10-Q: FLY-E Group Faces Deep Losses, Going Concern Doubts

FLY-E Group reported a significant increase in net loss and a substantial decrease in net revenues for the three and six months ended September 30, 2025, alongside a loan default and ongoing legal challenges.

Summary

• Net revenues for the three months ended September 30, 2025, decreased by 42.7% to $3.9 million, compared to $6.8 million for the same period in 2024.
• Net revenues for the six months ended September 30, 2025, decreased by 37.2% to $9.2 million, compared to $14.7 million for the same period in 2024.
• Net loss for the three months ended September 30, 2025, increased by 55.4% to $1.8 million, from $1.1 million in 2024.
• Net loss for the six months ended September 30, 2025, increased by 186.2% to $3.8 million, from $1.3 million in 2024.
• Gross profit for the three months ended September 30, 2025, decreased by 66.4% to $976,521, from $2.9 million in 2024.
• Gross margin for the three months ended September 30, 2025, was 25.0%, down from 42.6% in 2024, primarily due to a 61% drop in average unit price of EVs to reduce aged inventory.
• Total operating expenses decreased by 51.0% for the three months and 20.5% for the six months ended September 30, 2025, mainly due to store closures/dispositions and reduced headcount.
• Interest expenses, net, surged by 2,167.4% to $539,537 for the three months and 1,081.8% to $1.1 million for the six months ended September 30, 2025, driven by increased loans and a higher weighted average annual interest rate of 37% (up from 13.1% as of March 31, 2025).
• The company defaulted on a $4.9 million loan with Peapack-Gladstone Bank since August 31, 2025, but secured a forbearance agreement extending the repayment deadline to March 31, 2026, with an interest rate of 12.875%.
• Management has determined there is substantial doubt about the company's ability to continue as a going concern.
• Multiple legal proceedings are ongoing, including a federal securities class action and two shareholder derivative actions, primarily related to alleged misleading statements and lithium battery safety issues, which led to an 87% stock price decline.
• The company completed two reverse stock splits: 1-for-5 on July 3, 2025, and 1-for-20 on November 4, 2025.
• Net proceeds of approximately $6.1 million were raised from a public offering on June 4, 2025, and $3.4 million (with an additional $7.6 million received post-period) from a private placement on September 18, 2025.
• 17 retail stores were disposed of during the six months ended September 30, 2025, to streamline corporate structure, reducing the total number of stores to 13 (12 in the U.S. and 1 in Canada).
• Material weaknesses in internal control over financial reporting were identified, including insufficient financial reporting personnel, lack of formal internal control policies, and inadequate IT general controls.

Sentiment

Score: 2

Explanation: The company faces severe financial distress with significant revenue declines, escalating net losses, a loan default, and a critical 'going concern' warning. Multiple ongoing legal challenges related to product safety and alleged misconduct, which previously led to an 87% stock price drop, further compound the negative outlook. While recent capital raises provide some short-term liquidity, the underlying operational and governance weaknesses suggest a high level of risk and uncertainty for investors.

Positives

• Successfully raised approximately $6.1 million net from a public offering and $3.4 million (with an additional $7.6 million post-period) from a private placement, providing capital for operations.
• Launched rental services with a high gross margin of 79.8% for the three months ended September 30, 2025, contributing to revenue diversification.
• Participated in the New York City Department of Transportation's $2 million trade-in program for e-bikes with the Fly-11 PRO model, indicating product recognition and compliance.
• Achieved a reduction in total operating expenses by 51.0% for the three months and 20.5% for the six months ended September 30, 2025, through store streamlining and reduced headcount.
• Resolved UL litigation with a $1,000,000 settlement, fully paid by December 2025, eliminating a significant legal overhang.

