy, seizure,
general assignment for the benefit of creditors, and a failure to
make available or deliver the products in the time and manner
provided for in the MLA.
Cenntro
is also being used to perform sub-assembly manufacturing of the
311. AYRO imports semi-knocked-down vehicle kits from Cenntro for
both the 411 and 311 models. The vehicle kits are received through
shipping containers by AYRO’s assembly facility in Round
Rock, Texas. The vehicles are then assembled with limited
customization requirements per order. As such, the partnership with
Cenntro allows AYRO to scale manufacturing operations without
significant investment in capital expenditures, and therefore bring
products to market rapidly.
AYRO
currently occupies 19,000 square feet of manufacturing space
configuration in a “U”-shaped assembly line with
multiple stations per vehicle. AYRO’s manufacturing space, as
currently occupied, allows up to five assembly lines plus adequate
raw material storage. The chart below indicates the number of
vehicles and assembly time required for each. Assembly time also
includes USDOT quality checks and testing as the final step of the
assembly process. Additionally, the number of vehicles indicated
below assumes a single shift. AYRO believes that its volumes could
be doubled per line by adding a second shift that would operate
from 4pm to midnight.
|
Vehicle
|
Assembly time (Man-Hours)
|
Vehicles assembled per line, per month
|
|
AYRO
411
|
12.0
|
200
|
|
AYRO
311
|
14.0
|
200
|
|
AYRO
311x (estimated)
|
15.0
|
180
|
Master Procurement Agreement with Club Car
In
March 2019, AYRO entered into a five-year Master Procurement
Agreement (the “MPA”) with Club Car for the sale of
AYRO’s four-wheeled vehicles. The MPA grants Club Car the
exclusive right to sell the AYRO 411 Fleet in North America,
provided that Club Car orders a mutually agreed on number of AYRO
vehicles per year. Under the terms of the MPA, AYRO receives orders
from Club Car dealers for vehicles of specific configurations, and
AYRO invoices Club Car once the vehicle has shipped. The MPA has an
initial term of five years commencing January 1, 2019 and may be
renewed by Club Car for successive one-year periods upon 60
days’ prior written notice. AYRO also agreed to collaborate
with Club Car on developing new products similar to the AYRO 411
Fleet and improvements to existing products, and AYRO granted Club
Car a right of first refusal to purchase similar commercial utility
vehicles which AYRO develops during the term of the MPA. AYRO is
currently engaged in discussions with Club Car to develop
additional products to be sold by Club Car in Europe and Asia, but
there can be no assurance that these discussions will be
successful. Pursuant to the MPA, AYRO also granted Club Car a right
of first refusal in the event that AYRO intends to sell 51% or more
of its assets or equity interests, which right of first refusal is
exercisable for a period of 45 days following AYRO’s delivery
of an acquisition notice to Club Car.
Strategic Partnership with Autonomic
Additionally, AYRO
is developing a technology platform that can be deployed to any
vehicle as additional value-add subscriptions offered directly to
the end customer. AYRO has partnered with Autonomic, a wholly-owned
subsidiary of Ford Smart Mobility LLC, to collect vehicle health,
use and location information (telematics) in its transportation
mobility cloud and produce purpose-built information back to AYRO,
customers and fleet operators, generating an additional revenue
stream. Working together, the companies aim to develop a range of
services to enable mobility applications for AYRO’s line of
vehicles which power everything from moving products and equipment
to people and last-mile delivery services.
Engineering
Development and Production Process Validation
As
a baseline, AYRO’s product development and engineering
efforts align with the Society of Automotive Engineering
(“SAE”) J2258_201611 standards for Light Utility
Vehicles. The J2258 standard provides key compliance criteria for
Gross Vehicle Weight Rating (“GVWR”), occupant
protection and safety restraint systems, lateral and longitudinal
stability, center of gravity and operating controls, among others.
AYRO’s test validation and inspection standards follow
Federal Motor Vehicle Safety Standards (“FMVSS”) 49 CFR
571.500 for LSVs with the additions of SAE J585 and FMVSS 111 for
rear visibility, lighting, signaling, reflectors, changes in
direction of movement, back-up camera response timing and field of
view.
AYRO’s
development standards and test compliance validation processes are
supported by a variety of test documentation including supplier
self-reporting, third party laboratory test reports and regional
compliance validation with the California Air Resource Board
(“CARB”) for speed, range and environmental
performance.
AYRO’s
production system follows a lean, cell-based, manufacturing model.
The process involves the following five sequential cells: (1) cab
preparation, (2) chassis preparation, (3) system integration and
testing, (4) final assembly and integration test, and (5) QA &
FMVSS Compliance. Assembly quality and shift efficiency metrics are
measured daily by AYRO production staff at end of every
shift.
AYRO
maintains a certification and compliance check list for each
vehicle. AYRO’s three and four-wheeled vehicles use an
automotive style steering wheel, turn signal stalk, headlight,
running light and reverse light controls, a multi-speed windshield
wiper and washer and an accelerator and brake pedal consistent with
controls employed in standard passenger cars. As the AEV 311 and
AEV 411 are direct drive vehicles, there is no stick shift, clutch,
paddle shift, or belt driven CSV (continuously variable)
transmission needed to operate the vehicle within the intended
torque band and speed range. Accordingly, AYRO’s vehicles are
homologated under existing 49 CFP 571.500 the U.S., state and local
LSV requirements and the corresponding motorcycle and autocycle
requirements under 49 CFR 571.3.
The
Industry and AYRO’s Competitive Position
The
U.S. electric vehicle market is expected by many commentators to
increase dramatically over the next decade, driven by factors such
as the country’s increasingly urbanized population, the
significant cost of owning and operating gas-powered vehicles, the
growing global awareness of the damaging effects of pollution and
greenhouse gas emissions, and rising investment in clean technology
and supporting infrastructure.
A
segment of the electric vehicle market, low speed electric vehicles
(“LSEVs”)—which are LSVs but cannot be powered by
gas or diesel fuel—are growing increasingly popular as
eco-friendly options for consumers and commercial entities. LSEVs
run on electric motors fueled by a variety of different batteries,
such as lithium ion, molten salt, zinc-air and various nickel-based
designs.
In
2017, the global LSEV market was valued at approximately $2,395
million, according to Allied Market Research, and global sales of
LSEVs have only continued to grow over the past two years, with
sales expected to reach 1.5 million units in 2021. According to the
Low Speed Electric Vehicles Market report conducted by Market Study
Report, over the next five years, the LSEV market is expected to
register a 10.8% compound annual growth rate in terms of revenue,
with the global market size expected to reach $8,870 million by
2024, up from $4,790 million in 2019.
Trends Driving the Need for Electric Vehicles
Trends
such as increasingly stringent government regulations aimed toward
reducing vehicle emissions, growing urban populations, and social
pressure to adopt sustainable lifestyles all create a demand for
more ecologically and economically sustainable methods of
transportation. This demand continues to spur technological
advancements and LSEV market growth.
Incentivizing Effect of Government Rules and
Regulations. Expanding rules and regulations governing
vehicle emissions have contributed to growth in the LSEV market. In
particular, the U.S., Germany, France, and China have implemented
stringent laws and regulations governing vehicular emissions,
requiring automobile manufacturers to use advanced technologies to
combat high-emission levels in vehicles. To incentivize
clean-energy use, many governments are increasingly instituting
substantial incentives for consumers to purchase electric vehicles,
such as:
●
tax credits,
rebates, and exemptions; reduced vehicle registration
fees;
●
reduced utility
rates; and
Further,
governments are establishing infrastructure benchmarks to support
the growth of the electric vehicle industry.
A prime
example of government involvement in developing the electric
vehicle industry, a recent New Jersey bill aims to have 330,000
electric vehicles on state roads by the end of 2024 and a total of
2 million by 2035. To facilitate this goal, the bill calls for the
state to have 400 fast-charging stations and another 1,000
slow-charging stations, both by 2025. Thirty percent of all
apartment, condo and townhouse developments in New Jersey would
need to have chargers by 2030, while half of all franchise hotels
would need to have chargers by 2050. As the network of government
rules and regulations expands, so too should investment in the
research and development of LSEV technology and
infrastructure.
Urbanization on the Rise. According to
the U.N., in 2015, 55% of the world’s population was urban,
and by 2050, it is estimated that this percentage will increase to
68%. As the world
population continues to urbanize, a growing number of consumers are
expected to seek alternatives, such as LSEVs, to internal
combustion engine vehicles in order to save money and space in
congested city streets.
Increasing Sense of Social
Responsibility. In tandem with governmental efforts to curb
pollution and encourage more sustainable transportation practices,
consumers face increasing social pressure to adopt eco-friendly
lifestyles. As this demand grows, the LSEV market should continue
to develop.
Target Markets
The
multipurpose applications and clean energy use of LSEVs make them
popular across a wide array of industries and customers, including
college and university campuses, resorts and hotels, corporate
parks, hospitals, warehouses, individual consumers, last mile
delivery service providers, municipalities, and the food service
industry. A number of these market segments, and AYRO’s
competitive position within them, are discussed in greater detail
below.
Universities. LSEVs are growing
increasingly common on university and college campuses due to a
number of factors. LSEVs fulfill the versatile needs of campuses
better than golf carts or standard combustion vehicles because, not
only does LSEVs’ low speed threshold promote safer driving
among pedestrians, the vehicles are also street legal with on-road
safety features, enabling drivers to drive on roads and free up
pedestrian space along sidewalks and smaller pathways.
Additionally, the significantly reduced carbon imprint of LSEVs
compared to internal combustion engine vehicles appeal to
environmentally aware students and professors looking to promote
environmental sustainability on campus. By transitioning from
internal combustion engine vehicles to LSEVs, campuses should be
able to reduce significantly the costs spent on fuel, oil, parts,
and maintenance. AYRO’s vehicles, particularly the AYRO 411
Fleet, provide all of these benefits to university and college
campuses. AYRO estimates that in the U.S., there are over 1,800
higher education campuses with over 10,000 students each with over
400 on-campus vehicles that are ideal targets for the AYRO 411
Fleet as campuses transition from fossil-fueled campus fleet
vehicles to EVs.
Food Delivery Services. As the
millennial generation assumes a more substantial portion of the
consumer population, customers increasingly favor convenience and
timeliness, spurring dramatic growth in online ordering and
delivery services across a wide swath of industries, including food
delivery and restaurant ordering services. Food delivery sales are
anticipated to increase over 20% per year, culminating in an
expected $365 billion worldwide by 2030, according to Upserve.
Upserve further estimates that approximately 60% of U.S. consumers
report that they order delivery or takeout at least once a week.
Within the next decade, potentially over 40% of restaurant sales
will be attributable to delivery services, according to Morgan
Stanley.
In its
market research, AYRO has determined that delivery services,
including restaurants using the AYRO 311 as a delivery vehicle
rather than outsourcing delivery to third party services have
reduced their delivery costs by up to 50%. Delivery service
companies using the AYRO 311 as an in-house delivery vehicle rather
than outsourcing delivery are also better equipped to manage the
customer experience and maintain customer relationships and
data.
Last Mile Delivery Service. Retail
focus on last mile delivery—the movement of goods from a
transportation hub to the final delivery destination—has
grown exponentially over the past few years due to the rise in
online ordering and e-commerce. Consumers’ ability to pick
and choose products based on delivery speed and availability makes
last mile delivery a key differentiator among retailers. Last mile
delivery provides retailers timelier and more convenient delivery
options not offered by the main three shipping services in the U.S.
(the U.S. Postal Service, FedEx, and UPS). Additionally, given the
increasing designation of low emission zones in urban centers,
retailers will need to continue to deploy eco-friendly vehicles.
Retailers will likely expand the use of LSEV fleets to make
deliveries in low emission zones due to their zero gas emissions
and lower price than competing electric vehicles. AYRO expects that
the AYRO 411 Fleet, with its variety of cargo bed options ideal for
hauling and delivery and its low price point, should stand out
among the competition. Additionally, the AYRO 311 autocycle is
ideal for short point-destination deliveries for smaller packages
and urgent urban courier-style deliveries.
Municipalities. As more city
governments adopt regulations geared toward reducing pollution from
vehicles, cities are increasingly looking to replace their
municipal vehicles with zero-emission fleets. Such fleet overhauls,
however, can be costly. LSEVs are a cheaper and more practical
option for cities daunted by the cost of standard electronic
vehicles. AYRO’s LSEVs have both on and off-road
capabilities, making them particularly versatile for
municipalities.
On-Road and Personal Transportation.
LSEVs offer a feasible and practical method of transportation,
especially in urban centers. Because AYRO’s LSEVs are
street-legal, they offer city dwellers a more sustainable,
cost-efficient, easily maneuverable, compact and light weight
option compared to internal combustion engine vehicles. AYRO LSEVs
also offer a variety of specifications and equipment, meaning that
consumers do not have to sacrifice comfort or
convenience.
Market
Considerations
AYRO
primarily focuses on the LSEV North American market, which is
highly competitive and constitutes 28% of the global LSEV market
according to Wise Guy Reports. AYRO has examined various
considerations with regard to the AYRO’s market impact,
including cost comparisons to existing vehicles in the market,
market validation and target commercial markets.
Competition
The
worldwide automotive market, particularly for economy and
alternative fuel vehicles, is highly competitive, and AYRO expects
it will become even more so in the future. Other manufacturers have
entered the three-wheeled vehicle market, and AYRO expects
additional competitors to enter this market within the next several
years. As the LSEV market grows increasingly saturated, AYRO
expects to experience significant competition. The most competitive
companies in the global LSEV market include HDK Electric Vehicles,
Bradshaw Electric Vehicles, Textron Inc., Polaris Industries,
Yamaha Motors Co. Ltd., Ingersoll Rand, Inc., Speedway Electric,
AGT Electric Cars, Bintelli Electric Vehicles and Ligier Group.
AYRO’s relationship with Club Car, a division of Ingersoll
Rand, Inc., gives AYRO a strong competitive advantage. Despite this
fact, many of the other competitors listed above have significantly
greater financial, technical, manufacturing, marketing and other
resources than AYRO and may be able to devote greater resources to
the design, development, manufacturing, distribution, promotion,
sale and support of their products. Many of these competitors
modify an existing fossil-fuel powered golf cart to meet utility
and commercial needs for an all-electric commercial utility
vehicle, unlike the AYRO 411 Fleet, which was engineered, designed
and produced as a portfolio of electric, light duty trucks and
van.
When
compared to internal combustion engine vehicles, AYRO’s
vehicles are significantly more attractive based on tax, title and
license fees and CO2 emissions. Compared to a standard Ford F150
(gasoline) pickup truck (2.7 liter), the AYRO 411 Fleet provides an
approximate 49% reduction in operating expenses and an approximate
100% reduction in CO2 emissions (if renewed energy is used to
charge the AYRO vehicles, an increasing trend for most higher
education campuses and government facilities). Compared to a Nissan
Versa (gasoline) four cylinder (1.6 liter) sub-compact car, the
AYRO 311 provides a similarly drastic reduction in operating
expenses and CO2 emissions. Additionally, the AYRO 311’s
starting manufacturer suggested retail price (“MSRP”)
is $9,999. Arcimoto and SOLO market three-wheeled electric vehicles
with starting MSRPs of $19,900 and $15,888,
respectively.
AYRO’s most
closely-matched competitor in the LSEV industry is Polaris Gem
(“Gem”), an LSEV manufacturer that manufactures
products designed for applications similar to AYRO’s. Gem
offers three passenger vehicle models and two utility vehicle
models. Although Gem’s GEM el XD model, which is similar to
vehicles in the AYRO 411 Fleet, has a lower starting MSRP than the
AYRO 411 Fleet, the GEM el XD would need to be highly configured to
match the standard AYRO 411 Fleet features and, with such
configuration, would exceed the base MSRP of each vehicle in the
AYRO 411 Fleet. The AYRO 411 Fleet has a greater pick-up bed and
van box capacity that the GEM el XD, in addition to 13% more
horsepower and a 48% better turning radius, allowing drivers of the
AYRO 411 Fleet to execute maneuvers in tighter spaces than they
would using the GEM el XD.
AYRO
expects competition in its industry to intensify in the future in
light of increased demand for alternative fuel vehicles, continuing
globalization and consolidation in the worldwide automotive
industry. Factors affecting competition include product quality and
features, innovation and development time, pricing, reliability,
safety, customer service and financing terms. Increased competition
may lead to lower vehicle unit sales and increased inventory, which
may result in downward price pressure and may adversely affect
AYRO’s business, financial condition, operating results and
prospects. AYRO’s ability to successfully compete in its
industry will be fundamental to its future success in existing and
new markets and its market share. There can be no assurances that
AYRO will be able to compete successfully in its markets. If
AYRO’s competitors introduce new cars or services that
compete with or surpass the quality, price or performance of
AYRO’s vehicles or services, AYRO may be unable to satisfy
existing customers or attract new customers at the prices and
levels that would allow AYRO to generate attractive rates of return
on its investment. Increased competition could result in price
reductions and revenue shortfalls, loss of customers and loss of
market share, which could harm AYRO’s business, prospects,
financial condition and operating results.
AYRO’s
Strategy
AYRO’s
goal is to continue to develop and commercialize, automotive-grade,
sustainable electric transportation solutions for the markets and
use cases that AYRO believes can be well served by AYRO’s
purpose-built, street legal and road-ready electric vehicles.
AYRO’s business strategy includes the following:
|
●
|
Leverage the relationship with Club Car to expand AYRO’s
product portfolio and increase customer base. AYRO is working on and has plans to expand its
current electric transportation solutions portfolio in
collaboration with Club Car. This plan includes next generation
light duty trucks and new purpose-driven electric vehicles.
Additionally, AYRO is collaborating with Club Car’s sales and
marketing teams to expand adoption of its vehicles in the United
States and intends to expand its geographical footprint within Club
Car’s global distribution and channel
network.
|
|
●
|
Rapidly scale up AYRO’s operations to achieve
growth. AYRO intends to direct
resources to scale up AYRO’s operations, which AYRO believes
is needed to increase its revenue, including expanding and
optimizing its automotive component supply chain and AYRO’s
flow-based assembly operations in Round Rock, Texas. Further, AYRO
plans to include expanding sales territories and adding
distribution channels, forming strategic partnerships to build-out
its whole product offering and to access additional sales channels
or to accelerate product adoption for particular vertical markets,
building AYRO’s brand, and increasing manufacturing capacity
to produce higher volumes of electric vehicles.
|
|
●
|
Identify defined markets and use cases which are currently
under-served but represent sizable market opportunity sub-sets of
the electric vehicle market and focus development efforts on
road-ready autocycles and other purpose-built electric vehicles to
address such markets. AYRO is currently developing a new series of
automotive-grade autocycles, engineered and optimized to meet
targeted use cases such as last mile and urban delivery. AYRO is
also working on Club Car’s next generation, electric light
duty trucks and developing a new purpose-built vehicle with Club
Car. AYRO intends to direct resources to advance the development of
such purpose-built transportation solutions which AYRO believes
will allow the company to address currently underserved, yet growth
markets, that are application specific. AYRO believes that
AYRO’s all electric transportation solutions, such as its
compact, lightweight and maneuverable campus and urban vehicles,
can benefit targeted geographical and vertical customers by
offering lower annual/lifetime total cost of ownership for zero
emissions/zero carbon footprint vehicles.
|
|
●
|
Invest in research and development and qualification of sensors,
cameras, software and mobility services seeking to enhance the
value of using AYRO’s electric vehicles and to derive
incremental potential revenue streams for AYRO and its partner
ecosystem. AYRO intends to
integrate radio frequency-enabled hardware and develop data
collection, communication processes and mobility services in
collaboration with Autonomic. AYRO and Autonomic plan to develop a
technology platform that collects vehicle health, use and location
information (telematics) into its transportation mobility cloud and
produces purpose-built information back to AYRO, customers and
fleet operators, the subscription to which can be offered to the
end customers which AYRO believes will enhance the value of using
AYRO’s electric vehicles and provide additional revenue
stream.
|
Intellectual
Property
Patents
AYRO
has submitted two design patent applications covering their
vehicles.
1.
United
States Application No. 29/653,522.
●
This
application covers one of the designs for a three-wheel vehicle for
AYRO. The following is a diagram of the vehicle from the
application:
●
This
first application has been approved by the USPTO and the issue fee
has been paid. AYRO will have a registration number from the USPTO
once the number has been assigned.
2.
United
States Application No. 29/653,523.
●
This
application covers a different design for a three-wheel vehicle for
AYRO. The following is a diagram for this vehicle from the
application:
●
This
application has also been approved by the USPTO and the issue fee
has been paid. AYRO will have a registration number from the USPTO
once the number has been assigned.
Trademark and Trade Name
AYRO
has applied for the registration of the following with the United
States Patent and Trademark Office:
●
“AYRO”
– Applied for on May 15, 2019, serial
number 88431321.
●
AYRO LOGO” (
) – Applied for on October 11, 2019, serial
number 88651927
AYRO
has also filed international applications for the AYRO word mark in
the EU, Mexico, and Canada.
Governmental
Programs, Incentives and Regulations
Many
governmental standards and regulations relating to safety, fuel
economy, emissions control, noise control, vehicle recycling,
substances of concern, vehicle damage, and theft prevention are
applicable to new motor vehicles, engines, and equipment
manufactured for sale in the United States, Europe, and elsewhere.
In addition, manufacturing and other automotive assembly facilities
in the United States, Europe, and elsewhere are subject to
stringent standards regulating air emissions, water discharges, and
the handling and disposal of hazardous substances. The most
significant of the standards and regulations affecting AYRO are
discussed below.
Mobile Source Emissions Control
The
federal Clean Air Act imposes stringent limits on the amount of
regulated pollutants that lawfully may be emitted by new vehicles
and engines produced for sale in the United States. The current
(“Tier 2”) emissions regulations promulgated by
the Environmental Protection Agency, or EPA, set standards for
motorcycles. Tier 2 emissions standards also establish
durability requirements for emissions components to 5 years
or 30,000 kilometers.
California has
received a waiver from the EPA to establish its own unique
emissions control standards for certain regulated pollutants. New
vehicles and engines sold in California must be certified by the
California Air Resources Board (“CARB”). CARB’s
emissions standards for motorcycles are in line with those of the
EPA. AYRO currently expect that its vehicles will meet and exceed
both the EPA’s and CARB’s standards.
