Fabric.AI, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following management’s discussion and analysis should be read in conjunction with our historical consolidated financial statements and the related notes thereto. This management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our filings with the Securities and Exchange Commission (“SEC”) that could cause actual results or events to differ from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. See “Cautionary Note Regarding Forward-Looking Statements.”

References in this management’s discussion and analysis to “we,” “us,” “our,” “the Company,” “our Company,” or “AYRO” refer to AYRO, Inc. and its subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terms such as “anticipates,” “assumes,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “guides,” “intends,” “is confident that,” “may,” “plans,” “seeks,” “projects,” “targets,” “would” and “will” or the negative of such terms or other variations on such terms or comparable terminology. Such forward-looking statements include, but are not limited to, future financial and operating results, the company’s plans, objectives, expectations and intentions, statements concerning the strategic review of our product development strategy, the development and launch of the AYRO Vanish (the “Vanish”) and other statements that are not historical facts. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, and results of operations. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from our historical experience and our present expectations, or projections described under the sections in this Form 10-Q and our other reports filed with the SEC titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

A summary of the principal risk factors that make investing in our securities risky and might cause our actual results to differ materially from those projected in these forward-looking statements is set forth below. If any of the following risks occur, our business, financial condition, results of operations, cash flows, cash available for distribution, and ability to service our debt obligations and prospects could be materially and adversely affected.

• we may be acquired by a third party;
• we have a history of losses and have never been profitable, and we expect to incur additional losses in the future and may never be profitable;
• our failure to meet the continued listing requirements of the Nasdaq Capital Market (“Nasdaq”) could result in a delisting of our common stock;
• holders of our Series H-7 Convertible Preferred Stock with a stated value of $1,000 per share (“Series H-7 Preferred Stock”) are entitled to certain payments that may be paid in cash or in shares of common stock depending on the circumstances, if we make these payments in cash, we may be required to expend a substantial portion of our cash resources, and if we make these payments in common stock, it may result in substantial dilution to the holders of our common stock;
• the certificate of designations for the Series H-7 Preferred Stock (the “Certificate of Designations”) and the warrants issued concurrently therewith contain anti-dilution provisions and other adjustment provisions that have resulted in the reduction of the conversion price of the Series H-7 Preferred Stock and the exercise price of such warrants and may do so again in the future. These features may increase the number of shares of common stock issuable upon conversion of the Series H-7 Preferred Stock or upon the exercise of the warrants;

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• under the Purchase Agreement (defined herein) we are subject to certain restrictive covenants that may make it difficult to procure additional financing;
• a significant portion of our revenues has historically been derived from Club Car pursuant to the MPA (as defined herein). Following our termination of the MPA, our sales could decrease significantly, and we will need to identify new strategic channel partners to support the sales of our vehicles;
• we rely on a single third-party supplier and manufacturer located in Canada for certain sub-assembly and assembly parts for the Vanish and any disruption in the operations of this third-party supplier could adversely affect our business and results of operations;
• if we lose our exclusive license to manufacture the AYRO 411x model in North America, Cenntro could sell identical or similar products through other companies or directly to our customers;
• we may be unable to replace lost manufacturing capacity on a timely and cost-effective basis, which could adversely impact our operations and ability to meet delivery timelines;
• we may experience delays in the development and introduction of new products;
• the market for our products is developing and may not develop as expected;
• we are currently evaluating our product development strategy, which may result in significant changes and have a material impact on our business, results of operations and financial condition;
• our business is subject to general economic and market conditions, including trade wars and tariffs;
• if disruptions in our transportation network continue to occur or our shipping costs continue to increase, we may be unable to sell or timely deliver our products, and our gross margin could decrease;
• our limited operating history makes evaluating our business and future prospects difficult and may increase the risk of any investment in our securities;
• if we are unable to effectively implement or manage our growth strategy, our operating results and financial condition could be materially and adversely affected;
• developments in alternative technologies or improvements in the internal combustion engine may have a materially adverse effect on the demand for our electric vehicles;
• the markets in which we operate are highly competitive, and we may not be successful in competing in these industries;
• our future growth depends on customers’ willingness to adopt electric vehicles;
• we may experience lower-than-anticipated market acceptance of our current models and the vehicles in development;
• if we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed, and our reputation may be damaged;
• if we fail to include key feature sets relative to the target markets for our electric vehicles, our business will be harmed;
• unanticipated changes in industry standards could render our vehicles incompatible with such standards and adversely affect our business;
• our future success depends on our 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;
• unforeseen or recurring operational problems at our facilities, or a catastrophic loss of our manufacturing facilities, may cause significant lost or delayed production and adversely affect our results of operations;

