StableX Technologies, Inc. - Common Stock (SBLX) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Ayro, Inc. Second Quarter 2022 Financial Results and Corporate Update Conference Call. [Operator Instructions] Participants on 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 1 hour after the end of the call through November 11, 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.

Thank you, Danielle. 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 annual report on Form 10-K and subsequent periodic reports filed with the SEC, and Ayro's press release that accompanies this call, particularly the cautionary statements 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 metric, 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, August 11, 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 CEO, Tom Wittenschlaeger. Tom, please go ahead.

Thanks, Scott, and good morning to everyone on the call. I'm pleased to report on our continued progress, maximizing our competitive positioning and value proposition within the low-speed electric vehicle market. From food or product delivery in an urban environment to users in an arena or campus environment to users and indoor environments, where noxious fumes from diesel or gasoline-powered vehicles would prove unsafe, we believe the applications for a low-speed, all-electric utility vehicle are numerous across many industries in both the private and the public sector. We're currently generating sales on our first-generation, low-speed, purpose-built electric utility vehicle called Current that's based on our legacy partnerships with Cenntro for component delivery from China, and with Karma Automotive for manufacturing and assembly and with Club Car for end product distribution. Our next-generation electric vehicle is planned to be on our Ayro Z platform, which we expect will feature numerous technological and ergonomic upgrades, representing a premium, all-electric, purpose-built utility vehicle. We expect the vehicles produced from the Ayro Z platform to be built right here in Round Rock, Texas, in our manufacturing facility here using components that are primarily sourced from North America and Europe, and distributed both directly and through various third-party distributors. I'm happy to report that our supply chain for the Ayro Z is now 92% defined with 85% of that supply chain being sourced from North America. We expect the cost savings from reduced shipping alone to be significant for the new platform, and we also expect to be able to build a platform of fundamentally higher quality that should lead to substantially lower warranty and substantially lower support costs. We plan to unveil the Ayro Z prototype and to open preorders for the new Ayro Z by year-end. Moreover, we also expect to be approved for sales on the Federal Government's General Services Administration, or GSA, schedule by year-end 2022. We believe the ability to sell a clean green solution at the federal level under Buy American Provisions with minimal purchasing friction that also brings the sustainability elements that we expect the Ayro Z platform to inherently offer is a large selling point for many purchasers at the federal level. Now let's take a closer look at our second quarter financial results. We recognized $980,000 in revenue in the second quarter of 2022, an increase of 88% over the same period in the prior year. We experienced an increase in cost of goods sold expenses related to defective battery parts that our Chinese supplier Cenntro shipped to us for the lithium battery powered version of the current vehicle. Due to a 100% defect rate in some critical components for the lithium battery vehicles as well as a 100% defect rate on the motor controllers that render the vehicles inoperable, we rejected shipment from Cenntro for all of these components and requested a credit from Cenntro for the full purchase amount. This required a write-off to the cost of goods sold of $1.32 million due to these defective components. While any sales of the lithium version of the Current during the quarter were entirely absent. We're in discussions with Cenntro regarding this particular issue. This increased cost of goods expense was primarily responsible for the sequential increase in our net loss that rose from $4.58 million in the first quarter of 2022 to a net loss of $5.97 million in the second quarter of 2022. Our focus on fiscal discipline and expense rationalization remains as resolute as ever, despite the speed bump in the second quarter arising from a critical component issue itself. This example highlights the sensibility of our decision to bring manufacturing in-house and to source components from reliable and proven suppliers located primarily in North America. While this chart is certainly unfortunate, in no way do we believe it changes our outlook for the new Ayro Z platform and our product design and manufacturing strategies. Importantly, and I cannot stress this enough, we firmly believe that a successful rollout of the new Ayro Z product cycle will help maximize shareholder value and is what investors should ultimately focus on. To this end, we have moved a remarkable speed to have accomplished so much in such a relatively short period of time with the Ayro Z platform. We expect to unveil our new vehicle prototype by year-end and our manufacturing build-out in Round Rock, Texas is on track with respect to both budget and timeline. With its numerous food box architectures, configuration solutions and enabling technology features we intend to offer such as telematics, logistics support and route optimization, we believe the advanced Ayro Z electric vehicles will be an excellent solution for food delivery in many urban environments and address general utility needs in campus and arena environments. Our balance sheet remains quite strong. It affords us the opportunity to progress with our strategic direction without an immediate need to raise capital. Our cash and marketable securities at the end of the second quarter were $57.9 million, and we have no debt. That concludes my opening remarks. Now I'd like to turn the call over to Dave Hollingsworth, who will review our financial results in more detail. Dave?