Motor Vehicle Safety
The
National Highway Traffic Safety Administration
(“NHTSA”) defines a motorcycle as “a motor
vehicle with motive power having a seat or saddle for the use of
the rider and designed to travel on not more than three wheels in
contact with the ground.” In order for a manufacturer to sell
motorcycles in the U.S., the manufacturer has to self-certify to
meet a certain set of regulatory requirements promulgated by the
NHTSA in its FMVSS.
AYRO’s FMVSS
strategy is designed to meet both federal motorcycle and
state-specific autocycle requirements, as applicable, and conform
as much as possible to automotive FMVSS requirements while not
violating the motorcycle requirements that AYRO must
meet.
The
National Traffic and Motor Vehicle Safety Act of 1966, or
Safety Act, regulates vehicles and vehicle equipment in two primary
ways. First, the Safety Act prohibits the sale in the United States
of any new vehicle or equipment that does not conform to applicable
vehicle safety standards established by NHTSA. Meeting or exceeding
many safety standards is costly, in part because the standards tend
to conflict with the need to reduce vehicle weight in order to meet
emissions and fuel economy standards. Second, the Safety Act
requires that defects related to motor vehicle safety be remedied
through safety recall campaigns. A manufacturer is obligated to
recall vehicles if it determines the vehicles do not comply with a
safety standard. If AYRO or NHTSA determine that either a safety
defect or noncompliance exists with respect to any of its vehicles,
the cost of such recall campaigns could be
substantial.
Operator’s License and Helmet Requirements
State
regulations regarding operator licensing and occupant helmet
requirements are currently a nationwide patchwork with regard to
certain three-wheeled vehicles that may be classified as
autocycles. While the strong majority of states have some form of
exemption from helmet and motorcycle license requirements for
three-wheeled vehicles qualifying as autocycles, the specific
wording of each state’s statute may or may not include AYRO
311. In addition, for states that have passed specific autocycle
requirements, many require that the vehicle have standard operating
controls (accelerator and brakes) and a standard steering wheel,
plus additional requirements. The AYRO 311 offers standard controls
to meet requirements aligned with these elements. For example, in a
selection of AYRO’s larger market potential states of
California, Texas and Florida, three-wheeled vehicles that are
“fully enclosed” or “enclosed cab” are
exempt from helmet and motorcycle endorsement
requirements.
AYRO’s
advocacy strategy involves creating a plan to work with state
legislatures to advocate the normalization of these rules to reduce
consumer confusion in the marketplace that comes from conflicting
state-by-state regulations.
U.S. Environmental Protection Agency (“EPA”)
Certification
AYRO’s
product programs are built on plug-in electric, zero emissions
platforms. AYRO reports federal and state emissions data
consistent with 10 CFR 474 and California Air Resources Board
requirements for Zero-Emission Vehicle
certification.
Electromagnetic Compatibility
The
Federal Communications Commission (FCC) is the federal agency
responsible for implementing and enforcing the communications law
and regulations, including title 47 of the Code of Federal
Regulations, specifically Part 15, which regulates unlicensed
radio-frequency transmissions, both intentional and unintentional.
With very few exceptions, all electronics devices must be reviewed
to comply with Part 15 before they can be advertised or sold in the
U.S. market.
Motor Vehicle Manufacturer and Dealer Regulation
As
with helmet laws and driver license requirements, state laws that
regulate the manufacture, distribution, and sale of motor vehicles
are a patchwork, nationwide. AYRO’s agreement with Club Car
aims to provide U.S. and targeted countries channel and dealer
coverage. For AYRO’s electric vehicles, outside of
AYRO’s collaboration with Club Car or another third-party
sales/distribution white label partner, AYRO plans on a
multi-faceted approach to sales, including exploring the following:
(i) developing an expanded network of channel partners; (ii)
entering into direct sales via a national leasing company that will
in turn consummate sales with end users in a variety of states;
and/or (iii) opening facilities in high growth states and
delivering the vehicle to the end user via a common
carrier.
AYRO
is registered as a manufacturer in Texas, California, Colorado,
Louisiana, Florida, Arizona, with additional state applications
pending approval.
Pollution Control Costs
AYRO
is required to comply with stationary source air pollution, water
pollution, and hazardous waste control standards that are now in
effect or are scheduled to come into effect with respect to
AYRO’s manufacturing operations.
Compliance
with Environmental Laws
Compliance by AYRO
with applicable environmental requirements during the years ended
December 31, 2019 and 2018 and subsequently has not had a material
effect upon its capital expenditures, earnings or competitive
position.
Employees
As of
January 1, 2020, AYRO employed a total of 15 full-time and 2
part-time employees at its principal executive offices in Round
Rock, Texas. None of AYRO’s employees are covered by a
collective bargaining agreement. AYRO considers its relationship
with its employees to be strong.
Properties
AYRO
leases approximately 23,950 square feet of space in Round Rock,
Texas, under a lease that expires in December 2026. AYRO’s
manufacturing model only requires standard light-industrial
warehouse space and is scalable based on orders.
Future
minimum payments under the lease are as follows:
Year
Ending December 31,
2020 – $269,897
2021 – $276,098
2022
– $282,486
2023
– $289,066
2024
– $295,843
2025
– $302,823
2026
– $310,013
Legal
Proceedings
From
time to time, AYRO may be involved in litigation relating to claims
arising out of its operations in the normal course of business.
AYRO is not currently a party to any legal proceedings, the adverse
outcome of which, in its management’s opinion, individually
or in the aggregate, would have a material adverse effect on the
results of its operations or financial position.
Exhibit
99.2
RISK
FACTORS
You should carefully consider the risks described below. The risks
and uncertainties described below are not the only ones DropCar and
AYRO face, and these factors should be considered in conjunction
with general investment risks and other information included in the
exhibits to this Current Report on Form 8-K (the
“Form 8-K”),
including the matters addressed in the section titled
“Forward-Looking Statements” under Item 8.01 of this
Form 8-K. You should read and consider the risks associated with
the business of AYRO as these risk factors will also affect the
operations of the combined company going forward because, assuming
that the sale of substantially all of the assets of the DropCar
business (the
“Asset Sale”)
pursuant to that certain Asset Purchase Agreement, dated as of
December 19, 2019 by and among DropCar, Inc.
(“DropCar”),
DropCar Operating Company, Inc., a Delaware corporation and
Wholly-owned subsidiary of DropCar
(“DropCar
Operating”),
DC Partners Acquisition, LLC, Spencer Richarson and David
Newman
(the
“Asset Purchase Agreement”)
is approved, the business of the combined company will be
AYRO’s business. You should also read and consider the risk
factors associated with DropCar because these risk factors may
affect the operations and financial results of the combined
company.
Risks Related to the
Proposed Merger
There is no assurance when or if the merger will be completed. Any
delay in completing the merger may substantially reduce the
intended benefits that DropCar and AYRO expect to obtain from the
merger.
On
December 19, 2019, DropCar, ABC Merger Sub, Inc., a wholly-owned
subsidiary of DropCar (“Merger
Sub”) and AYRO, Inc. (“AYRO”)
entered into an agreement and plan of merger and reorganization (as
may be amended from time to time, the “Merger
Agreement”), which provides for, among other things, the
merger of AYRO with and into Merger Sub, with AYRO continuing as
the surviving corporation and a wholly-owned subsidiary of
DropCar. Completion of the merger is subject to the
satisfaction or waiver of a number of conditions as set forth in
the Merger Agreement, including the
approval by DropCar’s stockholders, approval by Nasdaq of
DropCar’s application for initial listing of DropCar’s
common stock in connection with the merger, and other customary
closing conditions. There can be no assurance that DropCar
and AYRO will be able to satisfy the closing conditions or that
closing conditions beyond their control will be satisfied or
waived. If the conditions are not satisfied or waived, the merger
may not occur or will be delayed, and DropCar and AYRO each may
lose some or all of the intended benefits of the merger. In
addition, if the Merger Agreement is terminated under certain
circumstances, DropCar or AYRO may be required to pay a termination
fee of $1,000,000. Moreover, each of DropCar and AYRO has incurred
and expect to continue to incur significant expenses related to the
merger, such as legal and accounting fees, some of which must be
paid even if the merger is not completed.
In addition, if the Merger Agreement is terminated
and DropCar’s or AYRO’s board of directors determines
to seek another business combination, it may not be able to find a
third party willing to provide equivalent or more attractive
consideration than the consideration to be provided by each party
in the merger. In such circumstances, the DropCar Board of
Directors (the “DropCar
Board”) may elect
to, among other things, divest all or a portion of DropCar’s
business, or take the steps necessary to liquidate all of
DropCar’s business and assets, and in either such case, the
consideration that DropCar receives may be less attractive than the
consideration to be received by DropCar pursuant to the Merger
Agreement. Further, approval of the issuance of shares of DropCar's
common stock to AYRO equity holders as merger consideration in the
merger (the “Share
Issuance”) and the Asset Sale are conditioned
on the approval by DropCar's stockholders of each other.
Accordingly, if the Share Issuance is not approved, the Asset Sale
will not be completed.
The issuance of shares of DropCar common stock to AYRO stockholders
in the merger will substantially dilute the voting power of current
DropCar stockholders. Having a minority share position may reduce
the influence that current stockholders have on the management of
DropCar.
Pursuant to the
terms of the Merger Agreement, at the effective time of the merger,
DropCar will issue shares of its common stock to AYRO equity
holders as merger consideration, including shares to be issued in
respect of the sale of shares of AYRO common stock (or common stock
equivalents) and warrants to purchase AYRO common stock resulting
in gross proceeds of an aggregate of $2 million (the “AYRO
Private Placement”) and upon conversion of the bridge loans
immediately prior to the closing of the merger. As a result, upon
completion of the merger, the current DropCar stockholders will
hold approximately 18.0% of the issued and outstanding equity in
DropCar and former AYRO stockholders will own pre-reverse stock
split shares and pre-reverse stock split shares issuable upon
exercise of certain warrants equal to approximately 80.0% of the
issued and outstanding equity in DropCar, in each case, excluding
certain warrants, options and restricted stock units. Accordingly,
the issuance of the shares of DropCar common stock to AYRO equity
holders in the merger will significantly reduce the ownership stake
and relative voting power of each share of DropCar common stock
held by current DropCar stockholders. Consequently, following the
merger, the ability of DropCar’s current stockholders to
influence the management of DropCar will be substantially
reduced.
Because the lack of a public market for AYRO common stock makes it
difficult to evaluate the fairness of the merger, AYRO stockholders
may receive consideration in the merger that is greater than or
less than the fair market value of the AYRO common
stock.
The
outstanding capital stock of AYRO is privately held and is not
traded in any public market. The lack of a public market makes it
extremely difficult to determine the fair market value of AYRO
shares. Since the percentage of DropCar’s common stock to be
issued to AYRO equity holders was determined based on negotiations
between the parties, it is possible that the value of the DropCar
common stock to be issued in connection with the merger will be
greater than the fair market value of AYRO shares. Alternatively,
it is possible that the value of the shares of DropCar common stock
to be issued in connection with the merger will be less than the
fair market value of AYRO shares.
Directors and officers of DropCar and AYRO may have interests in
the merger that are different from, or in addition to, those of
DropCar stockholders and AYRO stockholders generally that may
influence them to support or approve the merger.
The
officers and directors of DropCar and AYRO may have interests in
the merger that are different from, or are in addition to, those of
DropCar stockholders and AYRO stockholders generally. Effective
upon the closing of the merger, Mr. Keller and Mr. Smith will be
employed by the combined company and receive compensation and other
consideration. Three of the current directors of DropCar, which
shall include Joshua Silverman and two other current DropCar
directors, and all of the current directors of AYRO will be
appointed as directors of the combined company after the completion
of the merger and receive cash and equity compensation in
consideration for such service. All of AYRO’s executive
officers are expected to continue to serve as executive officers of
DropCar after the completion of the merger. Each outstanding stock
option to acquire shares of AYRO common stock held by executive
officers and directors of AYRO will be converted into an option to
acquire shares of DropCar common stock. In addition, the directors
and executive officers of DropCar and AYRO also have certain rights
to indemnification or to directors’ and officers’
liability insurance that will survive the completion of the merger.
These interests may have influenced the directors and executive
officers of DropCar and AYRO to support or recommend the proposals
presented to DropCar and AYRO stockholders.
The announcement and pendency of the merger could have an adverse
effect on DropCar’s or AYRO’s business, financial
condition, results of operations or business
prospects.
The
announcement and pendency of the merger could disrupt
DropCar’s and/or AYRO’s businesses in the following
ways, among others:
●
DropCar’s
or AYRO’s current and
prospective employees could experience uncertainty about
their future roles within the combined company; and, this
uncertainty might adversely affect DropCar’s or AYRO’s
ability to retain, recruit and motivate key personnel;
●
the
attention of DropCar’s or AYRO’s management may be
directed towards the completion of the merger and other
transaction-related considerations and may be diverted from the
day-to-day business operations of DropCar or AYRO, as applicable,
and matters related to the merger may require commitments of time
and resources that could otherwise have been devoted to other
opportunities that might have been beneficial to DropCar or AYRO,
as applicable;
●
customers,
prospective customers, suppliers, collaborators and other third
parties with business relationships with DropCar or AYRO may decide
not to renew or may decide to seek to terminate, change or
renegotiate their relationships with DropCar or AYRO as a result of
the merger, whether pursuant to the terms of their existing
agreements with DropCar or AYRO; and
●
the
market price of DropCar’s common stock may decline to the
extent that the current market price reflects a market assumption
that the proposed merger will be completed.
Should
they occur, any of these matters could adversely affect the
businesses of, or harm the financial condition, results of
operations or business prospects of, DropCar or AYRO.
During the pendency of the merger, DropCar or AYRO may not be able
to enter into a business combination with another party and will be
subject to contractual limitations on certain actions because of
restrictions in the Merger Agreement.
Covenants in the
Merger Agreement impede the ability of DropCar or AYRO to make
acquisitions or complete other transactions that are not in the
ordinary course of business pending completion of the merger other
than the sale of substantially all assets of the assets of DropCar
pursuant to the Asset Purchase Agreement, the AYRO Private
Placement and the issuance of pre-funded warrants to purchase
shares of AYRO common stock at an exercise price of $0.001 per
share, to be issued in a nominal stock subscription (the
“Nominal Stock Subscription”). As
a result, if the merger is not completed, the parties may be at a
disadvantage to their competitors. In addition, while the Merger
Agreement is in effect and subject to limited exceptions, each
party is prohibited from soliciting, initiating, encouraging or
taking actions designed to facilitate any inquiries or the making
of any proposal or offer that could lead to the entering into
certain extraordinary transactions with any third party, such as a
sale of assets, an acquisition, a tender offer, a merger or other
business combination outside the ordinary course of business. These
restrictions may prevent each of DropCar and AYRO from pursuing
otherwise attractive business opportunities or other capital
structure alternatives and making other changes to its business or
executing certain of its business strategies prior to the
completion of the merger, which could be favorable to DropCar
stockholders or AYRO stockholders.
Certain provisions of the Merger Agreement may discourage third
parties from submitting competing proposals, including proposals
that may be superior to the arrangements contemplated by the Merger
Agreement.
The terms of the Merger Agreement prohibit each of
DropCar and AYRO from soliciting competing proposals or cooperating
with persons making unsolicited takeover proposals, except in
limited circumstances if the DropCar Board determines in good
faith, after consultation with its independent financial advisor,
if any, and outside counsel, that an unsolicited competing proposal
constitutes, or would reasonably be expected to result in, a
superior competing proposal and that failure to take such action
would be reasonably likely to result in a breach of the fiduciary
duties of the DropCar Board. In addition, if DropCar or AYRO
terminate the Merger Agreement under specified circumstances,
including, in the case of DropCar, terminating because of a
decision of the DropCar Board to recommend a superior competing
proposal, DropCar or AYRO would be required to pay a termination
fee of $1,000,000. This
termination fee may discourage third parties from submitting
competing proposals to DropCar or its stockholders and may cause
the DropCar Board to be less inclined to recommend a competing
proposal.
The rights of AYRO stockholders who become DropCar stockholders in
the merger and DropCar stockholders following the merger will be
governed by the A&R Charter and the A&R
Bylaws.
Upon
consummation of the merger, outstanding shares of AYRO common stock
will be converted into the right to receive shares of DropCar
common stock. AYRO stockholders who receive shares of DropCar
common stock in the merger will become DropCar stockholders. As a
result, AYRO stockholders who become stockholders in DropCar will
be governed by DropCar’s organizational documents and bylaws,
rather than being governed by AYRO’s organizational documents
and bylaws. Pursuant to the Merger Agreement, DropCar’s
certificate of incorporation will be amended and restated, subject
to DropCar stockholders’ approval of the amended and restated
charter proposal (the “A&R Charter”), and
DropCar’s bylaws will be amended and restated (the “A&R
Bylaws”), immediately prior to the effective time of
the merger.
The Exchange Ratio is not adjustable based on the market price of
DropCar common stock so the merger consideration at the closing may
have a greater or lesser value than at the time the Merger
Agreement was signed.
The
Merger Agreement has set the Exchange Ratio formula for the AYRO
common stock, and the Exchange Ratio is only adjustable upward or
downward to reflect DropCar’s and AYRO’s equity
capitalization as of immediately prior to the effective time of the
merger. Any changes in the market price of common stock before the
completion of the merger will not affect the number of shares AYRO
securityholders will be entitled to receive pursuant to the Merger
Agreement. Therefore, if before the completion of the merger the
market price of DropCar common stock declines from the market price
on the date of the merger agreement, then AYRO securityholders
could receive merger consideration with substantially lower value.
Similarly, if before the completion of the Merger the market price
of DropCar common stock increases from the market price on the date
of the Merger Agreement, then AYRO securityholders could receive
merger consideration with substantially more value for their shares
of AYRO capital stock than the parties had negotiated for in the
establishment of the Exchange Ratio.
If the merger does not qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended, or is
otherwise taxable to U.S. AYRO equity holders, then such holders
may be required to pay U.S. federal income taxes.
For
U.S. federal income tax purposes, the merger is intended to
constitute a reorganization within the meaning of Section 368(a) of
the Code. If the Internal Revenue Services (the “IRS”)
or a court determines that the merger should not be treated as a
reorganization, a holder of AYRO common stock and warrants would
recognize taxable gain or loss upon the exchange of AYRO common
stock and conversion of warrants for DropCar common stock and
warrants pursuant to the Merger Agreement.
DropCar is expected to incur substantial expenses related to the
merger with AYRO.
DropCar
is expected to incur substantial expenses in connection with the
merger with AYRO, as well as operating as a public company. DropCar
will incur significant fees and expenses relating to legal,
accounting, financial advisory and other transaction fees and costs
associated with the merger. Actual transaction costs may
substantially exceed AYRO’s estimates and may have an adverse
effect on the combined company’s financial condition and
operating results.
Failure to complete the merger could negatively affect the value of
DropCar common stock and the future business and financial results
of both DropCar and AYRO.
If the
merger is not completed, the ongoing businesses of DropCar and AYRO
could be adversely affected and each of DropCar and AYRO will be
subject to a variety of risks associated with the failure to
complete the mergers, including without limitation the
following:
●
diversion
of management focus and resources from operational matters and
other strategic opportunities while working to implement the
merger;
●
reputational
harm due to the adverse perception of any failure to successfully
complete the merger; and
●
having
to pay certain costs relating to the merger, such as legal,
accounting, financial advisory, filing and printing
fees.
If the
merger is not completed, these risks could materially affect the
market price of DropCar common stock and the business and financial
results of both DropCar and AYRO.
The merger is expected to result in a limitation on the combined
company’s ability to utilize its net operating loss
carryforward.
Under
Section 382 of the Code, use of DropCar’s net operating loss
carryforwards (“NOLs”) will be limited if DropCar
experiences a cumulative change in ownership of greater than 50% in
a moving three year period. DropCar will experience an ownership
change as a result of the merger and therefore its ability to
utilize its NOLs and certain credit carryforwards remaining at the
effective time of the merger will be limited. The limitation will
be determined by the fair market value of DropCar’s common
stock outstanding prior to the ownership change, multiplied by the
applicable federal rate. It is expected that the merger will impose
a limitation on DropCar’s NOLs. Limitations imposed on
DropCar’s ability to utilize NOLs could cause U.S. federal
and state income taxes to be paid earlier than would be paid if
such limitations were not in effect and could cause such NOLs to
expire unused, in each case reducing or eliminating the benefit of
such NOLs.
The opinion received by the DropCar Board of Directors from Gemini
has not been, and is not expected to be, updated to reflect changes
in circumstances that may have occurred since the date of the
opinion.
At a
meeting held on December 18, 2019, DropCar’s financial
advisor, Gemini, rendered its opinion as to the fairness of the
merger consideration from a financial point of view to DropCar as
of the date of such opinion, and such opinion was one of many
factors considered by the DropCar Board in approving the merger.
The opinion does not speak as of the time the merger will be
completed or any date other than the date of such opinion.
Subsequent changes in the operation and prospects of DropCar or
AYRO, general market and economic conditions and other factors that
may be beyond the control of DropCar or AYRO, may significantly
alter the value of DropCar or AYRO or the prices of the shares of
DropCar common stock by the time the merger is to be completed. The
opinion does not address the fairness of the merger consideration
from a financial point of view to DropCar at the time the merger is
to be completed, or as of any other date other than the date of
such opinion, and the Merger Agreement does not require that the
opinion be updated, revised or reaffirmed prior to the closing of
the merger to reflect any changes in circumstances between the date
of the signing of the Merger Agreement and the completion of the
merger as a condition to closing the merger.
The merger may be completed even though material adverse changes
may result from the announcement of the merger, industry-wide
changes or other causes.