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• we may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims;
• if our vehicles fail to perform as expected due to defects, our ability to develop, market and sell our electric vehicles could be seriously harmed;
• we depend on key personnel to operate our business, and the loss of one or more members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business;
• transitioning from an offshoring to an onshoring business model carries risk;
• we currently have limited electric vehicles marketing and sales experience, and if we are unable to establish sales and marketing capabilities or enter into dealer agreements to market and sell our vehicles, we may be unable to generate any revenue;
• failure to maintain the strength and value of our brand could have a material adverse effect on our business, financial condition, and results of operations;
• the range of our electric vehicles on a single-charge declines over time, which may negatively influence potential customers’ decisions whether to purchase our vehicles;
• an unexpected change in failure rates of our products could have a material adverse impact on our business, financial condition, and operating results;
• increases in costs, disruption of supply or shortage of raw materials, in particular lithium-ion battery cells, chipsets and displays, could harm our business;
• customer financing and insuring our vehicles may prove difficult because retail lenders are unfamiliar with our vehicles and our vehicles have a limited loss history determining residual values within the insurance industry;
• our electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been observed to catch fire or vent smoke and flames;
• our business may be adversely affected by labor and union activities;
• we rely on our dealers for the service of our vehicles and have limited experience servicing our vehicles, and if we are unable to address the service requirements of our future customers, our business will be materially and adversely affected;
• if we fail to deliver vehicles and accessories to market as scheduled, our business will be harmed;
• failure in our information technology and storage systems could significantly disrupt the operation of our business;
• we may be required to raise additional capital to fund our operations, and such capital raising may be costly or difficult to obtain, and could dilute our stockholders’ ownership interests;
• our long-term capital requirements are subject to numerous risks;
• we may invest in or acquire other businesses, and our business may suffer if we are unable to successfully integrate acquired businesses into our company or otherwise manage the growth associated with multiple acquisitions;
• increased safety, emissions, fuel economy or other regulations may result in higher costs, cash expenditures, and/or sales restrictions;
• our vehicles are subject to multi-jurisdictional motor vehicle standards;
• we may fail to comply with evolving environmental and safety laws and regulations;
• changes in regulations could render our vehicles incompatible with federal, state, or local regulations, or use cases;
• unusual or significant litigation, governmental investigations or adverse publicity arising out of alleged defects in our vehicles, or otherwise, may derail our business;
• we are required to comply with state-specific regulations regarding the sale of vehicles by a manufacturer;
• we have identified a material weakness in our internal control over financial reporting, and if we are unable to remediate the material weakness, or if we experience additional material weaknesses in the future, our business may be harmed;
• if we are unable to adequately protect our proprietary designs and intellectual property rights, our competitive position could be harmed;
• we may need to obtain rights to intellectual property from third parties in the future, and if we fail to obtain licenses or fail to comply with our obligations in existing agreements under which we have licensed intellectual property and other rights from third parties, we could lose our ability to manufacture our vehicles;
• many of our proprietary designs are in digital form, and a breach of our computer systems could result in these designs being stolen;
• our proprietary designs are susceptible to reverse engineering by our competitors;
• if we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us;
• legal proceedings or third-party claims of intellectual property infringement and other challenges may require us to spend substantial time and money and could harm our business;
• we are generally obligated to indemnify our sales channel partners, customers, suppliers and contractors for certain expenses and liabilities resulting from intellectual property infringement claims regarding our products, which could force us to incur substantial costs;
• we are subject to exposure from changes in the exchange rates of local currencies; and
• we are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.

