Ayro, Inc. (AYRO) on Q4 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Ayro Inc. fourth quarter and year-end 2021 financial results and corporate update conference call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through June 23, 2022. I would now like to turn the call over to Scott Gordon of Core IR, the company’s investor relations firm. Please go ahead, sir.
Scott Gordon: Thank you Andrew. Good morning and thank you for participating in today’s conference call. Joining me from Ayro’s leadership team are Tom Wittenschlaeger, Chief Executive Officer, and Dave Hollingsworth, interim Chief Financial Officer. During this call, management will be making forward-looking statements including statements that address Ayro’s expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in Ayro’s most recently filed periodic reports on Form 10-K filed with the SEC and Ayro’s press release that accompanies this call, particularly the cautionary statement in it. Today’s conference call includes adjusted EBITDA, a non-GAAP financial measure that Ayro believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in Ayro’s earnings press release, which is available on its website at www.ayro.com under the Investor tab. The content of this call contains time-sensitive information that is accurate only as of today, March 23, 2022. Except as required by law, Ayro disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Tom Wittenschlaeger. Tom, please go ahead.
Tom Wittenschlaeger: Thanks Scott, and good morning to everyone on the call. I’d like to use this call as a way of recapping the past six months since I took the helm as CEO of Ayro and to provide some insight into what we believe 2022 holds for us. In many ways, the fourth quarter was one of transition, corporate and strategic review, and planting the seeds of our future success. Of course, that does not mean we’ve shifted our attention away from sales of our existing product, the Club Car Current, a low speed electric utility truck; in fact, it was entirely the opposite as we recognized record revenue from record unit sales of the Current. Our efforts are also supported by a very strong balance sheet with $69.2 million in cash and no debt. Ayro is a leader in the low speed electric vehicle market, which is a subset of the larger low speed market forecast to grow to $6.3 billion by 2025. After joining Ayro as CEO in September 2021, I evaluated the state of the company and the electric vehicle industry. It became apparent that since there is much less competition in the LSEV segment and no clearly identifiable leader nor large manufacturers poised to enter this segment, the LSEV market was extremely attractive. These are critical factors that led to our decision to emphasize the LSEV market over the high speed EV market which Ayro previously intended to address with the 311X. However, it was also apparent the current supply chain for our vehicles had to be modified to maximize the value we could achieve in the LSEV market. Sourcing our components for the Club Car Current from our supplier in China via trans-Pacific shipment is a slow process that has seen both rising shipping costs as well as west coast port delays that have plagued the global supply chain for months, so we set out to develop a new supply chain with heavy emphasis on North American souring to mitigate the increased expenses, delays and associated risks that have now become all too common in the global economy. In tandem with this new supply chain, we decided in December to develop a next-generation model year 2023 refresh to the Club Car Current, which we now refer to as the Ayro Z. This new model is expected to be ready to launch by year end 2022 and should feature major technology upgrades over the Current. Furthermore, our goal is to develop an Ayro Z model refresh each successive year in order to stay at the innovation forefront in the LSEV market. When fleet buyers, arena managers, colleges and universities or municipalities have a need for a sustainable utility vehicle in any of a multitude of payload configurations, we want them to have every reason to consider only Ayro vehicles. We also want federal and state agencies to consider using the Ayro Z utility vehicle as well, so we intend to have it included on the federal GSA schedule beginning in the fourth quarter of 2022 so it can be purchased by these government agencies. The government is a huge untapped market for Ayro as it has sustainability and green goals in many of its applications and agencies, and those are needs we’d like to fulfill. Our platform would offer an attractive solution in meeting both sustainability objectives as well as Buy American contract requirements of the federal government. We also intend to offer food box architecture and configuration solutions and other enabling technology infrastructure, such as telematics, logistics support and route optimization for the Ayro Z that will be necessary in food delivery applications. There are many urban environments where low speed vehicles are well suited to delivering food from restaurants due to relatively low speed limits. Our existing partnerships with Club Car, Gallery Carts, and Element Fleet Management should help us penetrate this segment and our goal is to have such ancillary product portfolio extensions available to launch at the same time as the launch of the Ayro Z vehicle itself. We have not eliminated the innovation and R&D aspects of our corporate and product development. Instead, we have chosen a more targeted approach to R&D that is laser focused on running at start-up speed to reach the market with a model refresh version of the Current that is anticipated to offer more technology advances and more payload configurations and be available for government direct purchase, all with a more localized and predictable supply chain. We will of course expand upon our strategy and progress on the Ayro Z development over time, but this should hopefully give everyone a good idea on the direction that Ayro is headed and the associated timing for future model year and new product rollouts. Now I’d like to turn to our financial performance in the fourth quarter of 2021. As I previously indicated, we enjoyed record quarterly revenue of $813,000, up 4% year-over-year and 45% sequentially on record unit deliveries. Based on our current projections, we expect revenue to be sequentially and set records once again in each of the first and second quarters of 2022. Due in part to some cost containment measures that began in the fourth quarter, net loss improved sequentially from the third quarter by 35%, even as we began the development of the Ayro Z vehicle in December. Aligning our cost structure with our revenue and strategic focus is of the utmost importance, and we expect continued sequential improvement in EBITDA and net loss in the first quarter of 2022 due to reduced headcount, the elimination of many manufacturing, engineering and marketing consultants previously employed by the company, and eliminating generally unnecessary expenses across the board. Even as we’re cutting many costs and expect to sequentially narrow our net loss in each of the first and second quarters of 2022, we will be accelerating our rate of product development for the Ayro Z and its product extensions. Lastly, at December 31, 2021, we had a cash balance of $69.2 million and we’re doing all we can to carefully manage our expenses to maintain our strong balance sheet. Having said that, we are evaluating other potential strategic M&A opportunities in the EV market that could be accretive beyond our internal strategic efforts. While we are not committed to growing inorganically, it is an avenue that we are certainly exploring. That concludes my opening remarks. The general theme I hope investors take away from this discussion is that there is a lot going on at the company under the hood that may not be evident; however, we fully intend to share our progress with investors as corporate events continue to unfold. Now I’d like to turn the call over to Dave Hollingsworth, who will review our financial results. Dave?