In
general, either party can refuse to complete the merger if there is
a material adverse change (as defined in the Merger Agreement)
affecting the other party between December 19, 2019, the date of
the Merger Agreement, and the closing of the merger. However, some
types of changes do not permit either party to refuse to complete
the merger, even if such changes would have a material adverse
effect on DropCar or AYRO, as the case may be:
●
changes in general economic, business, financial or market
conditions;
●
changes or events affecting the industries or industry sectors in
which the parties operate generally;
●
changes in generally accepted accounting principles;
●
changes in laws, rules, regulations, decrees, rulings, ordinances,
codes or requirements issued, enacted, adopted or otherwise put
into effect by or under the authority of any governmental
body;
●
changes caused by the announcement or pendency of the
merger;
●
changes caused by any action taken by either party with the prior
written consent of the other party;
●
changes caused by any decision, action, or inaction by governmental
or regulatory bodies, with respect to any products of either
party;
●
changes caused by any act of war, terrorism, national or
international calamity or any other similar event;
●
with respect to DropCar, a decline in DropCar’s stock price;
or
●
with respect to DropCar, a change in the listing status of
DropCar’s common stock on Nasdaq.
If
adverse changes occur but DropCar and AYRO must still complete the
merger, the market price of DropCar common stock may
suffer.
DropCar
and AYRO may become involved in securities litigation or
stockholder derivative litigation in connection with the merger,
and this could divert the attention of DropCar and AYRO management
and harm the combined company’s business, and insurance
coverage may not be sufficient to cover all related costs and
damages.
Securities
litigation or stockholder derivative litigation frequently follows
the announcement of certain significant business transactions, such
as the sale of a business division or announcement of a business
combination transaction. DropCar and AYRO may become involved in
this type of litigation in connection with the merger, and the
combined company may become involved in this type of litigation in
the future. Litigation often is expensive and diverts
management’s attention and resources, which could adversely
affect the business of DropCar, AYRO and the combined
company.
Risks Related to the Reverse Stock Split
The reverse stock split may not increase the combined
company’s stock price over the long term.
If the
amendmen to the A&R Charter to effect a reverse stock split
with respect to the issued and outstanding common stock of the
combined company immediately following the merger (the “Reverse
Stock Split”) is approved, the combined company
anticipates effecting a reverse stock split in order to cause stock
price to be at least $5.00 immediately following the merger. While
it is expected that the reduction in the number of outstanding
shares of common stock will proportionally increase the market
price of the combined company’s common stock upon
effectiveness of the reverse stock split, it cannot be assured that
the reverse stock split will result in any sustained proportionate
increase in the market price of the combined company’s common
stock, which is dependent upon many factors, including the business
and financial performance of the combined company, general market
conditions, and prospects for future success, which are unrelated
to the number of shares of the combined company’s common
stock outstanding. Thus, while the stock price of the combined
company might meet the initial listing requirements for Nasdaq
initially, it cannot be assured that it will continue to do
so.
The reverse stock split would have the effect of increasing the
amount of common stock that the combined company is authorized to
issue without further approval by the combined company’s
stockholders.
The
proposed amended and restated charter for the combined company is
anticipated to authorize the combined company to issue 100,000,000
shares of common stock and does not anticipate reducing this amount
in connection with the proposed reverse stock split. Except in
certain instances, as required by law or by the rules of the
securities exchange that lists the combined company’s common
stock, additional shares of common stock of the combined company
may be issued by the combined company without further vote of the
combined company’s stockholders. If the combined
company’s board of directors chooses to issue additional
shares of the combined company’s common stock, such issuance
could have a dilutive effect on the equity, earnings and voting
interests of the combined company’s
stockholders.
The reverse stock split may decrease the liquidity of
DropCar’s common stock.
Although the DropCar Board believes that the anticipated increase in the
market price of DropCar’s common stock could encourage
interest in its common stock and possibly promote greater liquidity
for its stockholders, such liquidity could also be adversely
affected by the reduced number of shares outstanding after the
reverse stock split. The reduction in the number of outstanding
shares may lead to reduced trading and a smaller number of market
makers for DropCar’s common stock.
The reverse stock split may lead to a decrease in overall market
capitalization of the combined company.
Should
the market price of DropCar’s common stock decline after the
reverse stock split, the percentage decline may be greater,
due to the smaller number of shares outstanding, than it would have
been prior to the reverse stock split. A reverse stock split is
often viewed negatively by the market and, consequently, can lead
to a decrease in the overall market capitalization of the combined
company. If the per share market price does not increase in
proportion to the reverse stock split ratio, then the value of the
combined company, as measured by its stock capitalization, will be
reduced. In some cases, the per-share stock price of companies that
have effected reverse stock splits subsequently declined back to
pre-reverse split levels, and accordingly, it cannot be assured
that the total market value of DropCar’s common stock will
remain the same after the reverse stock split is effected, or that
the reverse stock split will not have an adverse effect on
DropCar’s stock price due to the reduced number of shares
outstanding after the reverse stock split.
Risks Related to the Combined Company Following the
Merger
DropCar stockholders and AYRO stockholders may not realize a
benefit from the merger commensurate with the ownership dilution
they will experience in connection with the merger.
If
the combined organization is unable to realize the full strategic
and financial benefits currently anticipated from the merger,
DropCar stockholders and AYRO stockholders will have experienced
substantial dilution of their ownership interests in their
respective companies without receiving any commensurate benefit, or
only receiving part of the commensurate benefit to the extent the
combined organization is able to realize only part of the strategic
and financial benefits currently anticipated from the
merger.
You should carefully consider the risks described below. The risks
and uncertainties described below are not the only ones DropCar and
AYRO face, and these factors should be considered in conjunction
with general investment risks and other information included in the
exhibits to this Current Report on Form 8-K (the “Form
8-K”), including the matters addressed in the section titled
“Forward-Looking Statements” under Item 8.01 of this
Form 8-K. You should read and consider the risks associated with
the business of AYRO as these risk factors will also affect the
operations of the combined company going forward because, assuming
that the sale of substantially all of the assets of the ropCar
business (the “Asset Sale”) pursuant to that certain
Asset Purchase Agreement, dated as of December 19, 2019 by and
among DropCar, Inc. (“DropCar”), DropCar Operating
Company, Inc., a Delaware corporation and Wholly-owned subsidiary
of DropCar (“DropCar Operating”), DC Partners
Acquisition, LLC, Spencer Richarson and David Newman (the
“Asset Purchase Agreement”) is approved, the business
of the combined company will be AYRO’s business. You should
also read and consider the risk factors associated with DropCar
because these risk factors may affect the operations and financial
results of the combined company.
The market price of the combined company’s common stock after
the merger may be subject to significant fluctuations and
volatility, and the stockholders of the company may be unable to
resell their shares at a profit and incur losses.
There
has not been a public market for the combined company’s
common stock. The market price of the combined company’s
common stock could be subject to significant fluctuation following
the merger. The business of DropCar differs from that of AYRO in
important respects and, accordingly, the results of operations of
the combined company and the market price of the combined company
common stock following the merger may be affected by factors
different from those currently affecting the results of operations
of DropCar. Market prices for securities of technology companies
and electric vehicle companies in particular have historically been
particularly volatile and have shown extreme price and volume
fluctuations that have often been unrelated or disproportionate to
the operating performance of those companies. Broad market and
industry factors, as well as general economic, political and market
conditions such as recessions or interest rate changes, may
seriously affect the market price of the combined company’s
common stock, regardless of the actual operating performance of the
combined company. Some of the factors that may cause the market
price of the combined company’s common stock to fluctuate
include:
●
investors
react negatively to the effect on the combined company’s
business and prospects from the merger;
●
the
announcement of new products, new developments, services or
technological innovations by the combined company or the combined
company’s competitors;
●
actual
or anticipated quarterly increases or decreases in revenue, gross
margin or earnings, and changes in the combined company’s
business, operations or prospects;
●
announcements
relating to strategic relationships, mergers, acquisitions,
partnerships, collaborations, joint ventures, capital commitments,
or other events by the combined company or the combined
company’s competitors;
●
conditions
or trends in the electric vehicle or transportation
industries;
●
changes
in the economic performance or market valuations of other electric
vehicle or transportation companies;
●
decline
in electric vehicle industry enthusiasm or interest;
●
general
market conditions or domestic or international macroeconomic and
geopolitical factors unrelated to the combined company’s
performance or financial condition;
●
sale of
the combined company’s common stock by stockholders,
including executives and directors;
●
volatility
and limitations in trading volumes of the combined company’s
common stock;
●
volatility
in the market prices and trading volumes of technology
stocks;
●
the
combined company’s ability to finance its
business;
●
ability
to secure resources and the necessary personnel to pursue the plans
of the combined company;
●
failures
to meet external expectations or management guidance;
●
changes
in the combined company’s capital structure or dividend
policy, future issuances of securities, sales or distributions of
large blocks of common stock by stockholders;
●
the
combined company’s cash position;
●
announcements
and events surrounding financing efforts, including debt and equity
securities;
●
analyst
research reports, recommendation and changes in recommendations,
price targets, and withdrawals of coverage;
●
departures
and additions of key personnel;
●
disputes
and litigations related to intellectual properties, proprietary
rights, and contractual obligations;
●
investigations
by regulators into the operations of the combined company or those
of the competitors;
●
changes
in applicable laws, rules, regulations, or accounting practices and
other dynamics; and
●
other
events or factors, many of which may be out of the combined
company’s control.
In the
past, following periods of volatility in the overall market and the
market prices of particular companies’ securities, securities
class action litigations have often been instituted against these
companies. Litigation of this type, if instituted against the
combined company, could result in substantial costs and a diversion
of the management’s attention and resources of the combined
company. Any adverse determination in any such litigation or any
amounts paid to settle any such actual or threatened litigation
could require that the combined company make significant
payments.
If the merger is consummated, the business operations, strategies
and focus of DropCar will fundamentally change, and these changes
may not result in an improvement in the value of its common
stock.
Pending
the consummation of the merger, and subject to approval of the
Asset Sale Proposal, it is currently anticipated that the combined
company would focus its resources on executing AYRO’s current
business plan. Accordingly, substantially simultaneously following
the merger, the combined company has agreed to sell DropCar’s
legacy business and, as such, the stockholders of DropCar and AYRO
will not participate in the future prospects of such DropCar legacy
assets.
Following the
merger, it is expected that the combined company’s primary
products will be AYRO’s electric vehicles. Consequently, if
the merger is consummated, an investment in DropCar’s common
stock will primarily represent an investment in the business
operations, strategies and focus of AYRO. AYRO expects to incur
losses as it expands its operations, product suite and sales
territories, and AYRO’s products may not be profitable at
commercial scale. The failure to successfully scale up AYRO’s
operations and achieve growth with additional products and
territories will significantly diminish the anticipated benefits of
the merger and have a material adverse effect on the business of
the combined company. There is no assurance that the combined
company’s business operations, strategies or focus will be
successful following the merger, and the merger could depress the
value of the combined company’s common stock.
The unaudited pro forma combined financial statements are presented
for illustrative purposes only, and future results of the combined
company may differ materially from the unaudited pro forma
financial statements presented in this joint proxy and consent
solicitation statement/prospectus.
The
unaudited pro forma combined financial statements contained in this
joint proxy and consent solicitation statement/prospectus are
presented for illustrative purposes only and may not be an
indication of the combined company’s financial condition or
results of operations following the completion of the merger for
several reasons. The unaudited pro forma combined financial
statements have been derived from the historical financial
statements of DropCar and AYRO and adjustments and assumptions have
been made regarding the combined company after giving effect to the
merger and related transactions. The information upon which these
adjustments and assumptions have been made is preliminary, and
these kinds of adjustments and assumptions are difficult to make
with accuracy. Moreover, the pro forma financial statements do not
reflect all costs that are expected to be incurred by the combined
company in connection with the merger. As a result, the actual
financial condition and results of operations of the combined
company following the completion of the merger may not be
consistent with, or evident from, these pro forma financial
statements. The assumptions used in preparing the pro forma
financial information may not prove to be accurate, and other
factors may affect the combined company’s financial condition
or results of operations following the merger. Any decline or
potential decline in the combined company’s financial
condition or results of operations may cause significant variations
in the market price of DropCar common stock.
The combined company may issue additional equity securities in the
future, which may result in dilution to existing
investors.
To the
extent the combined company raises additional capital by issuing
equity securities, the combined company’s stockholders may
experience substantial dilution. The combined company may, from
time to time, sell additional equity securities in one or more
transactions at prices and in a manner it determines. If the
combined company sells additional equity securities, existing
stockholders may be materially diluted. In addition, new investors
could gain rights superior to existing stockholders, such as
liquidation and other preferences. In addition, the number of
shares available for future grant under the combined
company’s equity compensation plans may be increased in the
future. In addition, the exercise or conversion of outstanding
options or warrants to purchase shares of capital stock may result
in dilution to the combined company’s stockholders upon any
such exercise or conversion.
All of
DropCar’s outstanding shares of common stock are, and any
shares of DropCar common stock that are issued in the merger will
be, freely tradable without restrictions or further registration
under the Securities Act of 1933, as amended (the “Securities
Act”) except for the restricted stock units that will be
issued to Mr. Keller pursuant to the employment agreement to be
entered into with DropCar immediately prior to the consummation of
the merger, shares of DropCar common stock issued to certain
advisors, shares subject to lock-up agreements, and any shares held
by affiliates, as defined in Rule 144 under the Securities Act.
Rule 144 defines an affiliate as a person who directly, or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, DropCar and would
include persons such as DropCar’s directors and executive
officers and large shareholders. In turn, resales, or the perception
by the market that a substantial number of resales could occur,
could have the effect of depressing the market price for our common
stock.
The concentration of the capital stock ownership with insiders of
the combined company after the merger will likely limit the ability
of the stockholders of the combined company to influence corporate
matters.
Following the
merger, the executive officers, directors, five percent or greater
stockholders, and their respective affiliated entities of the
combined company will in the aggregate beneficially own
approximately 36% of the combined company’s outstanding
common stock. As a result, these stockholders, acting together,
have control over matters that require approval by the combined
company’s stockholders, including the election of directors
and approval of significant corporate transactions. Corporate
actions might be taken even if other stockholders oppose them. This
concentration of ownership might also have the effect of delaying
or preventing a corporate transaction that other stockholders may
view as beneficial.
Certain stockholders could attempt to influence changes within
DropCar which could adversely affect DropCar’s operations,
financial condition and the value of DropCar’s common
stock.
DropCar’s stockholders may from time to time
seek to acquire a controlling stake in DropCar, engage in proxy
solicitations, advance stockholder proposals or otherwise attempt
to effect changes. Campaigns by stockholders to effect changes at
publicly-traded companies are sometimes led by investors seeking to
increase short-term stockholder value through actions such as
financial restructuring, increased debt, special dividends, stock
repurchases or sales of assets or the entire company. Responding to
proxy contests and other actions by activist stockholders can be
costly and time-consuming and could disrupt DropCar’s
operations and divert the attention of the DropCar Board of
Directors and senior management from
the pursuit of the proposed merger transaction. These actions could
adversely affect DropCar’s operations, financial condition,
DropCar’s ability to consummate the merger and the value of
DropCar common stock.
The sale or availability for sale of a substantial number of shares
of common stock of the combined company after the merger and after
expiration of the lock-up period could adversely affect the market
price of such shares after the merger.
Sales of a substantial number of shares of common
stock of the combined company in the public market after the merger
or after expiration of the lock-up period and other legal
restrictions on resale, or the perception that these sales could
occur, could adversely affect the market price of such shares and
could materially impair the combined company’s ability to
raise capital through equity offerings in the future. Immediately
following the closing of the merger, the combined company is
expected to have outstanding approximately 52 million
shares of common stock (prior to
giving effect to the proposed reverse stock split). This includes
the shares being issued to AYRO stockholders as merger
consideration, which may be resold in the public market immediately
without restriction, unless such stockholder is subject to a
lock-up or other restrictions on resale. All of AYRO’s
executive officers and directors and principal stockholders and all
of DropCar’s directors who will continue to serve on the
board of directors of the combined company are subject to lock-up
agreements that restrict their ability to transfer shares of the
combined company’s capital stock during the period of one
year after the date of the closing of the merger, subject to
specified exceptions. Upon
completion of the merger, the combined company may permit its
officers, directors, employees, and certain stockholders who are
subject to the lock-up agreement to sell shares prior to the
expiration of the lock-up agreements. After the lock-up agreements
expire, approximately 20 million shares of common stock (prior to
giving effect to the proposed reverse stock split) held by the
combined company’s directors, executive officers and
principal stockholders will be subject to volume limitations under
Rule 144 under the Securities Act and various vesting agreements.
DropCar and AYRO are unable to predict what effect, if any, market
sales of securities held by significant stockholders, directors or
officers of the combined company or the availability of these
securities for future sale will have on the market price of the
combined company’s common stock after the
merger.
The
combined company also expects to assume approximately 7 million
shares of common stock subject to outstanding AYRO options (on an
as-converted to DropCar common stock basis and prior to giving
effect to the proposed reverse stock split). The combined company
intends to register all of the shares of common stock issuable upon
exercise of outstanding AYRO options, and upon the exercise of any
options or other equity incentives the combined company may grant
in the future, for public resale under the Securities Act.
Accordingly, these shares will be able to be freely sold in the
public market upon issuance as permitted by any applicable vesting
requirements, subject to the lock-up agreements described
above.
Moreover,
upon completion of the merger, the holders of approximately 10
million shares of common stock will have rights, subject to some
conditions, to require AYRO to file registration statements
covering their shares or to include their shares in registration
statements that the combined company may file for itself or its
stockholders.
If securities analysts do not publish research or reports about the
business of the combined company, or if they publish negative
evaluations, the price of the combined company’s common stock
could decline.
The
trading market for the combined company’s common stock will
rely in part on the availability of research and reports that
third-party industry or financial analysts publish about the
combined company. There are many large, publicly traded companies
active in the electric vehicle industry, which may mean it will be
less likely that the combined company receives widespread analyst
coverage. Furthermore, if one or more of the analysts who do cover
the combined company (if any) downgrades its stock, its stock price
would likely decline. If one or more of these analysts cease
coverage of the combined company, the combined company could lose
visibility in the market, which in turn could cause its stock price
to decline. Additionally, if securities analysts publish negative
evaluations of competitors in the electric vehicle industry, the
comparative effect could cause the combined company’s stock
price to decline.
The combined company may not be able to adequately protect or
enforce its intellectual property rights, which could harm its
competitive position.
The
combined company will primarily rely on patent, copyright,
trademark and trade secret laws, as well as nondisclosure
agreements and other methods, to protect its proprietary designs,
technologies or processes. It is possible that competitors or other
unauthorized third parties may obtain, copy, use or disclose
proprietary designs, technologies and processes, despite efforts by
the combined company to protect its proprietary designs,
technologies and processes.
The combined company’s management will be required to devote
a substantial time to comply with public company
regulations.
As
a public company, the combined company will incur significant
legal, accounting and other expenses that AYRO did not incur as a
private company. The Sarbanes-Oxley Act of 2002, the Dodd-Frank
Wall Street Reform and Consumer Protection Act as well as rules
implemented by the SEC and Nasdaq, impose various requirements on
public companies, including those related to corporate governance
practices. The combined company’s management and other
personnel will need to devote a substantial amount of time to these
requirements. Moreover, these rules and regulations will increase
the combined company’s legal and financial compliance costs
relative to those of AYRO and will make some activities more time
consuming and costly.
The
Sarbanes-Oxley Act requires, among other things, that the combined
company maintain effective internal control over financial
reporting and disclosure controls and procedures. In particular,
the combined company must perform system and process evaluation and
testing of its internal control over financial reporting to allow
management and the combined company’s independent registered
public accounting firm to report on the effectiveness of its
internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. The combined
company’s compliance with these requirements will require
that it incur substantial accounting and related expenses and
expend significant management efforts. The combined company will
likely need to hire additional accounting and financial staff to
satisfy the ongoing requirements of Section 404 of the
Sarbanes-Oxley Act. The costs of hiring such staff may be material
and there can be no assurance that such staff will be immediately
available to the combined company. Moreover, if the combined
company is not able to comply with the requirements of
Section 404 of the Sarbanes-Oxley Act, or if the combined
company or its independent registered public accounting firm
identifies deficiencies in its internal control over financial
reporting that are deemed to be material weaknesses, investors
could lose confidence in the accuracy and completeness of the
combined company’s financial reports, the market price of the
combined company’s common stock could decline and the
combined company could be subject to sanctions or investigations by
Nasdaq, the SEC or other regulatory authorities.
The combined company may not be able to timely and effectively
implement controls and procedures required by Section 404 of the
Sarbanes-Oxley Act of 2002 that will be applicable to the combined
company after the merger.
AYRO is
not currently subject to Section 404 of the Sarbanes-Oxley Act of
2002. However, following the merger, the combined company will be
subject to Section 404 of the Sarbanes-Oxley Act of 2002. The
standards required for a public company under Section 404 of the
Sarbanes-Oxley Act of 2002 are significantly more stringent than
those required of AYRO as a privately held company. Management may
not be able to effectively and timely implement controls and
procedures that adequately respond to the increased regulatory
compliance and reporting requirements that will be applicable to
DropCar after the merger. If management is not able to implement
the additional requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 in a timely manner or with adequate compliance, it may
not be able to assess whether its internal control over financial
reporting is effective, which may subject the combined company to
adverse regulatory consequences and could harm investor confidence
and cause the market price of the combined company’s common
stock to decline.
Subsequent to the consummation of the merger, the combined company
may be required to take write-downs or write-offs, restructuring
and impairment or other charges that could have a significant
negative effect on its financial condition, results of operations
and stock price, which could cause you to lose some or all of your
investment.
Although DropCar
and AYRO have conducted due diligence on each other, there can be
no assurances that their diligence revealed all material issues
that may be present in the other company’s business, that all
material issues through a customary amount of due diligence will be
uncovered, or that factors outside of DropCar’s and
AYRO’s control will not later arise. As a result, the
combined company may be forced to later write-down or write-off
assets, restructure operations, or incur impairment or other
charges that could result in losses. Even if due diligence
successfully identifies certain risks, unexpected risks may arise
and previously known risks may materialize in a manner not
consistent with each company’s preliminary risk analysis.
Even though these charges may be non-cash items and not have an
immediate impact on liquidity, the fact that the combined company
reports charges of this nature could contribute to negative market
perceptions about DropCar’s or its securities. In addition,
charges of this nature may make future financing difficult to
obtain on favorable terms or at all.
