Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

v3.20.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies

NOTE 13. COMMITMENTS AND CONTINGENCIES

 

Lease Agreements

 

In 2019 the Company entered into a new lease agreement for office and manufacturing space. The lease commencement date was January 16, 2020. Prior to the commencement date of the new lease agreement, the Company leased other office and manufacturing space on a short-term basis. Total rent expense paid for the short-term lease in January 2020 only was $26,265. The Company determined if an arrangement is a lease at inception of the contract and whether a contract is or contains a lease by determining whether it conveys the right to control the use of identified asset for a period of time. The contact provides the right to substantially all the economic benefits from the use of the identified asset and the right to direct use of the identified asset, as such, the contract is, or contains, a lease. In connection with the adoption of ASC 842, Leases, the Company has elected to treat the lease and non-lease components as a single component.

 

Leases were classified as an operating lease at inception. An operating lease results in the recognition of a Right-of-Use (“ROU”) assets and lease liability on the balance sheet. ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Because the lease does not provide an explicit or implicit rate of return, the Company determines incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis. The incremental borrowing rate for a lease is the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments for the asset under similar term, which is 10.41%. Lease expense for the lease is recognized on a straight-line basis over the lease term.

 

The Company’s lease does not contain any residual value guarantees or material restrictive covenants. Leases with a lease term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. The remaining term as of June 30, 2020 is 6.92 years. The Company currently has no finance leases.

 

During the three and six months ended June 30, 2020, cash paid for amounts included in the measurement of lease liabilities- operating cash flows from operating lease was $57,365 and $87,612, respectively. The components of lease expense consist of the following:

 

    Three months ended
June 30, 2020
    Six months ended
June 30, 2020
 
Operating lease expense   $ 61,196     $ 107,064  
Short-term lease expense     8,026       54,854  
Total lease cost   $ 69,222     $ 161,918  

 

Balance sheet information related to leases consists of the following:

 

    June 30, 2020  
Assets        
Operating lease – right-of-use asset   $ 1,160,942  
Total lease assets   $ 1,160,942  
         
Liabilities        
Current liabilities:        
Lease obligation – operating lease   $ 113,910  
Noncurrent liabilities:        
Lease obligation - operating lease, net of current portion     1,066,484  
Total lease liability   $ 1,180,394  

 

The weighted-average remaining lease term and discount rate is as follows:

 

Weighted average remaining lease term (in years) – operating lease     6.92  
Weighted average discount rate – operating lease     10.41 %

 

Cash flow information related to leases consists of the following:

 

   

Six months ended

June 30, 2020

 
Operating cash flows for operating leases   $ 30,286  
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets   $ 1,210,680  

 

As previously discussed, the Company adopted Topic 842 by applying the guidance at adoption date, January 1, 2019. As required, the following disclosure is provided for periods prior to adoption, which continue to be presented in accordance with ASC 842. Future minimum lease payment under non-cancellable lease as of June 30, 2020 are as follows:

 

As of June 30, 2020   Operating Leases  
2020, remaining   $ 114,730  
2021     234,628  
2022     240,985  
2023     247,533  
2024     254,277  
2025 and thereafter     574,530  
Total minimum lease payments     1,666,683  
Less effects of discounting     (486,289 )
Present value of future minimum lease payments   $ 1,180,394  

 

Supply Chain Agreements

 

In 2017, the Company executed a supply chain contract with Cenntro Automotive Group (“Cenntro”), the Company’s primary supplier, a manufacturer located in the Peoples’ Republic of China. Prior to the Merger, Cenntro was a significant shareholder in AYRO Operating. Currently, the Company purchases 100% of its vehicle chassis, cabs and wheels through this supply chain relationship with Cenntro. Contract terms are industry standard and represent arms-length market pricing. The Company must sell a minimum number of units in order to maintain its exclusive supply chain contract. The company was in default of the original exclusive term of the contract; however, in 2019, the contract was amended to remove the default clause. In December 2019, Cenntro, agreed to convert $1,100,000 of trade accounts payable due from the Company to 1,100,000 shares of the Company’s Seed Preferred Stock. As of June 30, 2020 and December 31, 2019, the amounts outstanding to Cenntro as a component of accounts payable were $266,127 and $83,955, respectively. Under a memo of understanding signed between the Company and Cenntro on March 22, 2020, the Company agrees 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.

 

Litigation

 

The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, that it believes are incidental to the operation of its business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on its results of operations, financial positions or cash flows.

  

Other

 

As of January 1, 2019, DropCar Operating, Inc. (“DropCar”) had accrued approximately $232,000 for the settlement of multiple employment disputes. As of June 30, 2020, approximately $13,200 remained accrued as accounts payable and accrued expenses for the settlement of three remaining employment disputes. During July 2020, two of the three remaining disputes were settled.

 

On March 23, 2018, DropCar was made aware of an audit being conducted by the New York State Department of Labor (“DOL”) regarding a claim filed by an employee. The DOL is investigating whether DropCar properly paid overtime for which DropCar has raised several defenses. In addition, the DOL is conducting its audit to determine whether the Company owes spread of hours pay (an hour’s pay for each day an employee worked or was scheduled for a period over ten hours in a day). If the DOL determines that monies are owed, the DOL will seek a backpay order, which management believes will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows. Management believes the case has no merit.

 

DropCar was a defendant in a class action lawsuit which resulted in a judgement entered into whereby the Company is required to pay legal fees in the amount of $45,000 to the plaintiff’s counsel. As of June 30, 2020, the balance due remains $45,000. This amount was included in the $186,000 of prefunded liabilities assumed by AYRO in the Merger – See Note 1.