Thanks, Tom, and good morning to everyone. Here's a summary of our fiscal second quarter 2022 financial results. Revenue for the first quarter ended June 30, 2022, was $981,560, an increase of 88% year-over-year and decline of 4% sequentially. This despite the unsalability of the entire NCM product line. The increased year-over-year revenue is attributable to the increased unit sales and deliveries of the Club Car Current light-duty EV as well as a higher average selling price. The total operating expenses in the second quarter of 2022 were approximately $4.1 million as compared to $7.8 million in the second quarter of 2021, and $4.4 million in the first quarter of 2022. The year-over-year decrease in total operating expenses was due primarily to the reduced research and development expense resulting from the discontinuation of the 311x product development and reduced general spending implemented during the corporate and strategic review by the management team. Adjusted EBITDA, a non-GAAP measure, in the second quarter of 2022 was a loss of approximately $4.2 million versus a loss of approximately $5.9 million in the second quarter of 2021, and a loss of approximately $4.2 million in the first quarter of 2022. The net loss in the second quarter of 2022 was approximately $6 million, which was an improvement over the net loss of approximately $7.7 million in the second quarter of 2021, but lower than the net loss of $4.6 million in the first quarter of 2022. This sequential increase in net loss from the first to second quarter of 2022 was largely a result of the $1.3 million in write-off charges in the second quarter of 2022 relating to the defective Cenntro components and impairments of Cenntro prepaid expenses that led to a write-down expense or cost of goods sold in the amount of $621,000. Cash and marketable securities at June 30, 2022, was approximately $57.9 million versus $63.5 million at March 31, 2022, and $59.2 million at the end of 2021. Total debt was 0 at June 30, 2022, as it was on March 31, 2022, and December 31, 2021. As a result of the June 30, 2022, the company had 37,020,518 common shares outstanding. That concludes my prepared remarks, and I'd like to turn the call back over to Tom for any...

Thank you, Dave. In summary, we remain steadfast and aggressive with our design of the new Ayro Z platform. We intend to unveil the first prototype Ayro Z by year-end, and we intend to maximize the monetization of the remaining inventory of the legacy current vehicles in parallel with our Ayro Z development. We believe that the market launch and penetration of the Ayro Z platform with its various anticipated reconfigurable payloads can address a wide, wide range of applications, has the potential to generate a sustainable competitive advantage and result in sustainable shareholder value for our family of Ayro investors. I'd like to thank all of our shareholders for their support, and I look forward to sharing additional accomplishments and developments as they unfold. And with that, I'd like to turn the call over to the operator so we can begin the question-and-answer session. Operator?

[Operator Instructions] The first question comes from Barry Sine of Spartan Capital Securities.

On the Z, you talked about preorders by year-end. Maybe if you don't mind, we can get a little more visibility. Is there a prototype that's actually running around in the wild somewhere? So how many of those are there? And then if we start orders by year-end, what does that mean for actual revenue shipments? Presumably, that's some time into 2023, maybe not 1Q.

So let me answer. You asked a number of questions. So let me let me kind of unbundle those and go one by one. So first of all, you might note from my prepared remarks that today, we have fundamentally north of 90% of our supply chain identified for the Z. So what that really means is, we are 8% away from having a supply chain fully in place where we can build production level Ayro Zs. Accordingly, there are no production level Ayro Zs running around at the moment because we're at a 92% supply chain accomplishment level. All that said, the development and the first verticals, we will build 17 first verticals of the Ayro Z and a number of those will go through the obligatory homologation testing. So we'll take a handful of them. We'll crash them. We'll crush them. We'll roll them over. We'll do all those exciting things that demonstrate the vehicle is suitable for sale, and then the remaining units will be further subjected to sustaining engineering to make sure that when we launch, we're launching a very reliable, very high performance, and most importantly, a very high-quality platform. So to answer your question, we would -- our intention is to do the unveil at year-end. Our intention is to build, commence low rate initial production as soon as we have completed homologation testing to ensure ourselves that what we're building is at the quality and performance level that we have aspired to. And at that point in time, we'll do a transition plan from low rate initial production to full production. I expect those transitions to occur in the first quarter of next year. And I'm going to not forecast volumes at this point in time until we get early -- some early feedback from potential customers on not just the vehicle, but on the payload configurations that we're offering with that vehicle. So I hope that answers at least half of your questions.

That answers that question thoroughly. I have a couple more, if you don't mind. Ayro has been largely built with a strong ecosystem of partners. Some of those partners and some of those relationships presumably are going to have to be renegotiated, remodified. And if I tick down the list, the first one, Galaxy, that seems to be fine. You put their payload on the Z. Club Car, I think they have like exclusive. So I'm not sure if you can -- if you'll still be exclusive with Club Car or if you're allowed to go parallel, selling the Z outside of them. Karma assemble the vehicles now, and you're going to replace them. So assume that has to be renegotiated. Element, presumably, they can support the Z as well as the Current unit. And then Cenntro, it sounds like you're on your way to phasing them out and you're starting to have quality issues with them. I'm not sure what your contracts are on those. Are we -- so my question on -- if we can go through each of those and what are the land mines potentially investors might see as you do that?