Anti-takeover provisions under Delaware corporate law may make it
difficult for the combined company stockholders to replace or
remove the DropCar Board of Directors and could deter or delay
third parties from acquiring the combined company, which may be
beneficial to the stockholders of the combined
company.
The
combined company will be subject to the anti-takeover provisions of
Delaware law, including Section 203. Under these provisions, which
will become effective upon the closing of the merger, if anyone
becomes an “interested stockholder,” the combined
company may not enter into a “business combination”
with that person for three (3) years without special approval,
which could discourage a third party from making a takeover offer
and could delay or prevent a change of control. For purposes of
Section 203 of the DGCL, “interested stockholder”
means, generally, someone owning fifteen percent (15%) or more of
the combined company’s outstanding voting stock or an
affiliate of the combined company that owned fifteen percent (15%)
or more of the combined company’s outstanding voting stock
during the past three (3) years, subject to certain exceptions as
described in Section 203 of the DGCL.
DropCar and AYRO do not anticipate that the combined company will
pay any cash dividends in the foreseeable future.
The
current expectation is that the combined company will retain its
future earnings, if any, to fund the development and growth of the
combined company’s business. As a result, capital
appreciation, if any, of the common stock of the combined company
will be your sole source of gain, if any, for the foreseeable
future.
In the event that the combined company fails to satisfy any of the
listing requirements of The Nasdaq Capital Market, its common stock
may be delisted, which could affect its market price and
liquidity.
Following the
merger, the combined company’s common stock is expected to be
listed on The Nasdaq Capital Market. For continued listing on The
Nasdaq Capital Market, the combined company will be required to
comply with the continued listing requirements, including the
minimum market capitalization standard, the corporate governance
requirements and the minimum closing bid price requirement, among
other requirements. In the event that the combined company fails to
satisfy any of the listing requirements of The Nasdaq Capital
Market, its common stock may be delisted. If the combined company
is unable to list on The Nasdaq Stock Market, it would likely be
more difficult to trade in or obtain accurate quotations as to the
market price of the combined company’s common stock. If the
combined company’s securities are delisted from trading on
The Nasdaq Stock Market, and the combined company is not able to
list its securities on another exchange or to have them quoted on
Nasdaq, the combined company’s securities could be quoted on
the OTC Bulletin Board or on the “pink sheets.” As a
result, the combined company could face significant adverse
consequences including:
●
a
limited availability of market quotations for its
securities;
●
a
determination that its common stock is a “penny stock”
which will require brokers trading in its common stock to adhere to
more stringent rules and possibly result in a reduced level of
trading activity in the secondary trading market for its
securities;
●
a
limited amount of news and analyst coverage for the combined
company; and
●
a
decreased ability to issue additional securities (including
pursuant to short-form registration statements on Form S-3 or
obtain additional financing in the future).
An active trading market for combined company common stock may not
develop.
The
listing of combined company common stock on The Nasdaq Capital
Market does not assure that a meaningful, consistent and liquid
trading market exists. Although DropCar common stock is listed on
The Nasdaq Capital Market, trading volume in its common stock has
been limited and an active trading market for shares DropCar common
stock may never develop or be sustained. If an active market for
the combined company common stock does not develop, it may be
difficult for investors to sell their shares without depressing the
market price for the shares or at all.
The combined company may be subject to a right of first refusal in
favor of Club Car LLC, which could impede our growth and adversely
impact the potential value of the combined company.
The
combined company will be subject to a master procurement agreement
entered into between Club Car LLC (“Club Car”) and
AYRO, dated March 5, 2019. Under the agreement, Club Car has been
granted a right of first refusal on offers to acquire 51% or more
of AYRO’s assets or equity interests, directly or indirectly,
by a third party. Such right is exercisable for a 45-day period
following the receipt of an acquisition notice from AYRO to Club
Car notifying Club Car of the terms of the proposed acquisition
offer and of the availability of its right of first refusal. If
exercised, Club Car would have the right acquire AYRO’s
assets or equity interests by matching or beating the terms of the
competing offer. Such right is valid during the term of the
agreement which commences January 1, 2019, and expires on January
1, 2024, subject to annual renewals in the discretion of Club
Car.
The
ability of Club Car to elect to exercise its first right of refusal
may limit or impede our ability to conduct our business on the
terms and in the manner we consider most favorable, which may
adversely affect our future growth opportunities. The existence of
the right of first refusal may also deter potential acquirors from
seeking acquiring us. If potential acquirors are deterred from
considering an acquisition of us, we may receive less than fair
market value acquisition offers or may not receive acquisition
offers at all, which might have a substantial negative effect on
the value of your investment in us and may impact the long-term
value, growth and potential of the combined company.
Risks Related to the Business of AYRO
AYRO has a history of losses and has never been profitable. AYRO
expects to incur additional losses in the future and may never be
profitable.
AYRO has never been profitable or generated
positive cash flow from its operations. AYRO has incurred a net
loss in each year since its inception in 2016 and have generated
limited revenues since inception, principally as a result of
AYRO’s investments in building the infrastructure in support
of its manufacturing and business operations and plans for growth.
AYRO experienced net losses of approximately $4.2 million in 2018
and $1.1 million in 2017. As of September 30, 2019, AYRO had an
accumulated deficit of approximately $10.5 million. AYRO may incur
significant additional losses as it continues to focus its
resources on scaling up AYRO’s operations for growth and
incur significant future expenditures for research and
development, sales and marketing, and general and administrative
expenses, capital expenses and working capital
fluctuations.
AYRO’s ability to generate revenue and
achieve profitability depends mainly upon its ability, alone or
with others, to successfully market its product that meets the
market demand and compliant with the rules, regulations and laws of
the federal, state, local and international governmental bodies.
AYRO may be unable to achieve any or all of these goals with regard
to its products. AYRO’s future vehicle roadmap requires
significant investment prior to commercial introduction, but these
vehicles may never be successfully designed, engineered,
manufactured or sold successfully. Moreover, scaling up of
AYRO’s operations, launching additional products and
expanding its sales territories will require significant additional
investment. AYRO will continue to incur losses until such
time that the its vehicle sales volume supports AYRO’s
underlying overhead costs. As a
result, AYRO may never be profitable or achieve significant and/or
sustained revenues. Even if AYRO is successful in generating
revenue and increasing its customer base, AYRO may not become
profitable in the future or may be unable to maintain any
profitability achieved if AYRO fails to increase its revenue and
manage its operating expenses or if AYRO incurs unanticipated
liabilities.
The market for AYRO’s products is developing and may not
develop as expected.
The
market for AYRO’s electric vehicles is developing and may not
develop as expected by AYRO. The market for alternative fuel
vehicles is relatively new, rapidly evolving, characterized by
rapidly changing technologies, price competition, additional
competitors, evolving multi-level government regulations and
industry standards, frequent new vehicle announcements and changing
consumer demands and behaviors. The electric vehicle market is in
its early stage where many standards and best practices have not
been established or is constantly evolving, and it can take many
years for the market to fully mature.
AYRO
believes its future success will depend in large part on
AYRO’s ability to quickly and efficiently adapt to both the
market demand for products and feature set as well as adapt to
newly-created statutory laws at the federal, state, local and
international levels. Due to the nature of the electronic vehicle
market still in development, it is difficult to predict the demands
for AYRO’s electric vehicles and ancillary services and
products, as well as the size and growth rate for this market, the
entry of competitive products, or the success of existing
competitive products. If a meaningful market for AYRO’s
vehicles does not develop, AYRO will not be
successful.
AYRO’s limited operating history makes evaluating its
business and future prospects difficult and may increase the risk
of any investment in its securities.
AYRO’s
limited operating history makes evaluating AYRO’s business
and future prospects difficult and may increase the risk of your
investment. AYRO’s quarterly and annual operating results
have fluctuated in the past and may fluctuate significantly in the
future, which makes it difficult to predict AYRO’s future
operating results. For example, in 2017, AYRO received $4,065,000
in revenue from a one-time sale of automotive parts from
AYRO’s China-based supplier to one of its customers in New
Jersey. AYRO’s recurring revenue from revenue-sharing
arrangements is seasonal as the majority derives from beach-front
resorts. In case of hurricanes or tropical storms this revenue
stream is at risk. Any substantial adjustment to overhead expenses
to account for lower levels of sales is difficult and takes time,
thus AYRO may not be able to reduce its costs sufficiently to
compensate for a shortfall in net sales, and even a small shortfall
in net sales could disproportionately and adversely affect
AYRO’s operating margin and operating results for a given
period.
AYRO’s
operating results may also fluctuate due to a variety of other
factors, many of which are outside its control, including the
changing and volatile local, national, and international economic
environments. Besides the other risks in this “Risk
Factors” section, factors that may affect AYRO’s
operations include:
●
fluctuations in
demand for AYRO’s products;
●
the inherent
complexity, length, and associated unpredictability of product
development windows and product lifecycles;
●
changes in
customers’ budgets for technology purchases and delays in
their purchasing cycles;
●
changing market
conditions;
●
any significant
changes in the competitive dynamics of AYRO’s markets,
including new entrants, or further consolidation;
●
AYRO’s
ability to continue to broaden AYRO’s customer and dealer
base beyond AYRO’s traditional customers and
dealers;
●
AYRO’s
ability to broaden AYRO’s geographical markets
●
the timing of
product releases or upgrades by AYRO or AYRO’s competitors;
and
●
AYRO’s
ability to develop, introduce, and ship in a timely manner new
products and product enhancements and anticipate future market
demands that meet customers’ requirements.
Each of
these factors individually, or the cumulative effect of two or more
of these factors, could result in large fluctuations in
AYRO’s quarterly and annual operating results. As a result,
comparing AYRO’s operating results on a period-to-period
basis may not be meaningful, and AYRO’s operating results for
any given period may be fall below expectations or AYRO’s
guidance. You should not
rely on AYRO’s past results as an indication of future
performance.
If AYRO is unable to effectively implement or manage AYRO’s
growth strategy, AYRO’s operating results and financial
condition could be materially and adversely affected.
AYRO’s
ability to generate revenue and grow its revenue will depend, in
part, on its ability to execute on its business plan, expand its
business model and develop new products in a timely manner. As part
of its growth strategy, AYRO may modify AYRO’s distribution
channels and engage in strategic transactions with third parties to
access additional sales and distribution channels and accelerate
product adoption for particular vertical markets, open new
manufacturing, research or engineering facilities or expand
AYRO’s existing facilities. Additionally, AYRO plans to add
additional product lines and expand AYRO’s businesses into
new geographical markets. There is a range of risks inherent in
such a strategy that could adversely affect AYRO’s ability to
successfully achieve these objectives, including, but not limited
to, the following:
●
the
potential failure to successfully operate its dealer-distribution
channels;
●
an
inability to attract and retain the customers, employees, suppliers
and/or marketing partners;
●
the
uncertainty that AYRO may not be able to generate, anticipate or
meet consumer demand;
●
the
potential disruption of AYRO’s business;
●
the
increased scope and complexity of AYRO’s operations could
require significant attention from management and impose
constraints on AYRO’s operations or other
projects;
●
inconsistencies
between AYRO’s standards, procedures and policies and those
of new points of sale or dealerships and costs or inefficiencies
associated with the integration of AYRO’s operational and
administrative systems if necessary;
●
unforeseen
expenses, delays or conditions, including the potential for
increased regulatory compliance or other third-party approvals or
consents, or provisions in contracts with third parties that could
limit AYRO’s flexibility to take certain
actions;
●
the
costs of compliance with local laws and regulations and the
implementation of compliance processes, as well as the assumption
of unexpected labilities, litigation, penalties or other
enforcement actions;
●
the
uncertainty that new product lines or ancillary services will
generate anticipated sales;
●
the
uncertainty that the expanded operations will achieve anticipated
operating results;
●
the
difficulty of managing the operations of a larger company;
and
●
the
difficulty of competing for growth opportunities with companies
having greater financial resources than AYRO has.
Any
one of these factors could impair AYRO’s growth strategy,
result in delays, increased costs or decreases in the amount of
expected revenues derived from AYRO’s growth strategy and
could adversely impact AYRO’s prospects, business, financial
condition or results of operations.
A significant portion of AYRO’s revenues are derived
from a single customer. If AYRO were to lose this customer,
AYRO’s sales could decrease significantly.
In
March of 2019, AYRO entered into a five-year Master Procurement
Agreement (the “MPA”) with Club Car, which grants Club
Car the exclusive right to sell the AYRO 411 Fleet in North
America, provided that Club Car orders at least 500 AYRO vehicles
per year. For the nine months ended Sptember 30, 2019, revenues
from Club Car constituted approximately 75% of AYRO’s revenue
target. For the year 2020, revenue projected to be generated from
Club Car pursuant to the MPA is expected to be a majority of
AYRO’s revenue. AYRO is therefore highly dependent on a
single customer to generate a material percentage of AYRO’s
annual revenues, and the lack of adoption, failure to achieve
reasonable “sell through” rates by the customer’s
dealers, unfavorable dealer/customer experience or discontinuation
or modification of terms may materially and adversely affect
AYRO’s sales and results of operations. Any loss of, or a
significant reduction in purchases by, Club Car which constitutes a
significant portion of AYRO’s sales could have an adverse
effect on AYRO’s financial condition and operating
results.
AYRO’s future growth depends on the customers’
willingness to adopt electric vehicles.
If
there is insufficient market demand for AYRO’s electric
vehicles than AYRO expects in the target markets, which include
universities, food delivery services, last mile delivery service,
municipalities and on-road and personal transportation,
AYRO’s business, prospects, financial condition and operating
results will be negatively impacted. Potential customers may be
reluctant to adopt electric vehicles as an alternative to
traditional internal combustion engine vehicles or other electric
vehicles due to various factors, which include but are not limited
to:
●
perceptions or
negative publicity about electric vehicle quality, dependability,
safety, stability of lithium-ion battery packs, utility,
performance and cost regarding AYRO’s vehicles or electric
vehicles sold by other manufacturers, especially if accidents or
certain events create a negative perception across the general
public;
●
the limited range
of the vehicle on a single battery charge cycle;
●
the impact of
driving habits and terrain on the battery life, especially the
differences from internal combustion engines;
●
the deterioration
rate of the battery packs that are impacted by many external
factors including but not limited to overall life, environmental
conditions, dormant time, and number of lifetime charge cycles and
these factors’ impacts on the batteries’ ability to
maintain an adequate charge;
●
local, regional,
national and international investment in charging infrastructure,
standardization of electric vehicle charging systems and cost of
charging that may impact adaptability for the overall electric
vehicle market;
●
the access to
knowledgeable service locations to support AYRO’s electric
vehicles;
●
the price of
alternative fuel sources, such as gasoline as an alternative to the
cost of charging electricity;
●
the availability of
governmental incentive and tax deductions and credits offered to
consumers for purchasing and using electric vehicles.
Any of
the above factors may hinder widespread adoption of electric
vehicles and influence prospective customers and dealers to decide
not to purchase AYRO’s electric vehicles. Such issues would
have an adverse material effect on AYRO’s financial
statements of operations, financial conditions, ability to develop
strategic partnerships and the ability to raise additional
funding.
AYRO may experience lower-than-anticipated market acceptance of its
current models and the vehicles in development.
AYRO’s
projected growth depends upon the end-consumers’ mass
adoption of its purpose-built electric vehicles. Although AYRO has
conducted some market research regarding AYRO’s electric
vehicles it current sells or is developing, many factors both
within and outside AYRO’s control, affect the success of its
vehicles in the marketplace. At this time, it is difficult to
measure consumers’ willingness to adopt purpose-built
electric vehicles, particularly two-passenger electric vehicles.
Offering fuel-efficient vehicles that consumers want and value can
mitigate the risks of increasing price competition and declining
demand, but vehicles that are perceived to be less desirable
(whether in terms of price, quality, styling, safety, overall
value, or other attributes) can exacerbate these risks. For
example, if a new vehicle were to experience quality issues at the
time of launch, the vehicle’s perceived quality could be
affected even after the issues had been corrected, resulting in
lower than anticipated sales volumes, market share, and
profitability. Moreover, if a new vehicle is not accepted by
consumers based on size, styling, or other attributes, AYRO would
experience lower than anticipated sales volumes, market share, and
profitability. If AYRO’s vehicles and are not adopted or
there is a reduction in demand for AYRO’s products caused by
a lack of customer acceptance, a slowdown in demand for electronic
transportation solutions, battery safety concerns, technological
challenges, battery life issues, competing technologies and
products, decreases in discretionary spending, weakening economic
conditions, or otherwise, it could result in reduced customer
orders, early order cancellations, the loss of customers, or
decreased sales, any of which would adversely affect AYRO’s
business, operating results, and financial condition.
If AYRO is unable to manage its growth and expand its operations
successfully, AYRO’s business and operating results will be
harmed and AYRO’s reputation may be damaged.
AYRO
has been expanding its operations significantly since inception and
anticipate that further significant expansion will be required to
achieve AYRO’s business objectives. The growth and expansion
of AYRO’s business and product offerings places a continuous
and significant strain on AYRO’s management, operational and
financial resources. Any such future growth would also add
complexity to and require effective coordination throughout
AYRO’s organization. AYRO’s future operating results depend to a
large extent on its ability to manage this expansion and growth
successfully. Risks that AYRO faces in undertaking this
expansion include:
●
establishing sufficient sales, service and service facilities in a
timely manner;
●
forecasting production and revenue;
●
training new personnel;
●
controlling expenses and investments in anticipation of expanded
operations;
●
establishing or expanding design, manufacturing, sales and service
facilities;
●
implementing and enhancing administrative infrastructure, systems
and processes;
●
addressing new markets; and
●
expanding operations and finding and hiring a significant number of
additional personnel, including manufacturing personnel, design
personnel, engineers and service technicians.
In this
regard, AYRO will be required to continue to improve its
operational, financial and management controls and its reporting
procedures, and AYRO may not be able to successfully implement
improvements to these systems and processes in a timely or
efficient manner, which could result in additional operating
inefficiencies and could cause AYRO’s costs to increase more
than planned. If AYRO does increase its operating expenses in
anticipation of the growth of its business and this growth does not
meet AYRO’s expectations, AYRO’s operating results and
gross margin will be negatively impacted. If AYRO is unable to
manage future expansion, its ability to provide high quality
products could be harmed, damage AYRO’s reputation and brand
and may have a material adverse effect on AYRO’s business,
operating results and financial condition.
Developments in alternative technologies or improvements in the
internal combustion engine may have a materially adverse effect on
the demand for AYRO’s electric vehicles.
Significant
developments related to ethanol or compressed natural gas, or
improvements in the fuel economy of the internal combustion engine
or hybrids, may materially and adversely affect AYRO’s
business and prospects in ways AYRO does not currently anticipate.
For example, types of fuel that are abundant and relatively
inexpensive in North America, such as compressed natural gas, may
emerge as consumers’ preferred alternative to petroleum-based
propulsion. If alternative energy engines or low gasoline
prices make existing four-wheeled vehicles with greater passenger
and cargo capacities less expensive to operate, AYRO may not be
able to compete with manufacturers of such vehicles. Furthermore,
given the rapidly changing nature of the electric vehicle market,
there can be no assurance that AYRO’s vehicles and technology
will not be rendered obsolete by alternative or competing
technologies. Any material change in the existing technologies may
cause delays in AYRO’s development and introduction of new or
upgraded vehicles, which could result in the loss of
competitiveness of AYRO’s vehicles, decreased revenue and a
loss of market share to competitors.
The markets in which AYRO operates are highly competitive, and AYRO
may not be successful in competing in these industries. AYRO
currently faces competition from new and established domestic and
international competitors and expect to face competition from
others in the future, including competition from companies with new
technology.
AYRO
faces significant competition, and there is no assurance that
AYRO’s vehicles will be successful in the respective markets
in which they compete. The worldwide vehicle market, particularly
for alternative fuel vehicles, is highly competitive today and AYRO
expects it will become even more so in the future. Established
automobile manufacturers such as General Motors, Ford, Nissan and
Toyota, as well as other newer companies such as Arcimoto and
Electrameccanica, have entered or are reported to have plans to
enter the alternative fuel vehicle market, including hybrid,
plug-in hybrid and fully electric vehicles. In some cases, such
competitors have announced an intention to produce electric
vehicles exclusively now or at some point in the future. Many of
AYRO’s existing or potential competitors have substantially
greater financial, technical and human resources than AYRO, and
significantly greater experience in manufacturing, designing and
selling electric vehicles, as well as in clearing regulatory
requirements of those vehicles in the United States and in foreign
countries. Many of AYRO’s current and potential future
competitors also have significantly more experience designing,
building and selling electric vehicles at commercial, or fleet,
scale. Large automobile or equipment manufacturers with greater
purchasing power allow them to acquire raw materials at a much
lower cost. Additionally, the large traditional manufacturer has
more readily access to efficient design, testing and service
facilities. AYRO does not have the company history, facilities or
capital to properly compete with large traditional manufacturers
should they decide to enter AYRO’s market. Mergers and
acquisitions in the electric vehicle market could result in even
more resources being concentrated among a smaller number of
AYRO’s competitors. Increased competition could result in
lower vehicle unit sales, price reductions, revenue shortfalls,
loss of customers and loss of market share, which could harm
AYRO’s business, prospects, financial condition and operating
results. Additionally, industry overcapacity has resulted in many
manufacturers offering marketing incentives on vehicles in an
attempt to maintain and grow market share; these incentives
historically have included a combination of subsidized financing or
leasing programs, price rebates, and other incentives. As a result,
AYRO is not necessarily able to set its prices to offset higher
costs. Continuation of or increased excess capacity could have a
substantial adverse effect on AYRO’s financial condition and
results of operations.
New
entrants seeking to gain market share by introducing new
technology, attractive feature sets, new products and development
of longer-life power packs may make it more difficult for AYRO to
sell AYRO’s vehicles and earn design wins which could create
increased pricing pressure, reduced profit margins, increased sales
and marketing expenses, or the loss of market share or expected
market share, any of which may significantly harm AYRO’s
business, operating results and financial condition.
AYRO’s future success depends on AYRO’s ability to
identify additional market opportunities and develop and
successfully introduce new and enhanced products that address such
markets and meet the needs of customers in such
markets.
AYRO
may not be able to successfully develop new electric vehicles or
address new market segments or develop a broader customer base.