For a more detailed discussion of these and other factors that may affect our business and that could cause our actual results to differ materially from those projected in these forward-looking statements, see the risk factors and uncertainties set forth in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K as filed with the SEC on April 1, 2024, as amended on April 26, 2024 (the “Form 10-K”). Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise, except as required by law.

Overview

We design and manufacture compact, sustainable electric vehicles for closed campus mobility, low speed urban and community transport, local on-demand and last mile delivery and government use. Our four-wheeled purpose-built electric vehicles are geared toward commercial customers, including universities, business and medical campuses, last mile delivery services and food service providers.

Nasdaq Deficiency

On July 18, 2024, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, based upon the closing bid price of the Company’s common stock for the 30 consecutive business days between June 3, 2024, to July 17, 2024, the Company did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). The letter also indicated that the Company will be provided with a compliance period of 180 calendar days, or until January 14, 2025, in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).

There is no assurance that we will maintain compliance with such minimum listing requirements. If Nasdaq delists our common stock from trading on its exchange for failure to meet the listing standards, an investor would likely find it significantly more difficult to dispose of or obtain our shares, and our ability raise future capital through the sale of our shares could be severely limited. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.

Products

Our 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 services, cargo services, and personal/group transport in a quiet, zero emissions vehicle with a lower total cost of ownership.

Manufacturing Agreement with Linamar

On July 28, 2022, we partnered with Linamar Corporation (“Linamar”), a Canadian manufacturer, in a manufacturing agreement (the “Linamar MLA”) to provide certain sub assembly and assembly parts, including the cabin frame and skate for the Vanish (collectively, the “Products”). During the term of the Linamar MLA, Linamar has the exclusive right to supply the Products to the Company, subject to certain exceptions. The Linamar MLA has an initial term of three years and will automatically renew for successive two-year terms unless either party has given at least 12 months’ written notice of nonrenewal. On June 21, 2024, the Company notified Linamar of its intention not to renew the Linamar MLA. As a result, the Linamar MLA will terminate in accordance with its terms on July 28, 2025.

Supply Agreement

During 2020, we entered into a supply agreement with Gallery Carts (“Gallery”), a leading provider of food and beverage kiosks, carts, and mobile storefront solutions. Joint development efforts have led to the launch of the parties’ first all-electric configurable mobile hospitality vehicle for “on-the-go” venues across the United States. This innovative solution permits food, beverage, and merchandising operators to bring goods directly to consumers.

On November 2, 2023, we entered into a supply agreement with Sirris Inc., (“Sirris”) a provider in motor vehicle parts for innovative vehicle types. Sirris has agreed to supply rear and front shocks to support the manufacturing of our electric vehicle fleet. Sirris is committed to meeting our upside demand for these products in the event production increases.

On December 21, 2023, we entered into a supply agreement with Athena Manufacturing, LP, a provider of customizable sophisticated metal products. As part of the agreement, we are able to submit devices, component, component assembly, material part, or piece that is custom to AYRO. This is a non-exclusive agreement in which we are able to engage other suppliers for these products.

Factors Affecting Results of Operations

Internal Restructuring

On January 31, 2024, the Company began implementing an internal restructuring to achieve greater efficiency in pursuit of its strategic goals. As part of the Company’s internal restructuring, among other things, the Company eliminated a substantial number of positions at the Company, which may impact its financial position and results of operations, as the Company re-evaluates its sales, marketing, and manufacturing functions. In connection with the restructuring, the Company began working closely with consultants to complete a thorough review of its new 411 fleet vehicle model year 2023 refresh, the Vanish (the “Vanish”), to achieve the Company’s objective of lowering the bill of materials (“BOM”) and overall manufacturing expenses, which in turn will reduce the Manufacturer’s Suggested Retail Price (“MSRP”) of the Vanish.

As part of this effort, in August 2024, Gilbert Villarreal was appointed as President of the Company’s subsidiary, Ayro Operating Company, Inc., and is expected to lead the review of the Vanish, including working with the Company’s vendors and partners in connection with the Vanish.

