AYRO: Two steps forward, one step back. Complex financing throws a wrench in our thesis.
NASDAQ:AYRO
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• AYRO, Inc., (NASDAQ:AYRO) has made impressive operational changes over the past 18 months and is now delivering the first of its premium, low-speed electric vehicle, the Vanish, with full production beginning in 2024.
• Additional details related to a $22 million preferred stock offering in August were provided in the company’s delayed 10-Q filing and raises the prospect of significant future dilution.
• AYRO’s business looks brighter as its products come to market but the stock is likely to face substantial headwinds based on the potential dilution tied to the preferred stock offering.
Business Update
AYRO, Inc. reported third quarter 2023 results after it filed a delayed 10-Q. We believe the delay was related to accounting determinations for the complex convertible preferred stock issuance previously announced in August.
AYRO remains a challenging story for investors to evaluate as significantly improving operations and a completely redesigned product is met with a capital structure that continues to grow more complex and potentially less favorable for existing common shareholders.
As we have discussed previously, the company was expected to have virtually no sales in Q3 2023 as it only recently commenced deliveries of its first production models of the Vanish. The company was able to deliver a few units before the end of the quarter and recorded $80,475 in product sales for the quarter. The company continued to invest in inventory (up another $1.3 million in the quarter to $4.25 million) which we believe is a result of the company’s efforts to address supply issues ahead of a shift to full production in 2024.
The company remains in its Low Rate Initial Production as it continues to produce vehicles to deliver to distributors, partners, and key customers. These initial vehicles placed with distributors and customer test drive events will likely be a critical way for decision-makers to see the Vanish in person.
AYRO reported cash and equivalents, marketable securities, and restricted cash of $47.9 million as of 9/30/23. The company’s quarterly burn rate has remained fairly stable and we believe the company has sufficient liquidity to last through the end of 2024.
The company’s stock has significantly underperformed the broader market over the past 3 months – falling roughly than 60% while the S&P 500 has been essentially flat – in large part due to dilution concerns that were validated in the delayed 10-Q filing.
We have left our model essentially unchanged as we think 2023 deliveries will remain limited to key distributors and customers and we may not get much insight into the outlook for 2024 until the company shifts to full production.
VALUATION
As of 9/30/23, AYRO has $47.9 million in cash, equivalents, marketable securities and restricted cash on its balance sheet which provides investors a measure of protection.
Investors have correctly been concerned with potential dilution related to the August convertible preferred issuance. While the fundamental outlook continues to improve for AYRO, holders of the company’s common stock will have to understand that the prospect of future dilution may significantly cap the upside in the stock.
We are adjusting our target value to $2.50 per share to account the significantly higher potential share count if the preferred is converted to common stock and warrants are exercised which is partially offset by the company’s recent track record of delivering on its operating goals over the past 18 months. We are maintaining fairly modest expectations for 2024 – with a forecast of 360 vehicles delivered next year but once the company reaches full production capability it could materially exceed this forecast if demand for a US-built LSEV with 98% of its components derived from North America and Europe suppliers materializes. The challenge for investors evaluating AYRO will be to consider the value of the company as it enters production of the Vanish and Valet against the prospect of substantial dilution related to the restrictive convertible preferred stock offering.
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