AYRO currently sells one three-wheeled two-passenger vehicle and
one four-wheeled truck, from which all of its revenues and derived.
AYRO’s future success will be dependent on AYRO’s
ability to address additional markets and anticipate AYRO’s
existing and prospective customers’ needs and develop new
vehicle models that meet those needs. In particular, AYRO is currently developing a new series of
automotive-grade autocycles, engineered and optimized to meet
targeted use cases such as last mile and urban delivery and is also
working on Club Car’s next generation, electric light duty
trucks and developing a new purpose-built vehicle with Club
Car. AYRO will have to incorporate the latest technological
improvements and enhancements into its future vehicles to be able
to compete in the rapidly evolving electric vehicle industry and
the target markets. There can be no assurance that AYRO will be
able to design future models of vehicles, or develop future
services, that will meet the expectations of AYRO’s customers
or address market demands, or that AYRO’s future models will
achieve market acceptance or become commercially
viable.
In
order to introduce new products and product enhancements, AYRO will
have to coordinate with AYRO’s suppliers and other third
parties to design a new model or an enhanced version of an existing
model that offer features desired by AYRO’s customers and the
level of performance and functionality or cost-effectiveness
superior to the vehicles offered by AYRO’s competitors. If
AYRO fails to coordinate these efforts and achieve market
introduction and acceptance of new or upgraded vehicles models that
address the needs of AYRO’s customers in a timely manner,
AYRO’s operating results will be materially and adversely
affected, and AYRO’s business and prospects will be
harmed.
Furthermore,
AYRO will need to address additional markets and expand its
customer demographic to further grow its business. AYRO’s
failure to address additional market opportunities could materially
harm its business, financial condition, operating results and
prospects.
If AYRO fails to include key feature sets relative to the target
markets for AYRO’s electric vehicles, AYRO’s business
will be harmed.
Achieving design
wins to support the needs of AYRO’s target markets is an
important success factor for AYRO’s business. In order to
achieve design wins, AYRO must:
●
anticipate the
features and functionality that OEMs, customers and consumers will
demand;
●
successfully
incorporate those features and functionalities into products that
meet the exacting design requirements of AYRO’s customers;
and
●
price AYRO’s
products competitively.
Failure
to maintain AYRO’s expertise and inability to deliver custom,
specific design systems could harm AYRO’s
business.
Unanticipated changes in industry standards could render
AYRO’s vehicles incompatible with such standards and
adversely affect AYRO’s business.
The
emergence of new industry standards and technical requirements
could render AYRO’s vehicles incompatible with vehicles
developed by competitors or make it difficult for AYRO’s
products to meet the requirements of AYRO’s end-customers.
Moreover, the introduction of new
industry standards, or changes to existing industry standards,
could cause AYRO to incur substantial development costs to adapt to
these new or changed standards, particularly if AYRO were to
achieve, or be perceived as likely to achieve, greater penetration
in the marketplace. If AYRO’s vehicles are not in
compliance with prevailing industry standards and technical
requirements for a significant period of time, AYRO could miss
opportunities to achieve crucial design wins, AYRO’s revenue
may decline and AYRO may incur significant expenses to redesign its
vehicles to meet the relevant standards, which could adversely
affect AYRO’s business, results of operations and
prospects.
AYRO relies on and intends to continue to rely on a single
third-party supplier and manufacturer located in the Peoples
Republic of China for the sub-assemblies in semi-knocked-down for
all of its vehicles. Any
disruption in the operations of this third-party supplier could
adversely affect AYRO’s business and results of
operations.
As part
of AYRO’s strategy to minimize its capital expenditures on
manufacturing infrastructure, AYRO currently relies on Cenntro
Automotive Group, located in the Peoples Republic of China
(“Cenntro”), for the sub-assemblies for both the AYRO
311 and AYRO 411 vehicles. Cenntro also owns the design of the AYRO
411 model and has granted AYRO an exclusive license to purchase the
411 vehicles for sale in North America. AYRO’s dependence on
a single supplier and manufacturer, and the challenges AYRO may
face in obtaining adequate supplies and vehicle kits required to
assemble its vehicles, involve several risks, including limited
control over pricing, availability, quality and delivery
schedules.
AYRO
cannot be certain that Cenntro will continue to provide AYRO with
the quantities of the sub-assembles that AYRO requires or satisfy
AYRO’s anticipated specifications and quality requirements.
If Cenntro experiences unanticipated delays, disruptions or shut
downs or is unable to ship required raw materials, sub-assemblies,
replacement or warranty parts for any reason, within or outside of
Cenntro’s control, AYRO’s manufacturing operations and
customer deliveries would be seriously impacted. Although AYRO
believes AYRO could locate alternative suppliers to fulfill
AYRO’s needs, AYRO may be unable to find a sufficient
alternative supply channel in a reasonable time or on commercially
reasonable terms or develop its own replacements, especially when
AYRO relies on the license granted by Cenntro who owns the design
of the AYRO 411 model. For example, in December 2019, a strain of
coronavirus was reported to have surfaced in Wuhan, China,
resulting in government-imposed quarantines and other public health
safety measures. At this point, the extent to which the coronavirus
may impact AYRO’s operations is uncertain; however, the
outbreak and spreading of the coronavirus could cause delays or
disruptions in AYRO’s supply chain and delivery of raw
materials from Cenntro or AYRO’s other suppliers located in
China, which would be disruptive to the manufacturing of the
vehicles and adversely impact AYRO’s business. In addition,
the spreading of the virus may make it more difficult for AYRO in
finding alternative manufactures or suppliers due to the high
concentration of such manufacturers or suppliers located in China.
Any performance failure on the part of Cenntro or any other
AYRO’s significant suppliers could interrupt production of
AYRO’s vehicles, which would have a material adverse effect
on AYRO’s business, financial condition and operating
results.
Unforeseen or recurring operational problems at AYRO’s
facility, or a catastrophic loss of AYRO’s manufacturing
facility, may cause significant lost or delayed production and
adversely affect AYRO’s results of operations.
AYRO
imports sub-assemblies from Cenntro and performs final assembly,
testing and safety qualifications in its facility in Round Rock,
Texas in an assembly line process. AYRO’s manufacturing
process could be affected by operational problems that could impair
AYRO’s production capability and the timeframes within which
AYRO expects to produce AYRO’s vehicles. Disruptions or shut
downs at AYRO’s assembly facility could be caused
by:
●
maintenance outages
to conduct maintenance activities that cannot be performed safely
during operations;
●
prolonged power
failures or reductions;
●
breakdown, failure
or substandard performance of any of AYRO’s machines or other
equipment;
●
noncompliance with,
and liabilities related to, environmental requirements or
permits;
●
disruptions in the
transportation infrastructure, including railroad tracks, bridges,
tunnels or roads;
●
fires, floods, snow
or ice storms, earthquakes, tornadoes, hurricanes, microbursts or
other catastrophic disasters, national emergencies, political
unrest, war or terrorist activities; or
●
other operational
problems.
If
AYRO’s manufacturing facility is compromised or shut down, it
may experience prolonged startup periods, regardless of the reason
for the compromise or shutdown. Those startup periods could range
from several days to several weeks or longer, depending on the
reason for the compromise or shutdown and other factors. Any
disruption in operations at AYRO’s facility could cause a
significant loss of production, delays in AYRO’s ability to
produce AYRO’s vehicles and adversely affect AYRO’s
results of operations and negatively impact AYRO’s customers.
Further, a catastrophic event could result in the loss of the use
of all or a portion of AYRO’s manufacturing facility.
Although AYRO carries property insurance, its coverage may not be
adequate to compensate AYRO for all losses that may occur. Any of
these events individually or in the aggregate could have a material
adverse effect on AYRO’s business, financial condition and
operating results.
AYRO may become subject to product liability claims, which could
harm AYRO’s financial condition and liquidity if AYRO is not
able to successfully defend or insure against such
claims.
AYRO
may become subject to product liability claims, which could harm
its business, prospects, operating results and financial condition.
The automobile industry experiences significant product liability
claims, and AYRO faces inherent risk of exposure to claims in the
event its vehicles do not perform as expected or malfunction
resulting in personal injury or death. AYRO’s risks in this
area are particularly pronounced given that Aryo’s vehicles
have a limited commercial history. A successful product liability
claim against AYRO that exceeds its product liability insurance
limits could require AYRO to pay a substantial monetary award.
Moreover, a product liability claim could generate substantial
negative publicity about AYRO’s vehicles and business and
inhibit or prevent commercialization of other future vehicles which
would have material adverse effect on AYRO’s brand, business,
prospects and operating results. AYRO maintains product liability
insurance for all AYRO’s vehicles with annual limits of $10
million on a claims-made basis, but any such insurance might not be
sufficient to cover all potential product liability claims. Any
lawsuit seeking significant monetary damages either in excess of
AYRO’s coverage, or outside of AYRO’s coverage, may
have a material adverse effect on AYRO’s reputation, business
and financial condition. AYRO may not be able to secure additional
product liability insurance coverage on commercially acceptable
terms or at reasonable costs when needed, particularly if AYRO does
face liability for AYRO’s vehicles and are forced to make a
claim under AYRO’s policy.
If AYRO’s vehicles fail to perform as expected due to
defects, AYRO’s ability to develop, market and sell
AYRO’s electric vehicles could be seriously
harmed.
AYRO’s
vehicles may contain defects in design and manufacturing that may
cause them not to perform as expected or that may require repair.
The discovery of defects in AYRO’s vehicles will result in
delays in new model launches, recall campaigns, reputational
damage, or increased warranty costs may negatively affect
AYRO’s business. Moreover, if one of AYRO’s vehicles is
a cause, or perceived to be the cause, of injury or death to an
operator, passenger or bystander, AYRO would likely be subject to a
claim. If AYRO were found responsible it could cause AYRO to incur
substantial liability which could interrupt or even cause AYRO to
terminate some or all of its operations.
Meeting
or exceeding many government-mandated safety standards is costly
and often technologically challenging. Government safety standards
also require manufacturers to remedy defects related to vehicle
safety through safety recall campaigns, and a manufacturer is
obligated to recall vehicles if it determines that the vehicles do
not comply with a safety standard. The costs of recall campaigns or
warranty costs to remedy such defects in vehicles that have been
sold could be substantial. Further, adverse publicity surrounding
actual or alleged safety-related or other defects could damage
AYRO’s reputation and confidence in AYRO’s vehicles,
which would adversely affect sales of AYRO’s
vehicles.
AYRO depends on key personnel to operate its business, and the loss
of one or more members of its management team, or its failure to
attract, integrate and retain other highly qualified personnel in
the future, could harm its business.
AYRO
believes its future success will depend in large part upon its
ability to attract and retain highly skilled managerial, technical,
finance and sales and marketing personnel. AYRO has only one line
of business and is highly dependent upon the continued service of
its key executive officers and other employees. The loss of and
failure to replace key management and personnel could have a
serious adverse effect on sales bookings, strategic relationships,
manufacturing operations, order fulfillment and customer service,
and may adversely impact the achievement of AYRO’s
objectives. Despite AYRO’s efforts to retain valuable
employees, members of its management may terminate their employment
with AYRO at any time. Although AYRO has written employment
agreements with its executive officers, these employment agreements
do not bind these executives for any specific term and allow
executive officers to leave at any time, for any reason, with or
without cause. AYRO does not maintain any “key-man”
insurance policies on any of the key employees nor does AYRO intend
to obtain such insurance.
Recruiting
and retaining qualified employees, consultants, and advisors for
AYRO’s business, including sales or technical personnel, is
crucial to continue to execute AYRO’s growth strategy.
Because the pool of qualified personnel with engineering or
manufacturing experience and/or experience working in the electric
vehicle market is limited overall, recruitment and retention of
senior management and skilled technical, sales and other personnel
is very competitive. Many of the companies with which AYRO
competes for experienced personnel have greater resources than AYRO
has. AYRO is also at a disadvantage in recruiting and retaining key
personnel as its small size and limited resources may be viewed as
providing a less stable environment, with fewer opportunities than
would be the case at one of AYRO’s larger
competitors. As a result, AYRO may not be successful in either
attracting or retaining such personnel and/or on acceptable terms
given the competition and may be required to increase the level of
compensation paid to existing and new employees, which could
materially increase AYRO’s operating expenses. In
addition, failure to succeed in expansion of AYRO’s
operations may make it more challenging to recruit and retain
qualified personnel.
AYRO’s management has minimal experience in mass-producing
electric vehicles.
AYRO’s
management has never mass-produced electric vehicles, which
generally involves manufacturing process challenges, such as
manufacturing to meet the volumes forecast and efficiently and
effectively managing supply chain sources for materials. If the
materials suppliers are not managed properly to support vehicle
demand, AYRO’s results of operations and working capital can
be adversely affected. If AYRO is unable to implement its business
plans in the timeframe estimated by management and successfully
transition into a mass-producing electric vehicle manufacturing
business, AYRO will not be able to scale up its operations to
generate greater profit. As a result, AYRO’s business,
prospects, operating results and financial condition will be
negatively impacted and AYRO’s ability to grow its business
will be harmed.
Furthermore, as the
scale of AYRO’s vehicle production increases, AYRO will need
to accurately forecast, purchase, warehouse and transport to its
manufacturing facilities components at much higher volumes than
AYRO has experience with. If AYRO is unable to accurately match the
timing and quantities of component purchases to AYRO’s actual
production plans or capabilities, or successfully implement
automation, inventory management and other systems to accommodate
the increased complexity in AYRO’s supply chain, AYRO may
have to incur unexpected storage, transportation and write-off
costs, which could have a material adverse effect on AYRO’s
financial condition and operating results.
AYRO currently has limited electric vehicles marketing and sales
experience. If AYRO is unable to establish sales and marketing
capabilities or enter into dealer agreements to market and sell its
vehicles, AYRO may be unable to generate any revenue.
AYRO
has limited experience selling and marketing its vehicles, and AYRO
currently has minimal marketing or sales organization. To
successfully expand its operations, AYRO will need to invest in and
develop these capabilities, either on its own or with others, which
would be expensive, difficult and time consuming. Any failure or
delay in the timely development of AYRO’s internal sales and
marketing capabilities could adversely impact the potential for
success of its products.
Further, given its
lack of prior experience in marketing and selling electric
vehicles, AYRO relies on third-party dealers to market its
vehicles. If these dealers do not commit sufficient resources to
market AYRO’s vehicles and AYRO is unable to develop the
necessary marketing and sales capabilities on its own, including
direct sales channel with its end-customers, AYRO will be unable to
generate sufficient revenue from the sale of its vehicles to
sustain or grow its business. AYRO may be competing with companies
that currently have extensive and well-funded marketing and sales
operations, in particular in the markets AYRO is targeting. Without
appropriate capabilities, whether directly or through third party
dealerships, AYRO may be unable to compete successfully against
these more established companies.
Failure to maintain the strength and value of AYRO’s brand
could have a material adverse effect on AYRO’s business,
financial condition and results of operations.
AYRO’s
success depends, in part, on the value and strength of AYRO’s
brand. Maintaining, enhancing, promoting and positioning
AYRO’s brand, particularly in new markets where AYRO has
limited brand recognition, will depend largely on the success of
AYRO’s marketing and merchandising efforts and AYRO’s
ability to provide high-quality services, warranty plans, products
and resources and a consistent, high-quality customer experience.
AYRO’s brand could be adversely affected if AYRO fails to
achieve these objectives, if AYRO fails to comply with laws and
regulations, if AYRO is subject to publicized litigation or if
AYRO’s public image or reputation were to be tarnished by
negative publicity. Some of these risks may be beyond AYRO’s
ability to control, such as the effects of negative publicity
regarding AYRO’s suppliers or third party providers of
services or other electric transportation companies or their
products or negative publicity related to members of management.
Any of these events could hurt AYRO’s image, resulting in
reduced demand for AYRO’s products and a decrease in sales.
Further, maintaining, enhancing, promoting and positioning
AYRO’s brands’ images may require AYRO to make
substantial investments in marketing and employee training, which
could adversely affect AYRO’s cash flow and which may
ultimately be unsuccessful. These factors could have a material
adverse effect on AYRO’s business, financial condition and
results of operations.
The range of AYRO’s electric vehicles on a single charge
declines over time which may negatively influence potential
customers’ decisions whether to purchase AYRO’s
vehicles.
The
range of AYRO’s electric vehicles on a single charge declines
principally as a function of usage, time and charging patterns. For
example, a customer’s use of their vehicle as well as the
frequency with which they charge the battery of their vehicle can
result in additional deterioration of the battery’s ability
to hold a charge. Additionally, over time a battery’s ability
to hold its initial charge will degrade as well. While expected in
electric vehicle applications, such battery deterioration and the
related decrease in range may negatively influence potential
customer decisions whether to purchase AYRO’s vehicles, which
may harm AYRO’s ability to market and sell AYRO’s
vehicles.
AYRO offers a product warranty to cover defective products at no
cost to the customer. An unexpected change in failure rates of
AYRO’s products could have a material adverse impact on
AYRO’s business, financial condition and operating
results.
AYRO
offers product warranties that generally extend for two years from
date of sale that require AYRO to repair or replace defective
products returned by the customer during the warranty period at no
cost to the customer. While defects in the individual parts for
AYRO’s vehicles are currently reimbursed by AYRO’s
supply chain, warranty labor is AYRO’s responsibility. AYRO
records an estimate for anticipated warranty-related costs at the
time of sale based on historical and estimated future product
return rates and expected repair or replacement costs. For the nine
months ended September 30, 2019 and the December year ended
December 31, 2018, and 2017, AYRO estimated $25,509 and $16,918 of
reserves for such warranty-related costs, respectively, and
recorded $1,280 and $2,024 of warranty-incurred costs,
respectively. The anticipated warranty-related cost for the year
2020 is estimated to be approximately $136,000. While such costs
and failure rates have historically been within management’s
expectations and the provisions established and AYRO receives
warranty coverage from AYRO’s vendors, unexpected changes in
failure rates could have a material adverse impact on AYRO’s
business requiring additional warranty reserves. These failures
could adversely impact AYRO’s operating results.
Increases in costs, disruption of supply or shortage of raw
materials, in particular lithium-ion cells, could harm AYRO’s
business.
AYRO
may experience increases in the cost or a sustained interruption in
the supply or shortage of raw materials. Any such increase or
supply interruption could materially negatively impact AYRO’s
business, prospects, financial condition and operating results.
AYRO uses various raw materials in its business 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 for these materials and could
adversely affect AYRO’s business and operating results. For
instance, AYRO 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 or
plug-in hybrid 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.
AYRO’s
business depends on the continued supply of battery cells for
AYRO’s vehicles. Any disruption in the supply of battery
cells from AYRO’s suppliers or industry shortage or price
escalations could temporarily disrupt the planned production of
AYRO’s vehicles until such time as a different supplier is
fully qualified. Moreover, battery cell manufacturers may choose to
refuse to supply electric vehicle manufacturers to the extent they
determine that the vehicles are not sufficiently safe. Furthermore,
current fluctuations or shortages in petroleum, shipping
seasonality and government-imposed tariffs and other economic
conditions may cause AYRO to experience significant increases in
freight charges and raw material costs. Substantial increases in
the prices for AYRO’s raw materials would increase
AYRO’s operating costs and could reduce AYRO’s margins
if AYRO cannot recoup the increased costs through increased
electric vehicle prices. AYRO might not be able to recoup
increasing costs of raw materials by increasing vehicle prices
which could materially adversely affect its business, prospects and
operating results.
AYRO’s business may be adversely affected by labor and union
activities.
Although none of
AYRO’s employees are currently represented by a labor union,
it is common throughout the automobile industry generally for many
employees at automobile companies to belong to a union, which can
result in higher employee costs and increased risk of work
stoppages. AYRO relies on other companies in the supply chain with
work forces that may or may not be unionized and are thus subject
to work stoppages or strikes organized by such unions could have a
material adverse impact on AYRO’s business, financial
condition or operating results. If a work stoppage occurs within
AYRO’s business, or within that of AYRO’s key
suppliers, it could delay the manufacturing, sale and shipment of
AYRO’s electric vehicles and have a material adverse effect
on AYRO’s business, prospects, operating results or financial
condition.
AYRO relies on its dealers for the service of its vehicles and has
limited experience servicing AYRO’s vehicles. If AYRO is
unable to address the service requirements of AYRO’s future
customers, AYRO’s business will be materially and adversely
affected.
Currently,
AYRO’s vehicles are serviced by the selling dealer. If the
dealer is unable to successfully address the service requirements
of AYRO’s customers, customer confidence in both the vehicles
and AYRO’s brand will erode and AYRO’s prospects,
operating results will be materially and adversely affected. In
addition, AYRO anticipates the level and quality of the service the
dealers will provide AYRO’s customers will have a direct
impact on the success of AYRO’s future vehicles. If
AYRO’s dealers are unable to satisfactorily service
AYRO’s customers, AYRO’s ability to generate customer
loyalty, grow AYRO’s business and sell additional vehicles
could be significantly impaired.
AYRO’s
dealers have very limited experience servicing AYRO’s
vehicles. Servicing electric vehicles is different than servicing
vehicles with internal combustion engines and requires specialized
skills, including high voltage training and servicing
techniques.
If AYRO fails to deliver vehicles and accessories to market as
scheduled, AYRO’s business will be harmed.
A
significant amount of AYRO’s revenue is seasonal. By missing
product delivery schedules, AYRO may miss that year’s
opportunity to bring and sell a new product to market. Seasonality
could be affected by many factors including but not limited to
governmental fiscal years, as municipalities tend to order vehicles
either at the end of its fiscal year when it knows it has funds
remaining, and summer tourist season for AYRO’s destination
fleet operators, as such customers tend to place their entire
orders for delivery in time for the beginning of the tourist
season.
AYRO’s success depends, in part, on establishing and
maintaining good relationships with its network of
dealers.