Inventory Obsolescence

During the three and nine months ended September 30, 2024, $86,840 and $1,709,449 impairment of inventory adjustment was recorded in cost of goods sold, related to the Vanish product. Included in the impairment of inventory adjustment during the three and nine months ended September 30, 2024, $0 and $476,340, respectively, related to physical inventory stock adjustments. No such adjustments were recognized during the three and nine months ended September 30, 2023.

Components of Results of Operations

Revenue

We derive revenue from the sale of our four-wheeled electric vehicles, and, to a lesser extent, shipping, parts, and service fees. In the past we have also derived rental revenue from vehicle revenue sharing agreements with tourist destination fleet operators, and, to a lesser extent, shipping, parts, and service fees. Provided that all other revenue recognition criteria have been met, we typically recognize revenue upon shipment, as title and risk of loss are transferred to customers and channel partners at that time. Products are typically shipped to dealers, directly to end customers, or in some cases to our international distributors. These international distributors assist with import regulations, currency conversions and local language. Our vehicle product sales revenues vary from period to period based on, among other things, the customer orders received and our ability to produce and deliver the ordered products. Customers often specify requested delivery dates that coincide with their need for our vehicles.

Because these customers may use our products in connection with a variety of projects of different sizes and durations, a customer’s orders for one reporting period generally do not indicate a trend for future orders by that customer. The Company continues to work on the engineering of the Vanish, while the Company evaluates the commercialization of the product during the internal restructuring.

Cost of Goods Sold

Cost of goods sold primarily consists of costs of materials and personnel costs associated with manufacturing operations, and an accrual for post-sale warranty claims. Personnel costs consist of wages and associated taxes and benefits. The cost of goods sold also includes freight and changes to our warranty reserves. Allocated overhead costs consist of certain facilities and utility costs. We expect the cost of revenue to increase in absolute dollars as product revenue increases.

During the three and nine months ended September 30, 2024, $86,840 and $1,709,449 of impairment of inventory adjustment was recorded in cost of goods sold, related to the Vanish product. Included in the impairment of inventory adjustment during the three and nine months ended September 30, 2024, $0 and $476,340, respectively, related to physical inventory stock adjustments. No such adjustments were recognized during the three and nine months ended September 30, 2023.

Operating Expenses

Our operating expenses consist of general and administrative, sales and marketing and research and development expenses. Salaries and personnel-related costs, benefits, and stock-based compensation expense are the most significant components of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities and utility costs.

Research and Development Expense

Research and development expense consists primarily of employee compensation and related expenses, prototype expenses, depreciation associated with assets acquired for research and development, amortization of product development costs, product strategic advisory fees, third-party engineering and contractor support costs and allocated overhead. We expect our research and development expenses to increase in absolute dollars as we continue to invest in new and existing products.

Sales and Marketing Expense

Sales and marketing expenses consist primarily of employee compensation and related expenses, sales commissions, marketing programs, travel and entertainment expenses and allocated overhead. Marketing programs consist of advertising, trade shows, events, corporate communications, and brand-building activities. We expect sales and marketing expenses to increase in absolute dollars as we expand our sales force, expand our product lines, increase marketing resources, and further develop potential sales channels.

General and Administrative Expense

General and administrative expenses consist primarily of employee compensation and related expenses for administrative functions including finance, legal, human resources, and fees for third-party professional services, and allocated overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to invest in growing our business.

Other (Expense) Income

Other (expense) income consists of income received or expenses incurred for activities outside of our core business. Other (expense) income consists primarily of interest expense, unrealized gain/loss on marketable securities, the changes in fair value of the warrant and the derivative liability.

Provision for Income Taxes

Provision for income taxes consists of estimated income taxes due to the United States government and to the state tax authorities in jurisdictions in which we conduct business. In the case of a tax deferred asset, we reserve the entire value for future periods.

Results of Operations

Three months ended September 30, 2024, compared to three months ended September 30, 2023

The following table sets forth our results of operations for each of the periods set forth below:

Revenue

Revenue was $0.01 million for the three months ended September 30, 2024, as compared to $0.09 million for the same period in 2023, a decrease of 94% or $0.08 million. The decrease in revenue was primarily due to a reduction of $0.07 million in product sales and $0.01 million decrease in shipping revenue.