Dave Hollingsworth: Thanks Tom and good morning everyone. Here’s a summary of our fiscal fourth quarter 2021 financial results. Revenue for the fourth quarter ended December 31, 2021 was $813,291, an increase of 4% year-over-year and an increase of 45% sequentially. The increased revenue is attributable to the increased unit sales and deliveries of the Club Car Current. Cost of sales in the fourth quarter was $2.74 million and included approximately $1.78 million in one-time costs required by good accounting practice and associated with our shift to a North American-based manufacturing and supply chain strategy that will not recur in future quarters. Total operating expense in the fourth quarter was approximately $5.2 million as compared to $11.6 million in the third quarter of 2021. The decrease in total operating expense is due to reduced general spending implemented during the corporate and strategic review by senior management that was put in place at the end of September 2021, as well as a decrease in stock-based compensation expense. The company expects an additional sequential reduction in ongoing operating expenses even with one-time severance costs in the first quarter of 2022, driven by an overall repositioning of engineering, design and manufacturing partnerships. Adjusted EBITDA, a non-GAAP measure was a loss of $7.1 million in the fourth quarter, which was sequential improvement of approximately $1.1 million compared to the third quarter 2021 EBITDA. Net loss in the fourth quarter was $7.8 million, which was an improvement from the net loss of $12 million in the third quarter 2021. The improved net loss in the fourth quarter is attributable to the aforementioned decrease in general expenses following management’s strategic review and implementation of cost reduction measures, as well as a decrease in the stock-based compensation from the third quarter to the fourth quarter. Cash at December 31, 2022 was $69.2 million versus $77.1 million at the end of the third quarter 2021. The quarterly cash burn accounts for the cash decline. Total debt was zero at December 31, 2021 as it was at September 30, 2021, and as of December 31, 2020, the company had 36,866,956 common shares outstanding. That concludes my prepared remarks, and I’d like to turn the call back to Tom for his remaining remarks.
Tom Wittenschlaeger: Thank you Dave. As I’ve indicated, we have lofty goals in 2022. Not every team can attempt to pull off a new vehicle design and manufacturing schedule over the course of 12 months; however, that is exactly our objective with the Ayro Z as we expect to be in position to launch it by the end of the year. We believe that we have the necessary automotive and EV experience to make this happen with an aggressive design schedule and a materially reduced development cost, so it’d be a great milestone and a great way to end 2022. Moreover, as I mentioned earlier, we expect sequentially higher revenue in each of the next two quarters and a leaner and more efficient operating structure at the company to protect our strong balance sheet. I’d like to thank all our shareholders for their support and I look forward to sharing additional accomplishments and developments as they unfold. With that said, I’d like to turn the call over to the operator so we can begin the question and answer session. Operator?
Operator: The first question comes from Barry Sine with Spartan Capital Securities. Please go ahead.
Barry Sine: Hey, good morning. A couple questions, if you don’t mind. First of all, I guess the highlight is a very good top line number, very good sales. What’s going on there? Is Club Car doing something different or are they doing promotions? Are these orders that have long been in the pipeline, and you’re also guiding to even better results going forward, so Club Car is your exclusive, I believe still, on the 411, so something good must be going on there.
Tom Wittenschlaeger: Barry, good morning. Good hearing from you. The answer to your question is we continue to work very, very closely with Club Car and we are seeing very good response from the Club Car dealer network. We’re seeing very good response from our partner, Gallery, and of course Element is in play in the larger strategic plays. But we’ve seen excellent sell-through with our partner, Club Car, and obviously with the Ayro X release, we’re seeing fairly good response to the product flowing through the channel, so we certainly expect--as we mentioned in our comments, we expect to see that momentum continue certainly into the first two quarters of this year.