In
the nine months ended September 30, 2019, AYRO sold 75% of its
vehicles to Club Car under its MPA, for distribution through Club
Car dealers. AYRO’s success depends, in part, on our
establishing and maintaining satisfactory relationships with both
Club Car corporate as well as its distribution channels or its
dealers. If AYRO were unable to establish and maintain an adequate
relationship with Club Car and its dealer network or, once
established, if AYRO’s relationship with Club Car or its
dealer network were to be eliminated abruptly or disrupted, it
could affect AYRO’s ability to respond quickly to
customers’ needs, resulting in various adverse consequences
to AYRO, including loss of sales, reduced cash flow, and/or a
shutdown of AYRO’s operations. In addition, as authorized
dealers of AYRO’s vehicles, the dealers could, through poor
performance on such dealer’s part, damage AYRO and
AYRO’s vehicles’ reputation in the marketplace
resulting in a loss of sales and cash flow which could adversely
affect AYRO’s business operations.
Customer financing and insuring AYRO’s vehicles may prove
difficult because retail lenders are unfamiliar with AYRO’s
vehicles and the vehicles have a limited loss history determining
residual values and within the insurance industry.
Retail
lenders are unfamiliar with AYRO’s vehicles and may be
hesitant to provide financing to AYRO’s customers.
AYRO’s vehicles do not have a loss history in the insurance
industry which may cause AYRO’s customers difficulty in
securing insurance coverage.
Failure in AYRO’s information technology and storage systems
could significantly disrupt the operation of AYRO’s
business.
AYRO’s
ability to execute its business plan and maintain operations
depends on the continued and uninterrupted performance of its
information technology (“IT”), systems. AYRO must
routinely update its IT infrastructure and its various IT systems
throughout the organization may not continue to meet its current
and future business needs. Modification, upgrade or replacement of
such systems may be costly. Furthermore, IT systems are
vulnerable to risks and damages from a variety of sources,
including telecommunications or network failures, malicious human
acts and natural disasters. Moreover, despite network security and
back-up measures, some of AYRO’s and its vendors’
servers are potentially vulnerable to physical or electronic
break-ins, computer viruses and similar disruptive problems.
Despite precautionary measures to prevent unanticipated problems
that could affect its IT systems, sustained or repeated system
failures that interrupt its ability to generate and maintain data
could adversely affect its ability to operate its
business.
AYRO Risks Relating to its Financial Position and Need for
Additional Capital
AYRO will be required to raise additional capital to fund its
operations, and such capital raising may be costly or difficult to
obtain and could dilute AYRO stockholders’ ownership
interests.
The
design, manufacture, sale and servicing of vehicles is a
capital-intensive business, and AYRO needs to raise additional
funds to expand its operations and reach the vehicle production
goals. At September 30, 2019, AYRO had a working capital deficit of
approximately $1.26 million. Based upon its current expectations,
AYRO believes that its existing capital resources, including the
bridge financing under the loan and security agreement, dated
December 19, 2019, will enable AYRO to continue planned operations
through March 2021, and with the capital resources that will become
available if and when the merger is consummated, including the net
proceeds from the AYRO Private Placement which will close
immediately prior to the consummation of the merger and
DropCar’s cash on hand, through March 2021. However, AYRO
cannot assure you that its plans will not change or that changed
circumstances will not result in the depletion of its capital
resources more rapidly than AYRO currently anticipates. If the
funds from the transactions related to the merger and the sales
revenue are not sufficient to cover AYRO’s cash requirements,
AYRO will need to raise additional capital, whether through the
sale of equity or debt securities, the entry into strategic
business collaborations, the establishment of other funding
facilities, licensing arrangements, or asset sales or other means,
in order to support its business plan. Such additional capital AYRO
may need may not be available on reasonable terms or at
all.
AYRO’s
ability to obtain the necessary financing to carry out AYRO’s
business plan is subject to a number of factors, including general
market conditions, performance of AYRO’s vehicles, market
demand for AYRO’s vehicles and investor acceptance of
AYRO’s business plan. These factors may make the timing,
amount, terms and conditions of such financing unattractive or
unavailable to AYRO. If AYRO is unable to obtain additional
financing on a timely basis, AYRO may have to curtail, delay or
eliminate its development activities and growth plans, and/or be
forced to sell some or all assets, perhaps on unfavorable terms,
which would have a material adverse effect on its business,
financial condition and results of operations, and ultimately could
be forced to discontinue its operations and liquidate, in which
event it is unlikely that stockholders would receive any
distribution on their shares. Further, AYRO may not be able to
continue operating if AYRO does not generate sufficient revenues
from operations needed to stay in business.
AYRO
has raised capital in the past primarily through debt and private
placements of its convertible preferred stock. Subject to the
restrictions in the Merger Agreement, AYRO may in the future pursue
the sale of additional equity and/or debt securities, or the
establishment of other funding facilities including asset-based
borrowings. There can be no assurances, however, that AYRO will be
able to raise additional capital through such an offering on
acceptable terms, or at all. Issuances of additional debt or equity
securities could impact the rights of the holders of AYRO common
stock and may dilute their ownership percentage. The terms of any
securities issued by AYRO in future capital transactions may be
more favorable to new investors, and may include preferences,
superior voting rights and the issuance of warrants or other
derivative securities, which may have a further dilutive effect on
the holders of any of AYRO’s securities then
outstanding.
The
terms of debt securities AYRO may have to issue or future
borrowings AYRO may have to incur to fund its operations could
impose significant restrictions on AYRO’s operations. The
incurrence of indebtedness or the issuance of certain equity
securities could result in increased fixed payment obligations and
could also result in restrictive covenants, such as limitations on
AYRO’s ability to incur additional debt or issue additional
equity, limitations on AYRO’s ability to acquire or license
intellectual property rights, and other operating restrictions that
could adversely affect AYRO’s ability to conduct AYRO’s
business.
If AYRO
raises additional funds through collaboration and licensing
arrangements with third parties, it may be necessary to relinquish
some rights to AYRO’s technologies or AYRO’s products,
to grant licenses on terms that are not favorable to AYRO, or to
issue equity instruments that may be dilutive to AYRO’s
stockholders.
In
addition, AYRO may incur substantial costs in pursuing future
capital financing, including investment banking fees, legal fees,
accounting fees, securities law compliance fees, printing and
distribution expenses and other costs. AYRO may also be required to
recognize non-cash expenses in connection with certain securities
AYRO issues, such as convertible notes and warrants, which may
adversely impact its financial condition.
AYRO’s long term capital requirements are subject to numerous
risks.
AYRO’s
long term capital requirements are expected to depend on many
potential factors, including, among others:
●
the
number of vehicles being manufactured and future models in
development;
●
the
regulatory compliance and clarity of each of AYRO’s
vehicles;
●
the
progress, success and cost of AYRO’s development programs
including manufacturing;
●
the
costs of manufacturing, developing sales, marketing and
distribution channels;
●
the
costs of enforcing its issued patents and defending intellectual
property-related claims;
●
AYRO’s
ability to successfully grow sales, including securing strategic
partner and distribution agreements and favorable pricing and
market share; and
●
AYRO’s
consumption of available resources more rapidly than currently
anticipated, resulting in the need for additional funding sooner
than anticipated.
AYRO Risks Related to Regulatory Matters
Increased safety, emissions, fuel economy, or other regulations may
result in higher costs, cash expenditures, and/or sales
restrictions.
The
motorized vehicle industry is governed by a substantial amount of
government regulation, which often differs by state and region.
Government regulation has arisen, and proposals for additional
regulation are advanced, primarily out of concern for the
environment, vehicle safety, and energy independence. In addition,
many governments regulate local product content and/or impose
import requirements as a means of creating jobs, protecting
domestic producers, and influencing the balance of payments. The
cost to comply with existing government regulations is substantial,
and future, additional regulations could have a substantial adverse
impact on AYRO’s financial condition.
AYRO’s vehicles are subject to multi-jurisdictional motor
vehicle standards.
All
vehicles sold must comply with federal, state and country-specific
motor vehicle safety standards. Rigorous testing and the use of
approved materials and equipment are among the requirements for
achieving federal certification. Failure of AYRO 311 or AYRO 411 or
future vehicle models to satisfy motor vehicle standards would have
a material adverse effect on AYRO’s business and operating
results.
Changes in regulations could render AYRO’s vehicles
incompatible with federal, state or local regulations, or use
cases.
Many
governmental standards and regulations relating to safety, fuel
economy, emissions control, noise control, vehicle recycling,
substances of concern, vehicle damage, and theft prevention are
applicable to new motor vehicles, engines, and equipment
manufactured for sale in the United
States, Europe, and elsewhere, including AYRO’s electric
vehicles. In addition, manufacturing and other automotive assembly
facilities in the United States, Europe, and elsewhere are subject
to stringent standards regulating air emissions, water discharges,
and the handling and disposal of hazardous substances. Therefore,
any unanticipated changes in regulations applicable to AYRO’s
electric vehicles could render AYRO’s vehicles incompatible,
which may prevent AYRO from selling such vehicles, and as a result,
AYRO could lose market share.
If AYRO fails to comply with environmental and safety laws and
regulations, AYRO could become subject to fines or penalties or
incur costs that could have a material adverse effect on the
success of its business.
AYRO is
subject to numerous environmental and health and safety laws,
including statutes, regulations, bylaws and other legal
requirements. These laws relate to the generation, use, handling,
storage, transportation and disposal of regulated substances,
including hazardous substances (such as batteries), dangerous goods
and waste, emissions or discharges into soil, water and air,
including noise and odors (which could result in remediation
obligations), and occupational health and safety matters, including
indoor air quality. These legal requirements vary by location and
can arise under federal, provincial, state or municipal laws. Any
breach of such laws and/or requirements would have a material
adverse effect on AYRO’s company and its operating
results.
Unusual or significant litigation, governmental investigations or
adverse publicity arising out of alleged defects in AYRO’s
vehicles, or otherwise may derail AYRO’s
business.
Although
AYRO plans to comply with governmental safety regulations, mobile
and stationary source emissions regulations, and other standards,
compliance with governmental standards, does not necessarily
prevent individual or class action lawsuits, which can entail
significant cost and risk. In certain circumstances, courts may
permit tort claims even when AYRO’s vehicles comply with
federal law and/or other applicable law. Furthermore, simply
responding to actual or threatened litigation or government
investigations of AYRO’s compliance with regulatory
standards, whether related to AYRO’s vehicles or business or
commercial relationships, may require significant expenditures of
time and other resources. Litigation also is inherently uncertain,
and AYRO could experience significant adverse results if litigation
is ever brought against AYRO. In addition, adverse publicity
surrounding an allegation of a defect, regulatory violation or
other matter (with or without corresponding litigation or
governmental investigation) may cause significant reputational harm
that could have a significant adverse effect on AYRO’s
sales.
In order for AYRO to sell directly to end customers, AYRO is
required to comply with state-specific regulations regarding sale
of vehicles by a manufacturer.
AYRO
sold approximately 17% of its vehicles directly to its end
customers in the year ended December 31, 2019. Going forward, AYRO
intends to focus on leveraging volume sales through dealers;
however AYRO will continue to sell vehicles directly to end
customers. Sales to both dealers and end customers require AYRO to
comply with state-specific regulations regarding the sale of
vehicles by a manufacturer, including licensing and registration
requirements. State laws that regulate the distribution, and sale
of motor vehicles by the manufacturer vary, and ensuring compliance
is time-consuming and costly. Moreover, for customers living in
states where AYRO is prohibited from selling directly from within
the state, AYRO will have to consummate sales at facilities in a
state that allows direct manufacturer-to-consumer sale and deliver
the vehicle to the end user via common carrier. As such, AYRO may
be required to either acquire and maintain a facility in multiple
states, or incur additional costs of delivery of the vehicle, which
consequently increases the cost and/or sales price of AYRO’s
vehicles and make our vehicles less desirable to
end-customers.
AYRO Risks Related to Its Intellectual Property
If AYRO is unable to adequately protect its proprietary designs and
intellectual property rights, AYRO’s competitive position
could be harmed.
AYRO’s
ability to compete effectively is dependent in part upon
AYRO’s ability to obtain patent protection for its designs,
products, methods, processes and other technologies, to preserve
its trade secrets, to prevent third parties from infringing on its
proprietary rights and to operate without infringing the
proprietary rights of third parties. AYRO relies on design patents,
trademarks, trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights.
There can be no assurance these protections will be available in
all cases or will be adequate to prevent AYRO’s competitors
from copying, reverse engineering or otherwise obtaining and using
AYRO’s designs, technology, proprietary rights or products.
For example, the laws of certain countries in which AYRO’s
products, components and sub-assemblies are manufactured or
licensed do not protect AYRO’s proprietary rights to the same
extent as the laws of the United States.
To
prevent substantial unauthorized use of AYRO’s intellectual
property rights, it may be necessary to prosecute actions for
infringement and/or misappropriation of AYRO’s trade secrets
and/or proprietary rights against third parties. Any such action
could result in significant costs and diversion of AYRO’s
resources and management’s attention, and there can be no
assurance AYRO will be successful in such action. Furthermore,
AYRO’s current and potential competitors may the ability to
dedicate substantially greater resources to enforce their
intellectual property rights than AYRO does. Accordingly, despite
its efforts, AYRO may not be able to prevent third parties from
infringing upon or misappropriating its trade secrets and/or
intellectual property.
In
addition, third parties may seek to challenge, invalidate or
circumvent AYRO’s patents, trademarks, copyrights and trade
secrets, or applications for any of the foregoing. There can be no
assurance that AYRO’s competitors or customers will not
independently develop technologies that are substantially
equivalent or superior to AYRO’s technology or design around
AYRO’s proprietary rights. In each case, AYRO’s ability
to compete could be significantly impaired.
AYRO is dependent on the manufacturing license it has obtained from
Cenntro and may need to obtain rights to other intellectual
property in the future. If AYRO fails to obtain licenses it needs
or fails to comply with its obligations in the agreement under
which AYRO licensed intellectual property and other rights from
third parties, AYRO could lose its ability to manufacture its
vehicles.
Cenntro
owns the design of the AYRO 411 model and has granted AYRO an
exclusive license to manufacture AYRO 411 model for sale in North
America. AYRO’s business is
dependent on such license, and if AYRO fails comply with its
obligations to maintain that license, AYRO’s business will be
substantially harmed. Under the Manufacturing License Agreement,
dated April 27, 2017, between AYRO and Cenntro, AYRO is granted an
exclusive license to manufacture and sell AYRO 411 in the United
States, and AYRO is required to purchase the minimum volume of
product units from Cenntro, among other obligations. No assurance
can be given that AYRO will be able to meet the required quota and
maintain its license granted by Cenntro and that AYRO’s
existing license will be extended on reasonable terms or at all. In
addition, AYRO may need to license intellectual property from other
third parties in the future for new vehicle models. No assurance
can be given that AYRO will be able to obtain such license or meet
its obligations to maintain the licenses it may have to obtain from
third parties in the future. If AYRO were to lose or otherwise be
unable to maintain these licenses for any reason, it would halt
AYRO’s ability to manufacture and sell its vehicles or may
prohibit development of the its future modes. Any of the foregoing
could result in a material adverse effect on AYRO’s business
or results of operations.
In
addition, if AYRO does not own the patents or patent applications
that it licenses, as is the case with AYRO 411’s patents, and
as such, AYRO may need to rely upon its licensors to properly
prosecute and maintain those patent applications and prevent
infringement of those patents. If AYRO’s licensors are unable
to adequately protect their proprietary intellectual property AYRO
licenses from legal challenges, or if AYRO is unable to enforce
such licensed intellectual property against infringement or
alternative technologies, AYRO will not be able to compete
effectively in the electric vehicle markets it is
targeting.
Many of AYRO’s proprietary designs are in digital form and
the breach of AYRO’s computer systems could result in these
designs being stolen.
If
AYRO’s security measures are breached or unauthorized access
to private or proprietary data is otherwise obtained, AYRO’s
proprietary designs could be stolen. Because AYRO holds many of
these designs in digital form on AYRO’s servers, there exists
an inherent risk that an unauthorized third party could conduct a
security breach resulting in the theft of AYRO’s proprietary
information. While AYRO has taken steps to protect AYRO’s
proprietary information, because techniques used to obtain
unauthorized access or sabotage systems change frequently and
generally are not identified until they are launched against a
target, AYRO may be unable to anticipate these techniques or to
implement adequate preventative measures. Any or all of these
issues could negatively impact AYRO’s competitive advantage
and AYRO’s ability to obtain new customers thereby adversely
affecting AYRO’s financial results.
AYRO’s proprietary designs are susceptible to reverse
engineering by AYRO’s competitors.
Much of
the value of AYRO’s proprietary rights is derived from
AYRO’s vast library of design specifications. While AYRO
considers its design specifications to be protected by various
proprietary, trade secret and intellectual property laws, such
information is susceptible to reverse engineering by AYRO’s
competitors. AYRO may not be able to prevent its competitors from
developing competing design specifications and the cost of
enforcing these rights may be significant. If AYRO is unable to
adequately protect its proprietary designs AYRO’s financial
condition and operating results could suffer.
If AYRO is unable to protect the confidentiality of its trade
secrets or know-how, such proprietary information may be used by
others to compete against AYRO.
AYRO
considers trade secrets, including confidential and unpatented
know-how and designs important to the maintenance of its
competitive position. AYRO protects trade secrets and confidential
and unpatented know-how, in part, by customarily entering into
non-disclosure and confidentiality agreements with parties who have
access to such knowledge, such as AYRO’s employees, outside
technical and commercial collaborators, consultants, advisors and
other third parties. AYRO also enters into confidentiality and
invention or patent assignment agreements with its employees and
consultants that obligate them to maintain confidentiality and
assign their inventions to AYRO. Despite these efforts, any of
these parties may breach the agreements and disclose AYRO’s
proprietary information, including AYRO’s trade secrets, and
AYRO may not be able to obtain adequate remedies for such
breaches.
Legal proceedings or third-party claims of intellectual property
infringement and other challenges may require AYRO to spend
substantial time and money and could harm AYRO’s
business.
Vehicles design and
manufacturing industry is characterized by vigorous protection and
pursuit of intellectual property rights, which has resulted in
protracted and expensive litigation for many companies. AYRO may
become subject to lawsuits alleging that AYRO has infringed the
intellectual property rights of others. The nature of claims
contained in unpublished patent filings around the world is unknown
to AYRO and it is not possible to know which countries patent
holders may choose for the extension of their filings under the
Patent Cooperation Treaty, or other mechanisms. To the extent that
AYRO has previously incorporated third-party technology and/or
know-how into certain products for which AYRO does not have
sufficient license rights, AYRO could incur substantial litigation
costs, be forced to pay substantial damages or royalties, or even
be forced to cease sales in the event any owner of such technology
or know-how were to challenge AYRO’s subsequent sale of such
products (and any progeny thereof). In addition, to the extent that
AYRO discovers or has discovered third-party patents that may be
applicable to products or processes in development, AYRO may need
to take steps to avoid claims of possible infringement, including
obtaining non-infringement or invalidity opinions and, when
necessary, re-designing or re-engineering products. However, AYRO
cannot assure you that these precautions will allow AYRO to
successfully avoid infringement claims. AYRO may also be subject to
claims based on the actions of employees and consultants with
respect to the usage or disclosure of intellectual property learned
at other employers. Third parties may in the future assert claims
of infringement of intellectual property rights against AYRO or
against AYRO’s customers or channel partners for which AYRO
may be liable.
AYRO’s involvement in intellectual property
litigation could result in significant expense to AYRO, adversely
affect the development of sales of the challenged product or
intellectual property and divert the efforts of its technical and
management personnel, whether or not such litigation is resolved in
AYRO’s favor. Uncertainties resulting from the
initiation and continuation or defense of intellectual property
litigation or other proceedings could have a material adverse
effect on AYRO’s ability to compete in the marketplace.
In the event of an adverse outcome in
any such litigation, AYRO may, among other things, be required
to:
●
pay substantial
damages;
●
cease the
development, manufacture, use, sale or importation of products that
infringe upon other patented intellectual property;
●
expend significant
resources to develop or acquire non-infringing intellectual
property;
●
discontinue
processes incorporating infringing technology; or
●
obtain licenses to
the infringing intellectual property, which licenses may not be
available on acceptable terms, or at all.
AYRO is generally obligated to indemnify AYRO’s sales channel
partners, customers, suppliers and contractors for certain expenses
and liabilities resulting from intellectual property infringement
claims regarding AYRO’s products, which could force AYRO to
incur substantial costs.
AYRO
has agreed, and expects to continue to agree, to indemnify
AYRO’s sales channel partners and customers for certain
intellectual property infringement claims regarding AYRO’s
products. As a result, in the case of infringement claims against
these sales channel partners and end-customers, AYRO could be
required to indemnify them for losses resulting from such claims or
to refund amounts they have paid to AYRO. AYRO’s sales
channel partners and other end-customers in the future may seek
indemnification from AYRO in connection with infringement claims
brought.
Risks Related to AYRO’s International Operations
Exchange rate fluctuations may materially affect
AYRO’s results of operations and financial
condition.
AYRO
operates internationally and is exposed to fluctuations in foreign
exchange rates between the U.S. dollar and other currencies,
particularly the Chinese Renminbi. AYRO’s reporting currency
is the U.S. dollar and, as a result, financial line items, if not
in the U.S. dollar, are converted into U.S. dollars at the
applicable foreign exchange rates. As AYRO’s business grows,
AYRO expects that at least some of its revenues and expenses will
be denominated in currencies other than the U.S. dollar. Therefore,
unfavorable developments in the value of the U.S. dollar relative
to other relevant currencies could adversely affect AYRO’s
business and financial condition.
AYRO
pays Cenntro in U.S. dollars; however, the per-unit price of the
sub-assemblies AYRO has to pay Cenntro may be affected due to the
exchange rate fluctuations. The value of the Renminbi against the
U.S. dollar and other currencies may fluctuate and is affected by,
among other things, changes in political and economic conditions in
China and by China's foreign exchange policies. Historically, the
exchange rate between the Renminbi and the U.S. dollar has
fluctuated significantly, and it is difficult to predict how market
forces or Chinese or U.S. government policy may impact such
exchange rate in the future. As of February 4, 2020, the Renminbi
was valued at 6.99813 against the U.S. dollar.
Very
limited hedging options are available in China to reduce our
exposure to exchange rate fluctuations. To date, AYRO has not
entered into any material hedging transactions in an effort to
reduce its exposure to foreign currency exchange risk. While AYRO
may decide to enter into hedging transactions in the future, the
availability and effectiveness of these hedges may be limited and
AYRO may not be able to adequately hedge its exposure or at
all.