Cost of goods sold and gross loss

Cost of goods increased by $0.05 million, or 23% for the three months ended September 30, 2024, as compared to the same period in 2023. The increase in cost of goods sold was mainly due to an increase of $0.09 million in inventory adjustments and allowances related to the impairment of 411x vehicles, and overhead allocations to better reflect current inventory, offset by a decrease of $0.09 million in materials due to decrease in sales.

Research and development expense

Research and development (“R&D”) expense was $0.01 million for the three months ended September 30, 2024, as compared to $1.33 million for the same period in 2023, a decrease of $1.32 million, or 99%. The Company had a decrease of $0.56 million and $0.71 million in R&D design costs, and salaries and related personnel costs, respectively. The decrease was primarily due to the Company being substantially complete with the R&D on the Vanish at the end of 2023, offset by the re-engineering work and design changes in the current year associated with the internal restructuring.

Sales and marketing expense

Sales and marketing expense was $0.22 million for the three months ended September 30, 2024, as compared to $0.39 million for the same period in 2023, a decrease of $0.17 million, or 45%. The Company had a decrease of $0.26 million in salaries and related expenses primarily due to decreased headcount associated with the internal restructuring.

General and administrative expenses

The majority of our operating losses from continuing operations resulted from general and administrative expenses. General and administrative expenses consist primarily of costs associated with our overall operations and with being a public company. These costs include personnel, legal and financial professional services, insurance, investor relations, and compliance related fees. General and administrative expense was $1.41 million for the three months ended September 30, 2024, compared to $4.37 million for the same period in 2023, a decrease of $2.96 million, or 68%. Salaries and related expenses decreased by $1.0 million, office expenses decreased by $0.26 million, and consultants services decreased by $0.18 million, primarily due to the decrease in headcount and expenses associated with the internal restructuring. Cost and associated expenses related to the issuance of Series H-7 Preferred Stock decreased by $1.24 million for the three months ended September 30, 2024 compared to the same period in 2023.

Other income and expense

We recorded a $8.83 million increase of net other income from a $0.05 million increase in interest income on cash accounts, an increase in realized gains of $0.47 million on marketable securities, offset by a decrease of $0.64 million in the unrealized gain on marketable securities, and an increase in other (income) expense of $0.47 million mainly due to settlements with vendors.

For the three months ended September 30, 2024 and 2023, the Company recognized a gain of $2.41 million and $3.22 million, respectively, for the change in fair value - derivative liability, a decrease of $0.81 million mainly due to the decrease in the Company’s stock price. The gain for the change in fair value – derivative liability was due to the decrease in the fair value of the derivative liability associated with the Series H-7 Preferred Shares that were issued in 2023.

The Company recognized a gain of $0.13 million and a loss of $10.10 million for the three months ended September 30, 2024 and 2023, respectively, for the change in fair value - warrant liability, an increase of $10.23 million primarily due to the decrease in stock price and the increase in the risk-free rate.

Nine months ended September 30, 2024, compared to nine months ended September 30, 2023

The following table sets forth our results of operations for each of the periods set forth below:

Revenue

Revenue was $0.06 million for the nine months ended September 30, 2024, as compared to $0.34 million for the same period in 2023, a decrease of 81%, or $0.28 million. The decrease in revenue was primarily due to the reduction in product sales of $0.28 million.

Cost of goods sold and gross loss

Cost of goods increased by $1.76 million, or 225% for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily due to an increase of $1.71 million in inventory adjustments to more accurately reflect current inventory, and an increase in freight charges of $0.30 million bringing inventory materials into the Company’s warehouse from outside vendors, offset by a decrease in materials of $0.25 million due to a decrease in sales.

Research and development expense

Research and development (“R&D”) expense was $1.40 million for the nine months ended September 30, 2024, as compared to $5.87 million for the same period in 2023, a decrease of $4.47 million, or 76%. The Company had a decrease of $2.53 million and $1.15 million in R&D design costs, and salaries and related personnel costs, respectively. The decrease was primarily due to the Company being substantially complete with the R&D on the Vanish at the end of 2023, offset by the re-engineering work and design changes in the current year associated with the internal restructuring.