Well, Barry, the way I would answer your question is, there are a great number of matters under negotiation right now. And what I've disclosed in previous disclosures is that our strategy is to shift from a strategy of offshoring to a strategy of onshoring and a strategy of outsourcing certain things to in-sourcing certain things like final assembly, production, quality and support. And clearly, you've captured -- what that fundamentally means is, there will be some repositioning of the various relationships. There will be fundamental changes to some of those relationships. And the way you have postulated it is, in fact, quite accurate. Although -- because we're amidst a number of discussions and negotiations, I will pass on answering that question explicitly, although I would not debate any of the points you're making at this point in time. What I will say is that we intend to sunset the legacy 411x production in the third quarter of this year. So as we sunset that production, it means we will simultaneously be standing up the production of the 411 here in Round Rock, Texas. And sorry, I can't tell you more, but I'll be happy to tell you more as soon as a number of our negotiations conclude.

Okay. No, that's very helpful. Visibility for the rest of this year. So presumably, given the long, long manufacturing and then shipping lead times, you've got some visibility. Presumably, the units are already either being manufactured or on the ocean given the lead times. You've also just mentioned that you're going to start sunsetting the act in the third quarter this year. So what does the rest of this year look like? Presumably, we start to see revenue decline sequentially until we start to see some revenue next year ramping on the Z models? Is that a fair way to think about it?

Well, I always think about it in a different way. And the way I would think about it, Barry, is we have an inventory of the Current vehicle product, and that inventory is in our hands. It's built, and it will serve as our source of continued revenue through the end of this year. As we deplete that inventory, we're standing up our inventory of the new 411 platform as we complete homologation and as we transition from first articles to low rate initial production. So there will be a transition and the transition will be fundamentally a disposition of existing inventory with an introduction of new inventory. And that transition will occur 4Q this year, 1Q next year. And how that ends up playing out in terms of the revenue profile is something that remains to be seen, but I don't anticipate a circumstance where the revenue falls to 0.

Okay. My last question is around the balance sheet and the sufficiency of cash to make this transition. And if I do the math, you just reported an EBITDA loss of $4.2 million. If I just annualize that, that [16.8], and you also just reported $59 million in cash. If I -- that ratio would, at current levels, get you 3.5 years before you run out of cash. And over the next 3.5 years, I would expect that you'd be really ramping, especially in the second half of next year Z shipments and really starting to generate revenue. And I'm also expecting that will be a positive gross margin vehicle versus the Current unit that's negative gross margin. So it seems to me is that the balance sheet looks adequate to support what we're doing, but I'd love to hear that out of the mouth of management.

I believe your way of looking at it is very, very thoughtful.

And just can you confirm that you would expect to have a positive gross margin on the Z units?

Well, Barry, so let me answer it this way. We're not working tirelessly to build a platform to lose money. That's -- that would be a definition of insanity. The -- what we expect to see is, we expect the Z to be a quality leader, a performance leader and a reconfigurability leader and a sustainability leader in its segment. We expect to make money on every vehicle from the jump, and we expect -- as you know, Barry, we expect the margins on those vehicles to rise as we progress up the production curve and as we continue to gain supply chain leverage. The margins will only improve over time as production rates ramp. So yes, I can -- that's the direction we're headed. And you might further remember that we separate the platform from the payload, and revenue and earnings are generated not only on the platform, but also on the payload. And now they'll also be generated on the platform, the payload and the enabling infrastructure or the applications that accompany the platform. So I hope that insight is a little bit helpful, Barry.

[Operator Instructions] The next question comes from Steve Cozzie of Amazon.

I just had one simple question really. With the new bill that's being introduced tomorrow and being voted on in the house, do you guys expect any sort of incentive being an EV company? Any kind of take advantage of the tax credit that is included in the bill?

Well, we've gathered whatever we can find on that bill, and it's very difficult to determine really the full throw of that incentive. What I would tell you is, I don't think we're going to need it. Our platform is going to be priced at a level where the utility it provides versus the cost that it engenders is in a fairly good balance. A lot of these incentives, as you well know, are on vehicles that are extraordinarily expensive, and our vehicle does not fall into that category. So long and the short of it is, we don't know right now. And while we understand there will be incentives, it's just hard to tell right now the extent to which those incentives will be applied. So I'm sorry, I can't give you an accurate answer for that.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Wittenschlaeger for closing remarks.

Well, thank you. I'd like to thank 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 third quarter results in November. Thank you, all. Have a pleasant day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.