AYRO’s international sales and operations subject AYRO to
additional risks that can adversely affect its operating results
and financial condition.
AYRO’s
international operations subject AYRO to a variety of risks and
challenges, including: increased management, travel, infrastructure
and legal compliance costs associated with having international
operations; reliance on sales channel partners; increased financial
accounting and reporting burdens and complexities; compliance with
foreign laws and regulations; compliance with U.S. laws and
regulations for foreign operations; and reduced protection for
intellectual property rights in some countries and practical
difficulties of enforcing rights abroad. Any of these risks could
adversely affect AYRO’s international operations, reduce
AYRO’s international sales or increase AYRO’s operating
costs, adversely affecting AYRO’s business, operating results
and financial condition and growth prospects.
AYRO is subject to governmental export and import controls that
could impair AYRO’s ability to compete in international
markets due to licensing requirements and subject AYRO to liability
if AYRO is not in compliance with applicable laws.
AYRO’s
products are subject to export control and import laws and
regulations, including the U.S. Export Administration Regulations,
U.S. Customs regulations and various economic and trade sanctions
regulations administered by the U.S. Treasury Department’s
Office of Foreign Assets Controls. Exports of AYRO’s products
must be made in compliance with these laws and regulations. If AYRO
violates these laws and regulations, AYRO and certain of its
employees could be subject to substantial civil or criminal
penalties, including the possible loss of export or import
privileges, fines, which may be imposed on AYRO and responsible
employees or managers, and, in extreme cases, the incarceration of
responsible employees or managers. In addition, if AYRO’s
channel partners, agents or consultants fail to obtain appropriate
import, export or re-export licenses or authorizations, AYRO may
also be adversely affected through reputational harm and penalties.
Obtaining the necessary authorizations, including any required
license, for a particular sale may be time-consuming, is not
guaranteed and may result in the delay or loss of sales
opportunities. Changes in AYRO’s products or changes in
applicable export or import laws and regulations may also create
delays in the introduction and sale of AYRO’s products in
international markets, prevent AYRO’s end-customers with
international operations from deploying AYRO’s products or,
in some cases, prevent the export or import of AYRO’s
products to certain countries, governments or persons altogether.
Any change in export or import laws and regulations, shift in the
enforcement or scope of existing laws and regulations, or change in
the countries, governments, persons or technologies targeted by
such laws and regulations, could also result in decreased use of
AYRO’s products, or in AYRO’s decreased ability to
export or sell AYRO’s products to existing or potential
end-customers with international operations. Any decreased use of
AYRO’s products or limitation on AYRO’s ability to
export or sell AYRO’s products would likely adversely affect
AYRO’s business, financial condition and operating
results.
AYRO is subject to governmental import duties that could
significantly increase AYRO’s costs.
The
majority of AYRO’s raw materials for AYRO’s vehicles
are shipped from the People’s Republic of China. The
U.S./China trade relations are in a highly volatile state of
uncertainty which could significantly affect the tariffs that are
applied to AYRO’s products. In 2018, the United States
government announced tariffs on certain steel and aluminum
products, technological hardware as well as automotive parts
imported into the United States, which has led to reciprocal
tariffs being imposed by the European Union and other governments
on products imported from the United States. The United States
government has implemented tariffs on goods imported from China,
and additional tariffs on goods imported from China are under
consideration.
The
battery industry (both lithium-ion and lead acid-based) has been
subjected to tariffs implemented by the U.S. government on goods
imported from China. If the U.S. and China are not able to resolve
their differences, new and additional tariffs may be put in place
and additional products, including raw materials AYRO uses to
manufacture its vehicles. If additional tariffs and related taxes
are applied to the cost of imports from China, AYRO’s costs
will continue to increase and AYRO may be required to substantially
increase the sales prices of AYRO’s vehicles. An increase in
sales prices of AYRO’s vehicles would likely adversely affect
AYRO’s business, financial condition and operating results.
If AYRO is unable to increase the sales prices of its vehicles to
reflect the increase in the costs of the vehicles, it will result
in lower gross margins on AYRO’s vehicles.
New regulations or standards or changes in existing regulations or
standards in the United States or internationally related to
AYRO’s suppliers’ products may result in unanticipated
costs or liabilities, which could have a material adverse effect on
AYRO’s business, operating results and future sales, and
could place additional burdens on the operations of AYRO’s
business.
AYRO’s
suppliers’ products are subject to governmental regulations
in many jurisdictions. To achieve and maintain market acceptance,
AYRO’s suppliers’ products must continue to comply with
these statutory regulations and many industry standards. As these
regulations and standards evolve, and if new regulations or
standards are implemented, AYRO’s suppliers may have to
modify their products. The failure of their products to comply, or
delays in compliance, with the existing and evolving industry
regulations and standards could prevent or delay introduction of
AYRO’s vehicles, which could harm AYRO’s business.
Supplier uncertainty regarding future policies may also affect
demand for electric vehicles, including AYRO’s vehicles.
Moreover, channel partners or customers may require AYRO, or AYRO
may otherwise deem it necessary or advisable, to alter its products
to address actual or anticipated changes in the regulatory
environment. AYRO’s inability to alter its products to
address these requirements and any regulatory changes may have a
material adverse effect on its business, operating results and
financial condition.
AYRO could be adversely affected by violations of the U.S. Foreign
Corrupt Practices Act and similar worldwide anti-bribery
laws.
AYRO
has international operations. The U.S. Foreign Corrupt Practices
Act and similar anti-bribery laws generally prohibit companies and
their intermediaries from making improper payments to foreign
government officials for the purpose of obtaining or retaining
business. Practices in the local business communities of many
countries outside the United States have a level of government
corruption that is greater than that found in the developed world.
AYRO’s policies mandate compliance with these anti-bribery
laws and AYRO has established policies and procedures designed to
monitor compliance with these anti-bribery law requirements;
however, AYRO cannot assure that its policies and procedures will
protect AYRO from potential reckless or criminal acts committed by
individual employees or agents. If AYRO is found to be liable for
anti-bribery law violations, AYRO could suffer from criminal or
civil penalties or other sanctions that could have a material
adverse effect on its business.
Risks Related to Asset Sale
While the Asset Sale is pending, it creates unknown impacts on
DropCar’s future which could materially and adversely affect
its business, financial condition and results of
operations.
While
the Asset Sale is pending, it creates unknown impacts on
DropCar’s future. Therefore, DropCar’s current or
potential business partners may decide to delay, defer or cancel
entering into new business arrangements with DropCar pending
consummation of the Asset Sale. The occurrence of these events
individually or in combination could materially and adversely
affect DropCar’s business, financial condition and results of
operations.
The failure to consummate the Asset Sale may materially and
adversely affect DropCar’s business, financial condition and
results of operations.
The
Asset Sale is subject to various closing conditions including,
among others, (i) the affirmative vote of the holders of a
majority of the outstanding shares of capital stock of DropCar
entitled to vote on the approval of the Asset Sale and (ii) the
consummation of a change in control transaction of DropCar, which
will occur as a result of the merger. DropCar cannot control these
conditions and cannot assure you that they will be satisfied. If
the Asset Sale is not consummated, DropCar may be subject to a
number of risks, including the following:
●
DropCar may not be
able to consummate the merger, the closing of which is conditioned
upon the consummation of the Asset Sale;
●
DropCar may not be
able to identify an alternate transaction, or if an alternate
transaction is identified, such alternate transaction may not
result in equivalent terms as compared to what is proposed in the
Asset Sale;
●
the trading price
of DropCar’s common stock may decline to the extent that the
current market price reflects a market assumption that the Asset
Sale will be consummated;
●
the failure to
complete the Asset Sale may create doubt as to DropCar’s
ability to effectively implement its current business
strategies;
●
DropCar’s
costs related to the Asset Sale, such as legal, accounting and
financial advisory fees, must be paid even if the Asset Sale is not
completed; and
●
DropCar’s
relationships with its customers, suppliers and employees may be
damaged and its business may be harmed.
The
occurrence of any of these events individually or in combination
could materially and adversely affect DropCar’s business,
financial condition and results of operations, which could cause
the market value of DropCar’s common stock to
decline.
Certain of DropCar’s executive officers have interests in the
Asset Sale Transaction that may be in addition to, or different
from, the interests of DropCar’s stockholders.
Stockholders should
be aware that DropCar’s executive officers have financial
interests in the Asset Sale that may be in addition to, or
different from, the interests of DropCar’s stockholders
generally. Each of Mr. Richardson and Mr. Newman is a party to the
Asset Purchase Agreement. The DropCar Board was aware of and
considered these potential interests, among other matters, in
evaluating and negotiating the Asset Sale and Asset Purchase
Agreement and in recommending to DropCar’s stockholders that
they approve the Asset Sale.
Risks
Related to the Business of DropCar Prior to the Consummation of the
Merger
DropCar has a history of losses and may be unable to achieve or
sustain profitability.
DropCar
has incurred net losses in each year since its inception and as of
December 31, 2018, it had an accumulated deficit of $29.8 million.
Such losses are continuing to date. DropCar does not know if its
business operations will become profitable or if it will continue
to incur net losses in the future. DropCar’s management
expects to incur significant expenses in the future in connection
with the development and expansion of DropCar’s business,
which will make it difficult for DropCar to achieve and maintain
future profitability. DropCar may incur significant losses in the
future for a number of reasons, including the other risks described
herein, and it may encounter unforeseen expenses, difficulties,
complications, delays and other unknown events. Accordingly, there
can be no certainty regarding if or when DropCar will achieve
profitability, or if such profitability will be
sustained.
Historical losses and negative cash flows from operations raise
doubt about DropCar’s ability to continue as a going
concern.
Historically, DropCar has
suffered losses and has not generated positive cash flows from
operations. This raises substantial doubt about DropCar’s
ability to continue as a going concern. The audit report of
EisnerAmper LLP for the year ended December 31, 2018 on
DropCar’s financial statements contained an explanatory
paragraph expressing doubt about the company’s ability to
continue as a going concern. DropCar
expects the audit report of Friedman LLP for the year ended
December 31, 2019 on DropCar’s financial statements to also
contain an explanatory paragraph expressing doubt about
DropCar’s ability to continue as a going
concern.
DropCar has a limited operating history which makes it difficult to
predict future growth and operating results.
DropCar has a relatively short
operating history which makes it difficult to reliably predict
future growth and operating results. DropCar faces all the risks
commonly encountered by other businesses that lack an established
operating history, including, without limitation, the need for
additional capital and personnel and intense competition. There is
no relevant history upon which to base any assumption as to the
likelihood that DropCar’s business will be
successful.
DropCar will require substantial additional funding, which may not
be available on acceptable terms, or at all.
DropCar has historically used
substantial funds to develop its cloud-based Enterprise Vehicle
Assistance and Logistics (“VAL”)
platform and will require substantial additional funds to continue
to develop its VAL platform and expand into new markets.
DropCar’s future capital requirements and the period for
which it expects its existing resources to support its operations
may vary significantly from what it expects. DropCar’s
monthly spending levels vary based on new and ongoing technology
developments and corporate activities. To date, DropCar has
primarily financed its operations through sales of its securities.
DropCar may intend to seek additional funding in the future through
equity or debt financings, credit or loan facilities or a
combination of one or more of these financing sources.
DropCar’s ability to raise additional funds will depend on
financial, economic and other factors, many of which are beyond
DropCar’s control. Additional funds may not be available to
DropCar on acceptable terms or at all.
If DropCar raises additional
funds by issuing equity or convertible debt securities,
DropCar’s stockholders will suffer dilution and the terms of
any financing may adversely affect the rights of these
stockholders. In addition, as a condition to providing additional
funds to DropCar, future investors may demand, and may be granted,
rights superior to those of existing stockholders. Debt financing,
if available, may involve restrictive covenants limiting
DropCar’s flexibility in conducting future business
activities, and, in the event of insolvency, debt holders would be
repaid before holders of equity securities received any
distribution of corporate assets.
If DropCar is unable to obtain
funding on a timely basis or on acceptable terms, or at all,
DropCar may have to delay its plans for expansion, limit strategic
opportunities or undergo reductions in its workforce or other
corporate restructuring activities.
Because DropCar’s VAL platform operates in a relatively new
market, DropCar must actively seek market acceptance of its
services, which it expects will occur gradually, if at
all.
DropCar
derives, and expects to continue to derive, a substantial portion
of its revenue from its VAL platform, which is part of a relatively
new and evolving market. DropCar services are substantially
different from existing valet, parking, maintenance and car storage
services and many potential clients may be reluctant to utilize
DropCar services until they have been tested in more established
commercial operations over a significant period. As a result,
DropCar may have difficulty achieving market acceptance for its
platform. If the market for DropCar services fails to grow or grows
more slowly than DropCar currently anticipates, DropCar’s
business would be negatively affected. To date, DropCar primarily
operates in the New York City, New Jersey, Washington D.C.,
Baltimore, Los Angeles and San Francisco metropolitan areas.
DropCar has targeted expansion into markets it believes are most
likely to adopt its platform. However, DropCar’s efforts to
expand within and beyond its current market may not achieve the
same success, or rate of adoption, that it has achieved to
date.
Future growth may place significant demands on DropCar’s
management and infrastructure.
DropCar’s business is
logistically and technologically complex. This complexity has
placed and may continue to place significant demands on
DropCar’s management and its operational and financial
infrastructure, and it may be challenging to sustain in future
growth periods. Many of DropCar’s systems and operational
practices were implemented when the company was at a smaller scale
of operations. In addition, as DropCar grows, it must implement new
systems and software to help run its operations and must hire
additional personnel. As DropCar’s operations grow in size,
scope and complexity, it will need to continue to improve and
upgrade its systems and infrastructure to offer an increasing
number of clients enhanced services, solutions and features.
DropCar may choose to commit significant financial, operational and
technical resources in advance of an expected increase in the
volume of its business, with no assurance that the volume of
business will increase. Growth could also strain DropCar’s
ability to maintain reliable service levels for existing and new
clients, which could adversely affect its reputation and business
in the future. For example, in the past, DropCar has experienced,
and may in the future experience, situations where the demand for
DropCar’s services exceeded the company’s estimates and
its employee base was, and may in the future be, insufficient to
support this higher demand. DropCar’s client experience and
overall reputation could be harmed if DropCar is unable to grow its
employee base to support higher demand.
In
addition, the financial results for the fiscal year ended December
31, 2018, include the impact of reflecting the results of
operations, financial condition and cash flows of WPCS
International – Suisun City, Inc., as discontinued
operations. DropCar completed the sale on December 24, 2018, and
accordingly, DropCar reflected income from operations of
discontinued component of $315,119 and loss on sale of component of
$4,169,718 for a total loss on discontinued operations of
$3,854,599.
Competition for staffing, shortages of qualified drivers and union
activity may increase our labor costs and reduce
profitability.
DropCar’s operations are
conducted primarily with employee drivers. Recently, there has been
intense competition for qualified drivers in the transportation
industry due to a shortage of drivers. The availability of
qualified drivers may be affected from time to time by changing
workforce demographics, competition from other transportation
companies and industries for employees, the availability and
affordability of driver training schools, changing industry
regulations, and the demand for drivers in the labor market. If the
industry-wide shortage of qualified drivers continues, DropCar will
likely have difficulty attracting and retaining enough qualified
drivers to fully satisfy customer demands. Due to the current
highly-competitive labor market for drivers, DropCar may be
required to increase driver compensation and benefits in the
future, or face difficulty meeting customer demands, all of which
could adversely affect DropCar’s
profitability.
If
DropCar’s labor costs increase, DropCar may not be able to
raise rates to offset these increased costs. Union activity is
another factor that may contribute to increased labor costs.
DropCar currently does not have any union employees, and any
increase in labor union activity could have a significant impact on
DropCar’s labor costs. DropCar’s failure to recruit and
retain qualified drivers, or to control DropCar’s labor
costs, could have a material adverse effect on its business,
financial position, results of operations, and cash
flows.
Deterioration in economic conditions in general could reduce the
demand for our services and damage DropCar’s business and
results of operations.
Adverse
changes in global, national and local economic conditions could
negatively impact DropCar’s business. DropCar’s
business operations are concentrated and will likely continue to be
concentrated in large urban areas, and business could be materially
adversely affected to the extent that weak economic conditions
result in the elimination of jobs and high unemployment in these
large urban areas. If deteriorating economic conditions reduce
discretionary spending, business travel or other economic activity
that fuels demand for our services, DropCar’s earnings could
be reduced. Adverse changes in local and national economic
conditions could also depress prices for DropCar’s services
or cause individual and/or corporate clients to cancel their
agreements to purchase DropCar’s services. Moreover, mandated
changes in local and/or national compensation as it relates to
minimum wage, overtime, and other compensation regulations may have
an adverse impact on DropCar’s profitability.
DropCar expects to face intense competition in the market for
innovative logistics, valet and car storage services, and
DropCar’s business will suffer if it fails to compete
effectively.
While DropCar believes that its
platform offers a number of advantages over existing service
providers, DropCar expects that the competitive environment for its
logistics, valet and storage services will become more intense as
companies enter the market. In addition, there are relatively low
barriers to entry into the DropCar business. Currently,
DropCar’s primary competitors are public transportation,
logistics, traditional valet and car storage providers, car sharing
services and traditional rental car companies that have recently
begun offering more innovative services. Many of DropCar’s
competitors have greater name recognition among DropCar’s
target clients and greater financial, technical and/or marketing
resources than DropCar has. DropCar’s competitors have
resources that may enable them to respond more quickly to new or
emerging technologies and changes in client preferences. These
competitors could introduce new solutions with competitive prices
or undertake more aggressive marketing campaigns than DropCar.
Failure to compete effectively could have a material adverse impact
on DropCar’s results of operations.
DropCar’s long-term sustainability relies on its ability to
anticipate or keep pace with changes in the marketplace and the
direction of technological innovation and customer
demands.
The
automotive industry, especially the vehicle support segment of the
automotive industry in which DropCar operates, is subject to
intense and increasing competition and rapidly evolving
technologies. DropCar believes that the automotive industry will
experience significant and continued change in the coming years. In
addition to traditional competitors, DropCar must also be
responsive to the entrance of non-traditional participants in the
automotive industry. These non-traditional participants, such as
ride-sharing companies and autonomous vehicles, may seek to disrupt
the historic business model of the industry through the
introduction of new technologies, new products or services, new
business models or new methods of travel. To compete successfully,
DropCar will need to demonstrate the advantages of DropCar services
over alternative solutions and services, as well as newer
technologies. Failure to adapt to innovations in technology and
service offerings in the automotive space could have a material
adverse impact on DropCar’s ability to sustain its business
and remain competitive.
DropCar’s growth depends on its ability to gain sustained
access to a sufficient number of parking locations on commercially
reasonable terms that offer convenient access in reaching
DropCar’s clients.
DropCar currently operates
Self-park in New York City. DropCar must therefore compete for
limited parking locations. Many cities are densely populated, and
parking locations may not be available at locations that provide
convenient access to DropCar’s clients or on terms that are
commercially reasonable. If DropCar is unable to gain sustained
access to a sufficient number of parking locations that are
convenient to DropCar’s clients, DropCar’s ability to
attract and retain clients will suffer. This challenge of finding
adequate parking will grow if DropCar is able to successfully grow
its subscriber base. If DropCar is unable to gain sustained access
to a sufficient number of parking locations, or DropCar is unable
to gain such access on commercially reasonable terms, this could
have a material adverse impact on DropCar’s business,
financial condition and results of operations.
If DropCar fails to successfully execute its growth strategy, its
business and prospects may be materially and adversely
affected.
To date, DropCar primarily
operates in the New York metropolitan area. DropCar’s growth
strategy includes expanding its services to new geographic
locations, which may not succeed due to various factors, including
one or more of the following: competition, DropCar’s
inability to build brand name recognition in these new markets,
DropCar’s inability to effectively market its services in
these new markets or DropCar’s inability to deliver
high-quality services on a cost-effective and continuous and
consistent basis. In addition, DropCar may be unable to identify
new cities with sufficient growth potential to expand its network,
and DropCar may fail to attract quality drivers and other employees
and/or establish the necessary commercial relationships with local
vendors that are required in order to deliver DropCar’s
services in these areas. If DropCar fails to successfully execute
its growth strategy, it may be unable to maintain and grow its
business operation, and DropCar’s business and prospects may
be materially and adversely affected.
DropCar may experience difficulties demonstrating the value to
customers of newer, higher priced and higher margin services if
they believe existing services are adequate to meet end customer
expectations.
As DropCar develops and
introduces new services, it faces the risk that customers may not
value or be willing to purchase these higher priced and higher
margin services due to pricing constraints. Owing to the extensive
time and resources that DropCar invests in developing new services,
if DropCar is unable to sell customers new services,
DropCar’s revenue could decline and its business, financial
condition, operating results and cash flows could be negatively
affected.
If efforts to build and maintain strong brand identity are not
successful, DropCar may not be able to attract or retain clients,
and DropCar’s business and operating results may be adversely
affected.
DropCar
believes that building and maintaining its brand is critical to the
success of its business. Consumer client and automotive awareness
of the brand and its perceived value will depend largely on the
success of marketing efforts and the ability to provide a
consistent, high-quality client and business experience.
Conversely, any failure to maximize marketing opportunities or to
provide clients with high-quality valet, logistics, maintenance and
storage experiences for any reason could substantially harm
DropCar’s reputation and adversely affect its efforts to
develop as a trusted brand. To promote its brand, DropCar has made,
and will continue to make, substantial investments relating to
advertising, marketing and other efforts, but cannot be sure that
such investment will be successful.
Furthermore,
as the primary point of contact with clients, DropCar relies on its
drivers to provide clients and business partners with a
high-quality client experience. The failure of DropCar drivers to
provide clients and business partners with this trusted experience
could cause customers and business partners to turn to alternative
providers, including DropCar’s competitors. Any incident that
erodes consumer affinity for the DropCar brand, including a
negative experience with one of DropCar’s valets or damage to
a customer’s car could result in negative publicity, negative
online reviews and damage DropCar’s business.
DropCar relies on third-party service providers to provide parking
garages for its clients’ cars. If these service providers
experience operational difficulties or disruptions, DropCar’s
business could be adversely affected.
