Quarterly report pursuant to Section 13 or 15(d)

COMMITMENTS AND CONTINGENCIES

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COMMITMENTS AND CONTINGENCIES
6 Months Ended
Jun. 30, 2021
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES

NOTE 14. 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. 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.

 

During March 2021, the Company subleased additional office space to support the Company’s expansion plan. The term is for 16 months with a total lease obligation of $131,408. 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 leases do 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 terms for the Company’s leases as of June 30, 2021 are 5.75 and 1.00 years, respectively. The Company currently has no finance leases.

 

During the six months ended June 30, 2021 and 2020, cash paid for amounts included in the measurement of lease liabilities- operating cash flows from operating lease was $67,009 and $30,286, respectively.

 

 

The components of lease expense consist of the following:

 

      2021       2020       2021       2020  
    Three Months Ended June 30,     Six Months Ended June 30,  
    2021     2020     2021     2020  
Operating lease expense   $ 127,463     $ 61,196     $ 196,258     $ 107,064  
Short-term lease expense     1,956       8,026       5,489       54,854  
Total lease cost   $ 129,419     $ 69,222     $ 201,747     $ 161,918  

 

Balance sheet information related to leases consists of the following:

 

    June 30, 2021     December 31, 2020  
Assets                
Operating lease – right-of-use asset, net   $ 1,125,368     $ 1,098,819  
Total lease assets   $ 1,125,368     $ 1,098,819  
                 
Liabilities                
Current liabilities:                
Lease obligation – operating lease   $ 245,801     $ 123,139  
Noncurrent liabilities:                
Lease obligation - operating lease, net of current portion     933,563       1,002,794  
Total lease liability   $ 1,179,364     $ 1,125,933  

 

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

 

      Date  
Weighted average remaining lease term (in years) – operating lease     5.75  
Weighted average discount rate – operating lease     10.41 %

 

Cash flow information related to leases consists of the following:

 

      June 30, 2021       June 30, 2020  
    For the six months ended  
    June 30, 2021     June 30, 2020  
Operating cash flows for operating leases   $ 67,009     $ 30,286  
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets   $ 120,440     $ 1,210,680  

 

 

Future minimum lease payment under non-cancellable lease as of June 30, 2021 are as follows:

 

      1  
As of June 30, 2021   Operating Leases  
2021, remaining   $ 183,537  
2022     306,691  
2023     247,533  
2024     254,277  
2025     261,223  
2026 and thereafter     313,307  
Total minimum lease payments     1,566,568  
Less effects of discounting     (387,204 )
Present value of future minimum lease payments   $ 1,179,364  

 

 

Manufacturing Agreements

 

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, the Karma Agreement was amended to allow Karma to assemble a certain number of units of the AYRO 411 vehicle. For the three and six months ended June 30, 2021, the Company recorded expense of $23,140 and $30,260 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. In addition, the setup costs balance of $73,333 was fully amortized on June 30, 2021, as full production started during the second quarter of 2021.

 

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

 

On February 12, 2021, the Company entered into an agreement with Arcimoto, Inc. to settle certain patent infringement claims (the “Arcimoto Settlement”) for a de minimis amount, pursuant to which the Company agreed to cease the production, importation and sale of the AYRO 311, among other things. Accordingly, the Company would not be contractually permitted to resume production of the AYRO 311. The Company is continuing the development of an all-new, three-wheeled electric vehicle, which the Company has intended to replace AYRO 311 as its three-wheeled electric vehicle product offering.

 

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, 2021, approximately $5,603 remained accrued as accounts payable and accrued expenses for the settlement of the final remaining employment dispute.

 

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, 2021 and December 31,2020, 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.