Sales and marketing expense

Sales and marketing expense was $0.77 million for the nine months ended September 30, 2024, as compared to $1.53 million for the same period in 2023, a decrease of $0.76 million, or 50%. Salaries and related expenses decreased by $0.58 million due to the reduction of our sales and marketing resources.

General and administrative expenses

The majority of our operating losses from continuing operations resulted from general and administrative expenses. General and administrative expenses consist primarily of costs associated with our overall operations and with being a public company. These costs include personnel, legal and financial professional services, insurance, investor relations, and compliance related fees. General and administrative expense was $6.45 million for the nine months ended September 30, 2024, compared to $10.46 million for the same period in 2023, a decrease of $4.01 million, or 38%. Salaries and related expenses decreased by $2.6 million, with office expenses decreased by $0.50 million, primarily due to decreased headcount and expenses associated with the internal restructuring. Cost and associated expenses related to the issuance of Series H-7 Preferred Stock decreased by $1.21 million for the nine months ended September 30, 2024, compared to the same period in 2023.

Other income and expense

We recorded a $20.69 million increase of net other income from a $0.01 million increase in interest income on cash accounts, an increase in realized gains of $0.87 million on marketable securities, offset by a decrease of $0.58 million in the unrealized gain on marketable securities, and an increase in other income (expense) of $0.67 million mainly due to settlements with vendors.

For the nine months ended September 30, 2024 and 2023, the Company recognized a gain of $5.04 million and $3.22 million, respectively, for the change in fair value - derivative liability, an increase of $1.82 million mainly due to the decrease in the Company’s stock price. The gain for the change in fair value – derivative liability was due to the decrease in the fair value of the derivative liability associated with the Series H-7 Preferred Shares that were issued in 2023.

The Company recognized a gain of $9.14 million and a loss of $10.10 million for the nine months ended September 30, 2024 and 2023, respectively, for the change in fair value - warrant liability, an increase of $19.24 million primarily due to the decrease in stock price and the increase in the risk-free rate.

Liquidity and Capital Resources

As of September 30, 2024, we had $2.73 million in cash cand cash equivalents, $10.02 million in restricted cash, $16.13 million in marketable securities and working capital of $28.28 million. As of December 31, 2023, we had $33.44 million in cash and cash equivalents and working capital of $44.67 million, including $10 million in restricted cash. The decrease in cash and cash equivalents and working capital was primarily a result of our operating loss and the Company’s internal restructuring. Our sources of cash since inception have been predominately from the sale of equity and debt.

Our business is capital-intensive, and future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the results of our strategic review, the expansion of our sales and marketing teams, the timing of new product introductions and the continuing market acceptance of our products and services. We are working to control expenses and deploy our capital in the most efficient manner.

We are evaluating other options for the strategic deployment of capital beyond our ongoing strategic initiatives, including potentially entering other segments of the electric vehicle market. We anticipate being opportunistic with our capital, and we intend to explore potential partnerships and acquisitions that could be synergistic with our competitive stance in the market.

We are subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals and products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital, and competition from larger companies, other technology companies and other technologies. Based on the foregoing, management believes that the existing cash and cash equivalents and marketable securities at September 30, 2024 will be sufficient to fund operations for at least the next twelve months following the date of this report.

Summary of Cash Flows

The following table summarizes our cash flows:

Operating Activities

During the nine months ended September 30, 2024, we used $10.33 million in cash in operating activities, a decrease in use of $10.97 million compared to the cash used in operating activities of $21.30 million during the same period in 2023. The decrease in cash used in operating activities was primarily a result of the decrease in our operating loss as the Company proceeds with the internal restructuring.

Our ability to generate cash from operations in future periods will depend in large part on profitability, the rate and timing of collections of our accounts receivable, inventory turnovers and our ability to manage other areas of working capital.