DropCar depends on third-party
service providers to provide parking garages for its clients’
cars. In particular, DropCar relies on local parking garage vendors
to provide adequate convenient parking locations. DropCar does not
control the operation of these providers. If these third-party
service providers terminate their relationship with DropCar, decide
to sell their facilities or do not provide convenient access to
DropCar’s clients’ vehicles, it would be disruptive to
DropCar’s business as DropCar is dependent on suitable
parking locations within relative proximity of its clients’
residences and business locations. This disruption could harm
DropCar’s reputation and brand and may cause DropCar to lose
clients.
If DropCar is unsuccessful in establishing or maintaining its
business-to-business (B2B) model, its revenue growth could be
adversely affected.
DropCar currently depends on
corporate clients and the B2B market for a significant portion of
its revenue. The success of this strategy will depend on
DropCar’s ability to maintain existing B2B partners, obtain
new B2B partners, and generate a community of participating
corporate clients sufficiently large to support such a model.
DropCar may not be successful in establishing such partnerships on
terms that are commercially favorable, if at all, and may encounter
financial and logistical difficulties associated with sustaining
such partnerships. If DropCar is unsuccessful in establishing or
maintaining its B2B model, its revenue growth could be adversely
affected.
DropCar faces risks related to liabilities resulting from the use
of client vehicles by DropCar employees.
DropCar’s business can
expose it to claims for property damage, personal injury and death
resulting from the operation and storage of client cars by DropCar
drivers. While operating client cars, drivers could become involved
in motor vehicle accidents due to mechanical or manufacturing
defects, or user error by the DropCar-employed driver or by a
third-party driver that results in death or significant property
damage for which DropCar may be liable.
In addition, DropCar depends on
its drivers to inspect the vehicles prior to driving in order to
identify any potential damage or safety concern with the vehicle.
To the extent that DropCar is found at fault or otherwise
responsible for an accident, DropCar’s insurance coverage
would only cover losses up to a maximum of $5 million, in certain
instances, in the United States.
DropCar may experience difficulty obtaining coverage for certain
insurable risks or obtaining such coverage at a reasonable
cost.
DropCar
maintains insurance for workers’ compensation, general
liability, automobile liability, property damage and other
insurable risks. DropCar is responsible for claims exceeding
DropCar’s retained limits under its insurance policies, and
while DropCar endeavors to purchase insurance coverage
corresponding to its assessment of risk, DropCar cannot predict
with certainty the frequency, nature or magnitude of claims or
direct or consequential damages and may become exposed to liability
at levels in excess of DropCar’s historical levels resulting
from unusually high losses or otherwise. Additionally,
consolidation of entities in the insurance industry could impact
DropCar’s ability to obtain or renew policies at competitive
rates, which could have a material adverse impact on
DropCar’s business, as would the incurrence of uninsured
claims or the inability or refusal of DropCar’s insurance
carriers to pay otherwise insured claims. Any material changes in
DropCar’s insurance costs due to changes in frequency of
claims, the severity of claims, the costs of premiums or for any
other reason could have a material adverse effect on
DropCar’s financial position, results of operations, or cash
flows.
DropCar’s success depends on the continued reliability of the
internet infrastructure.
DropCar’s services are
designed primarily to work over the internet, and the success of
our platform is largely dependent on the development and
maintenance of the internet infrastructure, along with
DropCar’s clients’ access to low-cost, high-speed
internet. The future delivery of DropCar’s services will
depend on third-party internet service providers to expand
high-speed internet access, to maintain a reliable network with the
necessary speed, data capacity and security, and to develop
complementary products and services for providing reliable and
timely internet access. Any outages or delays resulting from damage
to the internet infrastructure, including problems caused by
viruses, malware and similar programs, could reduce clients’
access to the internet and DropCar’s services and could
adversely impact DropCar’s business.
System interruptions that impair access to DropCar’s website
or mobile application could substantially harm DropCar’s
business and operating results.
The satisfactory performance,
reliability and availability of DropCar’s website and mobile
application, which enable clients to access DropCar’s
services, are critical to DropCar’s business. Any systems
interruption that prevents clients and visitors from accessing
DropCar’s website and mobile App could result in negative
publicity, damage to DropCar’s reputation and brand and could
cause DropCar’s business and operating results to suffer.
DropCar may experience system interruptions for a variety of
reasons, including network failures, power outages, cyber-attacks,
problems caused by viruses and similar programs, software errors or
an overwhelming number of clients or visitors trying to reach
DropCar’s website during periods of strong demand. Because
DropCar is dependent in part on third parties for the
implementation and maintenance of certain aspects of
DropCar’s systems and because some of the causes of system
interruptions may be outside of DropCar’s control, DropCar
may not be able to remedy such interruptions in a timely manner, or
at all. Any significant disruption to DropCar’s website,
mobile application or internal computer systems could result in a
loss of clients and adversely affect DropCar’s business and
results of operations.
If DropCar is unable to protect confidential client information,
DropCar’s reputation may be harmed, and DropCar may be
exposed to liability and a loss of clients.
DropCar’s
system stores, processes and transmits confidential client
information, including location information and other sensitive
data. DropCar relies on encryption, authentication and other
technologies to keep this information secure. DropCar may not have
adequately assessed the internal and external risks posed to the
security of its systems and may not have implemented adequate
preventative safeguards. In the event that the security of its
system is compromised in the future, DropCar may not take adequate
reactionary measures. Any compromise of information security could
expose DropCar’s confidential client information, damaging
DropCar’s reputation and exposing the company to costly
litigation and liability that could harm its business and operating
results.
Security breaches, loss of data and other disruptions could
compromise sensitive information related to DropCar’s
business, prevents DropCar from accessing critical information or
exposes DropCar to liability, which could adversely affect
DropCar’s business and reputation.
DropCar
utilizes information technology systems and networks to process,
transmit and store electronic information in connection with
DropCar’s business activities. As the use of digital
technologies has increased, cyber incidents, including deliberate
attacks and attempts to gain unauthorized access to computer
systems and networks, have increased in frequency and
sophistication. These threats pose a risk to the security of
DropCar’s systems and networks and the confidentiality,
availability and integrity of DropCar’s data, all of which
are vital to DropCar’s operations and business strategy.
There can be no assurance that DropCar will be successful in
preventing cyber-attacks or successfully mitigating their
effects.
Despite
the implementation of security measures, DropCar’s internal
computer systems and those of DropCar’s contract research
organizations and other contractors and consultants are vulnerable
to damage or disruption from hacking, computer viruses, software
bugs, unauthorized access or disclosure, natural disasters,
terrorism, war, and telecommunication, equipment and electrical
failures. In addition, there can be no assurance that DropCar will
promptly detect any such disruption or security breach, if at all.
Unauthorized access, loss or dissemination could disrupt
DropCar’s operations, including DropCar’s ability to
conduct research and development activities, process and prepare
company financial information, and manage various general and
administrative aspects of DropCar’s business. To the extent
that any such disruption or security breach results in a loss of or
damage to DropCar’s data or applications, or inappropriate
disclosure or theft of confidential, proprietary or personal
information, DropCar could incur liability, suffer reputational
damage or poor financial performance or become the subject of
regulatory actions by state, federal or non-US authorities, any of
which could adversely affect DropCar’s business.
Future legislation or regulations may adversely affect
DropCar’s business and results of
operations.
Although
various jurisdictions and government agencies are considering
implementing legislation in response to the rise of other ride- and
car-sharing enterprises, such as Uber Technologies Inc., currently
no such legislation exists that DropCar believes has jurisdiction
over, or applicability to, DropCar’s operations. DropCar does
not believe it are subject to any material government regulations
or oversight, but regulations impacting parking and traffic
patterns in the areas of DropCar’s operations could impact
the services it provides. DropCar is also subject to various U.S.
federal, state and local laws and regulations, including those
related to environmental, health and safety, financial, tax,
customs and other matters. DropCar cannot predict the substance or
impact of pending or future legislation or regulations, or the
application thereof. The introduction of new laws or regulations or
changes in existing laws or regulations, or the interpretations
thereof, could increase the costs of doing business for DropCar or
its clients or otherwise restrict its actions and adversely affect
its financial condition, results of operations and cash
flows.
Seasonality may cause fluctuations in DropCar’s financial
results.
DropCar generally experiences
some effects of seasonality due to increases in travel during the
summer months and holidays such as Thanksgiving and Christmas.
Accordingly, the use of DropCar’s services and associated
revenue have generally increased at a higher rate during such
periods. DropCar’s revenue also fluctuates due to inclement
weather conditions, such as snow or rain storms. This seasonality
may cause fluctuations in DropCar’s financial
results.
DropCar
depends on key personnel to operate its business, and the loss of
one or more members of the DropCar
management team, or DropCar’s failure to attract, integrate
and retain other highly qualified personnel in the future, could
harm DropCar’s business.
DropCar believes its future
success will depend in large part upon its ability to attract and
retain highly skilled managerial, technical, finance and sales and
marketing personnel. DropCar currently depends on the continued
services and performance of the key members of its management team,
including Spencer Richardson, DropCar’s Co-Founder and Chief
Executive Officer, and David Newman, DropCar’s Co-Founder and
Chief Business Development Officer. The loss of any key personnel
could disrupt DropCar’s operations and have an adverse effect
on DropCar’s ability to grow the business.
Prior to the second quarter in
2018, DropCar has relied on outside consultants and other service
providers for the majority of DropCar’s accounting and
financial support. During 2018, DropCar hired new members to its
management team. In February of 2019, DropCar terminated its Chief
Financial Officer and on the same day engaged a consultant to serve
as its Chief Financial Officer going forward. DropCar competes in
the market for personnel against numerous companies, including
larger, more established competitors who have significantly greater
financial resources and may be in a better financial position to
offer higher compensation packages to attract and retain human
capital. DropCar cannot be certain that it will be successful in
attracting and retaining the skilled personnel necessary to operate
its business effectively in the future.
DropCar may become engaged in legal proceedings that could result
in unforeseen expenses and could occupy a significant amount of
management’s time and attention.
From time to time, DropCar may
become subject to litigation, claims or other proceedings that
could negatively affect its business operations and financial
position. Litigation disputes could cause DropCar to incur
unforeseen expenses, could occupy a significant amount of
management’s time and attention and could negatively affect
DropCar’s business operations and financial position.
DropCar’s business is subject to interruptions, delays and
failures resulting from natural or man-made
disasters.
DropCar’s
services, systems and operations are vulnerable to damage or
interruption from earthquakes, volcanoes, fires, floods, power
losses, telecommunications failures, terrorist attacks, acts of
war, human errors, break-ins and similar events. A significant
natural disaster could have a material adverse impact on
DropCar’s business, operating results and financial
condition. DropCar may not have sufficient protection or recovery
plans in certain circumstances and our insurance coverage may be
insufficient to compensate for losses that may occur. As DropCar
relies heavily on its servers, computer and communications systems
and the internet to conduct its business and provide a high-quality
client experience, such disruptions could negatively impact
DropCar’s ability to run the business, which could have an
adverse effect on DropCar’s operating results.
DropCar has incurred significant increased costs as a result of
operating as a public company, and DropCar’s management is
required to devote substantial time to public company compliance
requirements.
As a public company, DropCar
faces increased legal, accounting, administrative and other costs
and expenses that it did not incur as a private company. The
Sarbanes-Oxley Act of 2002, including the requirements of Section
404, and rules and regulations subsequently implemented by the SEC,
the Public Company Accounting Oversight Board, and The
Nasdaq Capital Market require public
companies to meet certain corporate governance standards. A number
of those requirements require DropCar management to carry out
activities it has not done previously. For example, DropCar has
adopted new internal controls and disclosure controls and
procedures. DropCar’s management and other personnel will
need to devote a substantial amount of time to these requirements.
Moreover, these rules and regulations have increased
DropCar’s legal and financial compliance costs and will make
some activities more time-consuming and costlier. These increased
costs will require DropCar to divert a significant amount of money
that it could otherwise use to expand its business and achieve its
strategic objectives.
Failure to establish and maintain effective internal controls in
accordance with Sections 302 and 404 of the Sarbanes-Oxley Act
could have an adverse effect on DropCar’s business and stock
price.
DropCar is required to comply
with the SEC’s rules implementing Sections 302 and 404 of the
Sarbanes-Oxley Act, which require management to certify financial
and other information in DropCar’s quarterly and annual
reports and provide an annual management report on the
effectiveness of controls over financial reporting. DropCar is
required to disclose changes made in its internal controls and
procedures on a quarterly basis. DropCar is required to make its
annual assessment of its internal controls over financial reporting
pursuant to Section 404 as of December 31, 2018.
To
comply with the requirements of Sections 302 and 404, DropCar has
undertaken or may in the future undertake various actions, such as
implementing new internal controls and procedures and hiring
additional accounting or internal audit staff. Testing and
maintaining internal controls can divert DropCar’s
management’s attention from other matters that are important
to the operation of DropCar’s business. In addition, when
evaluating DropCar’s internal controls over financial
reporting, DropCar may identify material weaknesses that it may not
be able to remediate in time to meet the applicable deadline
imposed upon DropCar for compliance with the requirements of
Sections 302 and 404. If DropCar identifies material weaknesses in
its internal controls over financial reporting or is unable to
comply with the requirements of Sections 302 and 404 in a timely
manner or asserts that its internal controls over financial
reporting are effective, or if it becomes necessary for
DropCar’s independent registered public accounting firm to
express an opinion as to the effectiveness of DropCar’s
internal controls over financial reporting and is unable to do so,
investors may lose confidence in the accuracy and completeness of
DropCar’s financial reports and the market price of
DropCar’s common stock could be negatively affected. In
addition, DropCar could become subject to investigations by
The Nasdaq Capital Market, SEC or other
regulatory authorities, which could require additional financial
and management resources.
A material weakness in DropCar’s internal controls could have
a material adverse effect on DropCar.
Effective internal
controls are necessary for DropCar to provide reasonable assurance
with respect to DropCar’s financial reports and to adequately
mitigate risk of fraud. If DropCar cannot provide reasonable
assurance with respect to its financial reports and adequately
mitigate risk of fraud, DropCar’s reputation and operating
results could be harmed. Internal control over financial reporting
may not prevent or detect misstatements because of its inherent
limitations, including the possibility of human error, the
circumvention or overriding of controls, or fraud. Therefore, even
effective internal controls can provide only reasonable assurance
with respect to the preparation and fair presentation of financial
statements. In addition, projections of any evaluation of
effectiveness of internal control over financial reporting to
future periods are subject to the risk that the control may become
inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.
A material weakness is a
deficiency, or combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of DropCar’s annual
or interim financial statements will not be prevented or detected
on a timely basis. A material weakness in DropCar’s internal
control over financial reporting could adversely impact
DropCar’s ability to provide timely and accurate financial
information. If DropCar is unable to report financial information
timely and accurately or to maintain effective disclosure controls
and procedures, DropCar could be subject to, among other things,
regulatory or enforcement actions by the SEC, any one of which
could adversely affect DropCar’s business
prospects.
DropCar’s Chief Executive
Officer and Chief Financial Officer have concluded that
DropCar’s disclosure controls and procedures are not
effective due to the material weaknesses resulting from a limited
segregation of duties among DropCar’s employees with respect
to DropCar’s control activities and this deficiency is the
result of DropCar’s limited number of employees. DropCar also
identified material weaknesses surrounding the financial closing
process and the recording of debt and equity transactions that
occurred in the year ended December 31, 2018. These deficiencies
may affect DropCar’s management’s ability to determine
if errors or inappropriate actions have taken
place.
Risks
Relating to DropCar’s Financial Position and Need for
Additional Capital
DropCar’s ability to use NOLs may be
limited.
At December 31, 2018, DropCar had
approximately $3.3 million of operating loss carryforwards for
federal and $1.1 million New York state tax purposes that may be
applied against future taxable income. The NOLs will begin to
expire in the year 2035 if not utilized prior to that date. To the
extent available, DropCar intends to use these NOLs to reduce the
corporate income tax liability associated with DropCar’s
operations. The ability to utilize these NOLs may be limited under
Section 382 of the Code, which apply if an ownership change occurs.
To the extent DropCar’s use of NOLs is significantly limited,
DropCar’s income could be subject to corporate income tax
earlier than it would if DropCar were able to use NOLs, which could
have a negative effect on DropCar’s financial
results.
The recently passed comprehensive federal tax reform bill could
adversely affect DropCar’s business and financial
condition.
On
December 22, 2017, President Trump signed into law the “Tax
Cuts and Jobs Act,” or TCJA, which significantly reforms the
Internal Revenue Code of 1986, as amended, or the Code. The TCJA,
among other things, includes changes to U.S. federal tax rates,
imposes significant additional limitations on the deductibility of
interest and NOLs, allows for the expensing of capital
expenditures, and puts into effect the migration from a
“worldwide” system of taxation to a territorial system.
DropCar’s net deferred tax assets and liabilities were
revalued at the newly enacted U.S. corporate rate, and the
estimated impact was recognized in DropCar’s tax expense in
2017. DropCar continues to examine the impact this tax reform
legislation may have on its business. However, the effect of the
TCJA on DropCar’s business, whether adverse or favorable, is
uncertain, and may not become evident for some period of time.
DropCar urges investors to consult with their legal and tax
advisers regarding the implications of the TCJA on an investment in
DropCar’s common stock.
DropCar’s principal stockholders and management own a
significant percentage of DropCar common stock and are able to
exert significant control over matters subject to stockholder
approval.
Based on the beneficial ownership
of DropCar’s common stock as of October 21, 2019,
DropCar’s officers and directors, together with holders of 5%
or more of DropCar’s common stock outstanding and their
respective affiliates, beneficially own approximately 61.8% of
DropCar’s common stock. Accordingly, these stockholders have
significant influence over the outcome of corporate actions
requiring stockholder approval, including the election of
directors, consolidation or sale of all or substantially all of
DropCar’s assets or any other significant corporate
transaction. The interests of these stockholders may not be the
same as or may even conflict with your interests. For example,
these stockholders could delay or prevent a change of control of
the company, even if such a change of control would benefit the
other stockholders, which could deprive such other stockholders of
an opportunity to receive a premium for their common stock as part
of a sale of the company or its assets and might affect the
prevailing market price of DropCar’s common stock. The
significant concentration of stock ownership may adversely affect
the trading price of DropCar’s common stock due to
investors’ perception that conflicts of interest may exist or
arise.
The price of DropCar’s common stock may be volatile and
fluctuate substantially, and you may not be able to resell your
shares at or above the price you paid for them.
The trading price of
DropCar’s common stock is highly volatile and could be
subject to wide fluctuations in response to various factors, some
of which are beyond DropCar’s control, such as reports by
industry analysts, investor perceptions or negative announcements
by other companies involving similar technologies. The stock market
in general and the market for smaller companies, like DropCar in
particular, have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. As
a result of this volatility, DropCar stockholders may not be able
to sell their common stock at or above the price they paid for it.
The following factors, in addition to other factors described in
this “Risk Factors” section of DropCar’s most
recent filings with the SEC, may have a significant impact on the
market price of DropCar’s common stock:
●
issuances of new equity
securities pursuant to a future offering, including issuances of
preferred stock;
●
the success of competitive
products, services or technologies;
●
regulatory or legal developments
in the United States and other countries;
●
adverse
actions taken by regulatory agencies with respect to
DropCar’s
services
it provides;
●
developments or disputes
concerning patent applications, issued patents or other proprietary
rights;
●
the recruitment or departure of
key personnel;
●
actual or anticipated changes in
estimates as to financial results, development timelines or
recommendations by securities analysts;
●
variations in DropCar’s
financial results or those of companies that are perceived to be
similar to DropCar;
●
variations
in the costs of the services DropCar provides;
●
market conditions in the market
segments in which DropCar operates;
●
variations in quarterly and
annual operating results;
●
announcements of new products
and/or services by DropCar or its competitors;
●
the gain or loss of significant
customers;
●
changes in analysts’
earnings estimates;
●
short selling of shares of
DropCar’s common stock;
●
changing the exchange or
quotation system on which shares of DropCar’s common stock
are listed;
●
trading
volume of DropCar’s
common
stock;
●
sales
of DropCar’s
common
stock by DropCar,
DropCar’s
executive
officers and directors or DropCar stockholders
in the future;
●
changes in accounting principles;
and
●
general
economic and market conditions and overall fluctuations in the U.S.
equity markets.
In
addition, broad market and industry factors may negatively affect
the market price of DropCar’s
common
stock, regardless of DropCar’s
actual
operating performance, and factors beyond DropCar’s
control
may cause DropCar’s
stock
price to decline rapidly and unexpectedly.
DropCar may be subject to securities litigation, which is expensive
and could divert management attention.
Companies that have experienced
volatility in the market price of their stock have frequently been
the objects of securities class action litigation. DropCar may be
the target of this type of litigation in the future. Class action
and derivative lawsuits could result in substantial costs to
DropCar and cause a diversion of DropCar’s management’s
attention and resources, which could materially harm
DropCar’s financial condition and results of
operations.
Risks Related to Intellectual Property
DropCar may not be able to adequately protect its intellectual
property rights or may be accused of infringing the intellectual
property rights of third parties.
DropCar’s business depends
substantially on its intellectual property rights, the protection
of which is crucial to DropCar’s business success. To protect
DropCar’s proprietary rights, DropCar relies or may in the
future rely on a combination of trademark law and trade secret
protection, copyright law and patent law. DropCar also utilizes
contractual agreements, including, in certain circumstances,
confidentiality agreements between the company and its employees,
independent contractors and other advisors. These afford only
limited protection, and unauthorized parties may attempt to copy
aspects of DropCar’s website and mobile application features,
software and functionality, or to obtain and use information that
DropCar considers proprietary or confidential, such as the
technology used to operate DropCar’s website, its content and
company trademarks. DropCar may also encounter difficulties in
connection with the acquisition and maintenance of domain names,
and regulations governing domain names may not protect
DropCar’s trademarks and similar proprietary
rights.
In addition, DropCar may become
subject to third-party claims that DropCar infringes the
proprietary rights of others. Such claims, regardless of their
merits, may result in the expenditure of significant financial and
managerial resources, injunctions against DropCar or the payment of
damages. DropCar may need to obtain licenses from third parties who
allege that DropCar has infringed their rights, but such licenses
may not be available on terms acceptable to DropCar or at
all.
