WPCS INTERNATIONAL INC

The Company places orders with various suppliers. During the three months ended March 31, 2021 and 2020, multiple suppliers provided more than 10% of the Company’s raw materials purchases. During the three months ended March 31, 2021, one supplier accounted for approximately 30%, another supplier accounted for 22%, and a third supplier accounted for 16%. During the three months ended March 31, 2020, the Company’s purchases of raw materials from one supplier accounted for approximately 38%, another supplier accounted for 16% and a third supplier accounted for approximately 12%. The Company’s top supplier accounted for approximately 58% and 77% of its bill of materials as included in costs of goods sold for the three months ended March 31, 2021 and 2020, respectively. Any disruption in the operation of this supplier could adversely affect the Company’s operations.

In 2017, the Company executed a supply chain contract with Cenntro, the Company’s primary supplier, a manufacturer located in the People’s Republic of China. Prior to the Merger, Cenntro was a significant shareholder in AYRO Operating. Through the partnership, Cenntro acquired 19% of AYRO Operating’s common stock. Cenntro beneficially owned approximately 3.37% of the Company’s common stock as of March 31, 2021. Cenntro owns the design of the AYRO 411 Fleet vehicles and has granted the Company an exclusive license to purchase the AYRO 411 Fleet vehicles for sale in North America. Currently, the Company purchases 100% of its vehicle chassis, cabs and wheels through this supply chain relationship with Cenntro. The Company must sell a minimum number of units in order to maintain its exclusive supply chain contract upon availability of the 411x product. As of March 31, 2021 and 2020, the amounts outstanding to Cenntro as a component of accounts payable were $13,469 and $69,825, respectively. See Note 11 for concentration amounts.

Under a memo of understanding signed between the Company and Cenntro on March 22, 2020, the Company agreed to purchase 300 units within the following twelve months of signing the memo of understanding, and 500 and 800 in each of the following respective twelve-month periods. On July 9, 2020, in exchange for certain percentage discounts for raw materials, the Company made a $1.2 million prepayment for inventory. During the three months ended March 31, 2021, the Company made an additional deposit of $100,000, as prepayment for additional inventory for 2021. As of March 31, 2021 and 2020, the prepayment deposits were $1,044,590 and $49,162.

On September 25, 2020, AYRO entered into a Master Manufacturing Services Agreement with Karma Automotive, LLC (the “Karma Agreement”). The term of the contract is for 12 months. Pursuant to the agreement Karma will provide certain manufacturing services, starting in 2021, under an attached statement of work including final assembly, raw material storage and logistical support of our vehicles in return for compensation of $1,160,800.

The Company paid Karma an amount of $440,000 for the first production level builds and $80,000 for setup costs. In addition, the Company issued warrants to an advisor to the transaction with a fair value of $66,845 due at signing of the contract and was expensed in the prior year. The payment was recorded as prepaid expense as of December 31, 2020. On February 24, 2021, a first amendment to the Karma Agreement was made where Parties jointly agree to amend the terms of Exhibit A Statement of Work to Master Services Agreement, in order to allow Karma to assemble a certain number of units of the AYRO 411 vehicle. For the period ended March 31, 2021, the Company recorded an expense of $7,120 related to the Karma Agreement for the assembly of the AYRO 411 vehicle as discussed above. This amount was recorded against cost of goods for direct labor as part of the first production level builds.

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 $3.30 million for the three months ended March 31, 2021, compared to $1.25 million for the same period in 2020, an increase of $2.05 million. Contracting for professional services increased by $0.34 million primarily a result of additional audit, legal and investor relations expenses incurred to support public reporting requirements. This amount was offset by the decrease of various expenses, primarily acquisition and financing cost of $0.35 million and a decrease in consulting services of $0.06 million. Board compensation expense increased by $0.12 million. Salaries and related costs increased by $0.28 million due to corporate expansion. Stock-based compensation expense increased by $1.53 million, primarily due to the expense of director and employee equity awards granted in 2020. Other public company-related expenses increased by $0.09 million.

Depreciation decreased by $0.01 million, primarily driven by fully depreciating the tooling for our AYRO 311 product line during 2020 and the reclassification of depreciation expense for demonstration vehicles assigned to the sales and marketing team due to our redirection of our marketing focus in-house. Rent decreased for the three months ended March 31, 2021 as compared to the same period in 2020 due to the accounting in 2020 for $0.02 million expense from contract liabilities and a rent payment towards the prior office space of $0.03 million.

During the three months ended March 31, 2021, we received net proceeds of an aggregate of $58.27 million from the issuance of common stock, net of fees and expenses, $0.18 million from the exercise of options to purchase additional shares of common stock, and $0.10 million from the exercise of warrants for cash. During the three months ended March 31, 2020, we received $0.50 million in debt financing from certain DropCar investors of which the note was repaid upon closing of the Merger.