Investing Activities

During the nine months ended September 30, 2024, we used cash of $15.25 million from investing activities as compared to $26.14 million of cash used in investing activities during 2023, a decrease of $10.89 million. We used $15.08 million to invest in marketable securities during the nine months ended September 30, 2024 as compared to $24.03 million during the nine months ended September 30, 2023, a decrease of $8.95 million and purchased $0.17 million in property plant and equipment during the nine months ended September 30, 2024 as compared to $2.08 million during the nine months ended September 30, 2023, a decrease of $1.91 million.

Financing Activities

During the nine months ended September 30, 2024, we used cash of $5.10 million from financing activities as compared to $21.63 million of cash provided in financing activities during 2023, a decrease of $26.73 million. The decrease in cash used was due to cash redemptions of the Series H-7 preferred stock of $5.10 million, and no proceeds from private placement of preferred stock, as compared to $21.63 million of proceeds from the private placement of preferred stock and no cash used in redemptions for the nine months ended September 30, 2023.

Known Trends, Events, and Uncertainties

Currently, the Company is experiencing supply chain shortages, including with respect to lithium-ion battery cells, integrated circuits, vehicle control chips, and displays. Certain production-ready components may be delayed in shipment to Company facilities, which has and may continue to cause delays in validation and testing for these components, which would in turn create a delay in the availability of saleable vehicles. Additionally, the emergence and effects of public health crises, such as pandemics and epidemics and the consequences of the ongoing war between Russia and Ukraine and between Israel and various factors in the Middle East, including related sanctions and countermeasures, are difficult to predict, and could adversely impact geopolitical and macroeconomic conditions, the global economy, and contribute to increased market volatility, which may in turn adversely affect our business and operations.

Other than as discussed above and elsewhere in this report, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

Critical Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our unaudited condensed consolidated financial statements are prepared. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

Our critical accounting estimates have not changed materially from those previously reported in our Form 10-K.

Under the supervision and with the participation of management, including our principal executive and principal financial officers, we evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of September 30, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were ineffective due to the material weakness in internal control over financial reporting discussed below.

In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2023, management identified a material weakness. In the Company’s assessment the material weakness was related to the Company’s lack of a sufficient number of accounting personnel with the appropriate level of technical knowledge, experience and training in GAAP and SEC reporting requirements and in addition, due to limited resources and headcount, we did not have multiple people in the accounting function for full segregation of duties.

Plan for Remediation of Material Weakness

We have engaged a third party to conduct a full assessment of our controls and procedures.

Changes in Internal Control over Financial Reporting

Except as disclosed below, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Resignation of David E. Hollingsworth

On March 1, 2024, David E. Hollingsworth, who served as Chief Financial Officer of the Company, tendered his resignation from his roles as an officer and employee of the Company, effective as of March 1, 2024. Mr. Hollingsworth’s resignation from the Company was not in connection with any disagreement between Mr. Hollingsworth and the Company, its management, the Board, or any committee of the Board on any matter relating to the Company’s operations, policies or practices, or any other matter.

The Appointment of Joseph Ramelli

On August 21, 2024, the Company appointed Joseph Ramelli to the position of Chief Financial Officer of the Company.

Except as set forth below, there have been no material changes to the risk factors as identified in our Form 10-K.

The following description of risk factors includes any material changes to risk factors associated with our business, financial condition and results of operations previously disclosed in “Item 1A. Risk Factors” of the Form 10-K. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition, and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results, and stock price.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-Q. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock.

Our common stock is listed on Nasdaq. We must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price of $1.00 per share or risk delisting, which would have a material adverse effect on our business. A delisting of our common stock from The Nasdaq Capital Market could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities.

On July 18, 2024, the Company received a letter from the Listing Qualifications Department of the Nasdaq Stock Market indicating that, based upon the closing bid price of the Company’s common stock for the 30 consecutive business days between June 3, 2024, to July 17, 2024, the Company did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). The letter also indicated that the Company will be provided with a compliance period of 180 calendar days, or until January 14, 2025, in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).

There is no assurance that we will maintain compliance with such minimum listing requirements. If Nasdaq delists our common stock from trading on its exchange for failure to meet the listing standards, an investor would likely find it significantly more difficult to dispose of or obtain our shares, and our ability raise future capital through the sale of our shares could be severely limited. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities.