AYRO: Positive operating news clashes with market realities.
NASDAQ:AYRO
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Business Update
There have been several recent events at AYRO (NASDAQ:AYRO) that are likely to impact both the near-term outlook for the company and the share price.
1-for-8 Reverse Split: On September 14, the company’s board of directors approved a resolution to effect a reverse split of the company’s share at a ratio of 1-to-8 and it was filed to become effective at 4:00 pm on September 15th. While we were aware of the reverse split probability the exact ratio of the exchange was unknown until last week (previously, the company had indicated that the ratio could be between 1-to-2 and 1-to-10). The reverse will have the desired effect of helping the company’s shares regain compliance with the NASDAQ $1.00 minimum bid requirement. While a reverse split does not implicitly indicate anything negative about a business, it is clear that stocks instituting reverse splits have typically seen the market react negatively to the news. In August, for example, there were 38 reverse splits and 92% of those companies’ shares were trading lower a month later. While this isn’t a scientific study it does seem to reflect the market realities in 2023 where most reverse splits continue to underperform the broader market. We would also note that some EV-related companies, Mullen Automotive (NASDAQ:MULN), Faraday Future Intelligent Electric (NASDAQ:FFIE), and Ideanomics, Inc. (NASDAQ:IDEX) all had reverse splits in August, and the shares of all three have continued to underperform. We continue to believe that AYRO is in a significantly better position than most of these other companies as it is launching a completely revamped product into a market ripe for disruption but the realities of the market when it comes to companies enacting reverse splits cannot be ignored.
As a result of this split the new outstanding share count will be roughly 4.7 million shares before accounting for conversion shares from the convertible preferred stock issued in August (we estimate that the fully diluted share count will be 7.45 million with the conversion shares).
Convertible Preferred Stock Financing: As we noted in our last report on AYRO, On August 8, 2023, the company announced a private placement of 22,000 shares of convertible preferred stock convertible into 22,000,000 shares of common stock (now 2.75 million shares after the reverse split) along with warrants to buy another 22,000,000 shares (now 2.75 million shares) with an exercise price of $1.00 ($8.00 after the split). The terms of this transaction are complex and we believe the terms were very favorable to the new investors which may create a further overhang for the stock.
As we noted in August, this appears to be fairly expensive financing (given the warrants and interest to be paid) but the conversion and warrant exercise prices are well above the current trading price (now $8/share after the reverse split). We estimate that the company has roughly $48-$50 million in cash and equivalents on the balance sheet after this financing or between $6.45/share and $6.70/share after the reverse split. With the stock trading significantly below these levels, we feel comfortable that the risk/reward ratio remains favorable.
In early September, the company also filed an S-3 with the SEC to register roughly 7.5 million conversion shares (938 thousand after the reverse split) that may be sold by investors in the August convertible preferred financing. While these shares are unlikely to be sold at the current prices (again, the conversion price of $8.00 per share is well above the current market price). While this was mostly just a formality associated with the August financing, the registration of roughly 20% of the current float could be another cap on the share price in the near term.
AYRO is an interesting study of the tug-of-war between fundamentals and stock-related price action. The shares are encountering some technical challenges from the new financing and the reverse split while the operations of the company are just about to enter an exciting new phase.
In mid-August, Ayro announced that their first channel partners had placed orders for the Vanish with shipments to commence in September. This is a major milestone for the company and we think that putting the Vanish in front of distributors and end-customers will be a catalyst for significant additional interest in the Vanish.
The company also announced in September that it had entered Low Rate Initial Production (“LRIP”). This initial manufacturing period during which we expect 50-60 vehicles to be produced will be used to test all of the company’s systems (tools, assembly, etc.) to minimize quality issues that could emerge when full-scale production begins. Entering LRIP in September fits with our original expectations and is a very good sign that the company can move to full production by Q1 2024.
In summary, there are some very good signs coming out of Ayro on the operational side of the business and we think investors should be encouraged by the milestones achieved to date. However, we recognize that the capital markets have not been kind to stocks that undergo reverse splits as those companies usually have limited access to capital and poor outlooks (neither of which is the case with Ayro). We think opportunistic investors may be able to capitalize on the lack of understanding around the Ayro story to establish long-term positions if the stock is volatile in the near term.
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