Negatives

• Net revenues decreased significantly by 42.7% for the three months and 37.2% for the six months ended September 30, 2025, indicating a substantial decline in sales.
• Net loss increased by 55.4% for the three months and 186.2% for the six months ended September 30, 2025, highlighting worsening profitability.
• Gross margin sharply declined from 42.6% to 25.0% for the three months ended September 30, 2025, primarily due to lower average unit prices to reduce aged inventory.
• Interest expenses surged by over 2,000% for the three months and over 1,000% for the six months ended September 30, 2025, reflecting increased debt and higher borrowing costs.
• Defaulted on a $4.9 million loan with Peapack-Gladstone Bank, necessitating a forbearance agreement with a higher interest rate of 12.875%.
• Management has expressed substantial doubt about the company's ability to continue as a going concern, indicating severe financial instability.
• Facing multiple ongoing legal proceedings, including a federal securities class action and two shareholder derivative actions, alleging misleading statements and lithium battery safety issues, which caused an 87% stock price drop.
• Identified material weaknesses in internal control over financial reporting, suggesting deficiencies in financial oversight and compliance.
• Disposed of 17 retail stores during the six months ended September 30, 2025, reducing the total store count and potentially impacting retail presence.
• Total units sold decreased by 2,924 units for the six months ended September 30, 2025, with significant drops in motorcycle and battery sales.
• Inventory turnover days increased to 273 days for the six months ended September 30, 2025, from 143 days in the prior fiscal year, despite efforts to reduce aged inventory.

Risks

• Ability to obtain additional funding to market vehicles and develop new products.
• Ability to produce vehicles with sufficient volume and quality to satisfy customers.
• Inability of principal vendors to deliver necessary components for vehicles at acceptable prices and volumes.
• Principal vendors failing to perform quality control on products.
• Inability to obtain sufficient intellectual property protection for brand and technologies.
• Vehicles failing to perform as expected, leading to product warranty claims or recalls.
• Adverse determinations in significant product liability claims, particularly concerning lithium-ion batteries and potential safety hazards.
• Customers not adopting electric vehicles or the development of alternative technology that adversely affects the business.
• Increased government regulation of the industry.
• Risk of losing cash balances exceeding insurance limits held at banks.
• Ability to grow the rental services as planned.
• Ability to continue as a going concern due to recurring losses and liquidity challenges.
• Ability to maintain compliance with the continued listing standards of the Nasdaq Capital Market.
• Changes or developments with respect to domestic and international customs, tariffs, and trade policies, and corresponding or retaliatory actions by other countries.
• Ongoing federal securities class action and shareholder derivative actions could result in significant damages, legal fees, and reputational harm.
• Material weaknesses in internal control over financial reporting could lead to undetected material misstatements.
• Inflationary factors, such as increases in personnel and overhead costs, could impair operating results.
• Concentration risk with suppliers, where the top supplier represented approximately 72.0% of total purchases for the three months ended September 30, 2025.

Future Outlook

The company plans to open another online store focusing on selling gas bikes and expand its rental services to Miami, with future aspirations to extend business into South America and Europe. It is also developing a Fly E-Bike app for EV management services. Management anticipates a decrease in payroll, selling, and general and administrative expenses due to ongoing store sales. To address the going concern risk, management intends to pursue equity financing, other debt financing from financial institutions, and financial support from related parties.

Management Comments

• "Management has determined there is substantial doubt about its ability to continue as a going concern."
• "Management plans to alleviate the going concern risk through (i) equity financing to support the Companys working capital; (ii) other available sources of financing (including debt) from banks and other financial institutions; and (iii) financial support from the Companys related parties."

Industry Context

The company operates in a rapidly growing electric vehicle (EV) market, specifically focusing on E-motorcycles, E-bikes, and E-scooters. It faces increased competition, which may pressure prices and margins. The U.S. government's executive orders imposing tariffs on imported components could lead to supply chain disruptions and increased costs. Regulatory changes in New York State, including legislative packages for safe e-bike use and the NYC DOT's $2 million trade-in program for certified e-bikes (in which the company's Fly-11 PRO participates), are shaping the market, potentially providing tailwinds for compliant products but also posing margin pressures from other regulations.

Management Changes

Corporate Governance

Legal Proceedings

• **Federal Securities Class Action (Dino Kurt)**: Filed September 8, 2025, alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 during July 15, 2025, to August 14, 2025. Claims materially false and misleading statements about revenue growth, brand reputation, and business expansion, while concealing lithium battery safety issues and inadequate forecasting processes. The stock price declined by about 87% after the company filed a form NT 10-Q on August 14, 2025. Seeks damages in excess of $150,000.
• **Shareholder Derivative Action (Kishan Shah)**: Instituted November 17, 2025, against CEO Zhou Ou, former CFO Shiwen Feng, and former directors Lun Feng, Bin Wang, and Zanfeng Zhang. Alleges knowing or reckless breaches of fiduciary duties concerning 'Lithium Battery Misconduct' (lack of required NYC safety certification, substandard quality, deadly fires) from July 15, 2025, through August 14, 2025. Claims an 87.1% stock price plummet. Seeks damages, restitution, disgorgement of profits, and court orders for improved corporate governance and internal control procedures.
• **Shareholder Derivative Action (Martin Flynn)**: Instituted October 28, 2025, with similar factual basis to the Kishan Shah action, against CEO Zhou Ou, former CFO Shiwen Feng, and former directors Bin Wang, Lun Feng, and Zanfeng Zhang. Alleges breach of fiduciary duties and gross mismanagement by making materially false and misleading statements and omissions concerning the safety of the company's lithium battery. Claims an 87% stock price drop. Seeks damages, restitution, disgorgement of profits, and appropriate equitable relief.
• **UL Litigation**: UL LLC filed a complaint on March 12, 2025, alleging improper use of UL's trademark by claiming certain products were UL certified. The company entered into a settlement and release agreement with UL on May 21, 2025, agreeing to pay an aggregate amount of $1,000,000 before November 30, 2025. $800,000 was paid by September 30, 2025, and the remaining $200,000 was paid between October 1 and December 16, 2025, fully resolving the litigation.

Related Party Transactions

• **Accounts Receivable from Fly E Bike SRL**: $32,030 as of September 30, 2025, from an entity where CEO Zhou Ou owns over 50% equity interest.
• **Prepayments and Other Receivables to Fly E Bike SRL**: $161,826 advanced during the six months ended September 30, 2025. This amount is unsecured, non-interest bearing, and repayable on demand.
• **Prepayments to PJMG LLC**: $75,000 as of September 30, 2025, for consulting services from a company where former CFO Ruifeng Guo holds over 50% equity interest. $45,000 was expensed as consulting fees during the six months ended September 30, 2025.
• **Long-term Prepayment for Software Development to DF Technology US Inc (DFT)**: $0 as of September 30, 2025, as the ERP system was delivered on May 20, 2025. Former CFO Ruifeng Guo owns over 50% equity interest in DFT.
• **Tax Services from DGLG**: The company paid DGLG (where former CFO Ruifeng Guo is a partner) a total of $170,775 for tax services during the six months ended September 30, 2025.

Stakeholder Impact

• **Shareholders**: Experienced significant dilution from recent capital raises and a dramatic 87% stock price drop due to alleged misconduct and lithium battery safety concerns. Face ongoing uncertainty from multiple class action and derivative lawsuits seeking damages and corporate governance reforms.
• **Employees**: Payroll expenses decreased due to store closures and reduced headcount, indicating potential job losses or reduced staffing levels.
• **Customers**: May face concerns regarding the safety and quality of lithium batteries in the company's products, as highlighted by legal proceedings and the NYC DOT trade-in program. The launch of rental services and app development aims to enhance customer experience.
• **Creditors**: The company defaulted on a $4.9 million loan, although a forbearance agreement was reached. Increased interest rates on borrowings indicate higher costs of capital.
• **Suppliers**: The company has a high concentration risk with its top suppliers, indicating a significant dependency that could impact supply chain stability and pricing.

Next Steps

• Open another online store focusing on selling gas bikes in the future.
• Expand rental services to Miami in the near term.
• Extend business into South America and Europe in the future.
• Continue developing the Fly E-Bike app, a management service mobile software for EVs.
• Alleviate going concern risk through equity financing, other available sources of financing (including debt) from banks and other financial institutions, and financial support from related parties.
• Remediate material weaknesses in internal control over financial reporting by organizing regular training programs for accounting personnel, enhancing IT infrastructure by outsourcing the IT department, and implementing an enterprise resource planning system.

Key Dates

Recommendation

The company is in a precarious financial position, marked by substantial revenue declines, escalating net losses, and a critical 'going concern' warning. The default on a significant loan, coupled with a dramatic increase in interest expenses, highlights severe liquidity issues. Multiple ongoing legal proceedings, particularly those related to lithium battery safety and alleged misleading statements that led to an 87% stock price drop, indicate significant reputational damage and potential future liabilities. While capital raises provide some short-term relief, the underlying operational and governance weaknesses, including material weaknesses in internal controls, suggest a high level of risk and uncertainty for investors. The strategic streamlining of stores and entry into rental services are insufficient to offset the severe financial and legal headwinds, making the stock a strong sell.

Keywords

Electric Vehicles, E-bikes, E-motorcycles, E-scooters, Quarterly Report, Financial Results, Net Loss, Revenue Decline, Going Concern, Litigation, Product Liability, Lithium Battery Safety, Reverse Stock Split, Capital Raise, Retail Operations, Corporate Governance, Internal Controls