Barry Sine: Okay, and then on expenses, I guess the first area I want to talk about is what’s the current status, are you still making them at Karma or have you moved to Round Rock? What exactly was that $1.78 million inventory charge, and one of the initiatives I know you’ve talked about is getting more units in a shipping container, so where are we on that? Then, is there still more in the pipeline to come in future quarters in terms of moving back towards a positive gross margin?
Tom Wittenschlaeger: Okay, well those are a lot of questions, Barry, but let me take the first one and then turn it over to Dave for an explanation of the $1.78 million, and then I’ll try to circle back at your other questions. First things first - yes, we are building units as we speak at Karma. Karma is doing a very good job of doing so. Our supply chain at this point in time is unchanged. Obviously we’re placing tremendous emphasis through our sustaining engineering efforts on product quality so what we send to Club Car is the very best it can possibly be. Let me ask David to address the $1.78 million question.
Dave Hollingsworth: Yes, thanks Barry. I want to first disclose that these are broken out in our 10-Q that was filed today at 8:30, so you’ll be able to see some more detail into that $1.78 million, breaking it out. The bulk of it was a net present value adjustment due to the freight costs coming in China. They have just been much more massive than we could sustain going into 2022, so as is correct accounting procedures, we wrote down that freight expense of just over $1 million. We also had adjustments to some of our prepaid accounts that needed to be brought to a more consistent accounting for what we actually have in prepaid, and then as well as a Karma reduction due to different vehicles that we’ll be producing here in 2022 from the original contract amount that was disclosed last year. Those are the three components, and like I said, there’s a little bit more information you can see in the 10-K that we’ve disclosed.
Tom Wittenschlaeger: Okay Barry, last but not least, as to your question on expected margin performance and expected sell-through performance, as we mentioned in the prepared comments, we expect to continue to see momentum building in our sell-through. We currently have a fair amount of inventory in hand, onshore or on the water, so fundamentally our focus for now is taking that inventory and preparing it appropriately for sell through, and then conducting sell through obviously in conjunction with Club Car and Gallery and/or Element. As for the margin question, Dave and I haven’t at all completed the task of expense rationalization and cost reduction. We continue down that path, and so it’s reasonable to expect us continue the momentum of cost reduction and focusing our investments very, very clearly on those parts of the market and those parts of the product development activity that carry the greatest value accretion. I hope that gives you a sense of what our priorities are at this point in time.
Barry Sine: That’s very helpful. Just to clarify on that, you break out operating expenses into three different categories and there was a notable decline 4Q versus third quarter. I don’t want to put words in your mouth, but it sounds like you’re not done yet, we could see further sequential decline into the first quarter. The other one, though, that I’m wondering about is you’re doing development work on a brand-new vehicle, the Ayro Z, and so I would think you’d be hard pressed to keep a handle and reduce R&D expenses, especially as we go through the year. Maybe you can give us some color on that, please.
Tom Wittenschlaeger: Yes, happy to give you color on that, Barry. You don’t have to put words in my mouth -we’re not done yet, and as for the Ayro Z development, we have put a team in place that has tremendous experience in vehicle development, in product development, in technology development, and that team has an entirely different approach to rapid model year refresh development which is far more cost effective, it’s far more efficacious, and it’s going to produce a product that is vastly, vastly advanced over the legacy platform. We’re not going to spend more money, we’re going to spend less money in a more focused way, and in our view we’re aiming to have a platform that will set the standard in the low speed electric vehicle market. So no, you should not expect development expenses to go up - exactly the opposite.
Barry Sine: Last question - on the Ayro Z, do you have any thoughts on the selling price and the gross margin you’d want to achieve? Is the Current vehicle priced right, is it too high, and obviously you want to be able to make these things significantly more profitably than what you’re doing today through China.
Tom Wittenschlaeger: That’s a very complex question, Barry, as I’m sure you would know. I’m not going to comment on selling price or margin. At this point in time, we are working to develop a world-class bill of materials all sourced from the North American continent or selectively sourced from North America and overseas. Fundamentally, our intent is to do a model year refresh every year, which is very common and customary in the vehicle space, so we’re going to conduct ourselves like a vehicle company. We expect--obviously we’re not working this hard to not make margins on the new platform, that goes without saying, but fundamentally I can’t comment on that, Barry, because we haven’t even frozen the bomb yet. Until we get to that point in time, we obviously have targets, but targets are targets. It would be awfully arrogant to think that every target as we have set it would be one we would achieve. We’re certainly going to do very, very well in our view, but I’m going to reserve the right to answer that question on a future call.
Barry Sine: I’ll hold you to that, thank you very much for taking my questions.
Tom Wittenschlaeger: Our pleasure, Barry. Have a great day.
Operator: Again if you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Tom Wittenschlaeger for any closing remarks.
Tom Wittenschlaeger: I’d like to conclude by thanking all of you for participating on today’s call and for your interest in Ayro. We look forward to sharing our progress on our next quarterly conference call when we report our first quarter results in May. We thank each of you. Have a great day.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
