AYRO: The Vanish is just entering the back straight away
NASDAQ:AYRO
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Business Update
AYRO, Inc. (NASDAQ:AYRO) reported second quarter 2023 results last night and provided an update on the commercial launch of its new low-speed electric vehicle (LSEV), the Vanish.
As we have discussed in our previous reports, 2023 is a year for AYRO to reset expectations, establish supply chains, build its inventory, rebuild its sales channels, and design, test, and launch the Vanish. The process of going from an existing product to starting over at square one would be challenging for any business but it is particularly difficult to perform this kind of transformation inside of a publicly traded company.
The company anticipates entering Low Rate Initial Production in the fall during which time it is anticipated that they will produce 60 vehicles to deliver to distributors, partners, and key customers. We think this will be a very important step for the company because the potentially disruptive nature of the Vanish in the LSEV space is only apparent when you can sit behind the wheel of the vehicle.
This remains a challenging period for AYRO to navigate as it has to report results as a public company but their operations are much more akin to a pre-launch startup company. We think investors that can look past these near-term results and appreciate the opportunity in front of AYRO to bring a highly engineered, premium product to a commoditized market could be rewarded for that patience.
AYRO reported cash and equivalents of $33 million as of 6/30/23 which is still roughly $0.88 per share based on the current share count. The company’s quarterly burn rate has increased a bit in anticipation of the launch of the vanish and we estimate that at mid-August cash and equivalents stood at around $30 million. Last week the company announced that it had completed a placement of convertible preferred stock raising gross proceeds of $22 million for the company. Thus, cash and equivalents today stand at roughly $52 million or $0.87/share based on a new forecasted share count of 59.5 million which we believe is sufficient to get the company through to cash flow positive operations.
Outlook
AYRO’s CEO, Tom Wittenschlaeger, indicated that the Vanish has completed all of the homologation testing and safety requirements with certification to be received "shortly". The company now expects to enter Low Rate Initial Production ("LRIP") this fall which is slightly behind our original expectation but it still allows the Vanish to be in front of customers and in dealers' showrooms by Q4 2023.
We expect that the company will enter full production in Q1 2024 which means that they will be capable of producing 9 units per day.
The company also briefly mentioned the Valet (the company’s planned people mover for resorts, etc.) and the Vapor (a planned luxury golf cart) on the conference call and we believe that many of the lessons learned in bringing the Vanish to market will prove valuable in 2024 as they launch two new products.
We have made some minor adjustments to our model for the balance of 2023 as we think there will be 15 deliveries of the Vanish in Q4 however, we have boosted our delivery estimates for 2024 significantly to 310 units (up 16% versus our old estimate) and we are raising our revenue estimates for 2024 as a result. It is worth noting that while it is a bit of an unknown what demand will look like in 2024, the company has indicated that it expects to have the capacity to produce 2,000 vehicles per year with a single shift, has explored the idea of adding a second production shift and has secured a manufacturing partner that could help the company meet surge demand if it exceeds its current capacity.
RECENT NEWS
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 along with warrants to buy another 22,000,000 shares with an exercise price of $1.00.
The terms of the sale are complex but to summarize:
o The company is required to redeem the preferred shares in twelve monthly installments starting at some point between February 2024 and August 2025 at the investors’ election.
o The company can elect to meet these payments in cash (at 105% of the redemption amount) or common shares.
On the surface, this seems like fairly expensive financing but the conversion and warrant exercise prices are above the current trading price. With $30 million in cash and equivalents on the balance sheet before this placement, the timing may seem early but it appears that the goal was to provide enough financing to get the company to cash flow positive operations without having to pause in the middle of a production ramp to secure financing. As the adage says, the best time to get a loan is when you don't need it.
On August 8, 2023, the company filed a preliminary proxy for a special shareholder meeting to be held on September 14, 2023. The two biggest agenda items are approving the preferred stock sale mentioned above and approval of a reverse split (ranging from 1 for 2 to 1 for 10) to regain compliance with the NASDAQ minimum bid rule. It is difficult to forecast what the market reaction will be to this news and we will provide an update after the shareholder meeting.
VALUATION
As previously noted, as of mid-August 2023, AYRO has $52 million in cash and equivalents on its balance sheet which based on the new projected share count is roughly $0.87/share. We believe that the strength of the balance sheet provides investors with a level of protection at the current share price since the stock is trading at just $0.61/share.
Investors continue to lump AYRO in with many of the weaker EV companies that have struggled with product quality, market fit, and securing adequate financing. The combination of weak outlooks for many EV startups, a lack of understanding of the changes at AYRO, and the pre-revenue status of the Vanish, continue to weigh on the stock. However, we think that as the Vanish begins to be delivered to showrooms, customers and investors will take note that this has the potential to significantly change the market landscape for low-speed EVs.
We are forecasting limited sales for the balance of 2023 (just 15 Vanish deliveries at the end of Q4) with the first orders for the Vanish beginning in earnest in 2024. We are boosting our 2024 delivery estimate to 310 units (up from 265) but as the company has noted they expect to be able to produce up to 2,000 units in 2024. If end demand approaches anything close to this level of production, our estimates will prove to be very conservative and the company's revenues in 2024 could significantly exceed its current market capitalization.
Most of the company’s competitors have long operating histories and/or are part of larger industrial conglomerates, which makes it difficult to value the company based on a traditional blended value of comparable companies. We believe that the valuation of Club Car during the 2021 acquisition by Platinum Equity provides a clear measure of valuation in this industry. Platinum Equity paid 2.3 revenues for Club Car which deserved a premium as the market leader. If we apply a 10% discount to this revenue multiple to our 2025 revenue estimate and discount it back to 2024, we get a valuation for AYRO of roughly $1.10/share. We feel the company’s very strong balance sheet adds at least another $0.20/share of value and thus, we arrive at a 2024 target of $1.30.
However, if the company can capitalize on early demand indications and sales materially exceed our current forecast, we believe our target could prove to be too low and we will look to refine that valuation in late 2023/early 2024.
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