NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS
AYRO,
Inc. (the “Company”), a Delaware corporation formerly known as DropCar, Inc., a corporation located outside Austin,
Texas, is the merger successor discussed below of AYRO Operating Company, Inc., which was formed under the laws of the State of
Texas on May 17, 2016 as Austin PRT Vehicle, Inc. and subsequently changed its name to Austin EV, Inc. under an Amended and Restated
Articles of Formation filed with the State of Texas on March 9, 2017. On July 24, 2019, the Company changed its name to Ayro,
Inc. and converted its corporate domicile to Delaware. The Company was founded on the basis of promoting resource sustainability.
The Company is principally engaged in manufacturing and sales of environmentally-conscious, minimal-footprint Electric Vehicles
(“EV’s”). The all-electric vehicles are typically sold both directly and to dealers in the United States, Mexico
and Canada.
On
May 28, 2020, pursuant to the previously announced Agreement and Plan of Merger, dated December 19, 2019 (the “Merger Agreement”),
by and among the Company, ABC Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger
Sub”), and AYRO Operating Company, Inc., a Delaware corporation previously known as AYRO, Inc. (“AYRO Operating”),
Merger Sub was merged with and into AYRO Operating, with AYRO Operating continuing after the merger as the surviving entity and
a wholly owned subsidiary of the Company (the “Merger”). At the effective time of the Merger, without any action on
the part of any stockholder, each issued and outstanding share of AYRO Operating’s common stock, par value $0.001 per share
(the “AYRO Operating Common Stock”), including shares underlying AYRO Operating’s outstanding equity awards
and warrants, was converted into the right to receive 1.3634 shares (the “Exchange Ratio”) of the Company’s
common stock, par value $0.0001 per share (the “Company Common Stock”). Immediately following the effective time of
the Merger, the Company effected a 1-for-10 reverse stock split of the issued and outstanding Company Common Stock (the “Reverse
Stock Split”), and immediately following the Reverse Stock Split, the Company issued a stock dividend of one share of Company
Common Stock for each outstanding share of Common Stock to all holders of record immediately following the effective time of the
Reverse Stock Split (the “Stock Dividend”). The net result of the Reverse Stock Split and the Stock Dividend was a
1-for-5 reverse stock split. Upon completion of the Merger and the transactions contemplated in the Merger Agreement and assuming
the exercise in full of all pre-funded warrants issued pursuant thereto, (i) the former AYRO Operating equity holders (including
the investors in a bridge financing and in private placements that closed prior to closing of the Merger) own approximately 79%
of the outstanding equity of the Company; (ii) former DropCar stockholders own approximately 18% of the outstanding equity of
the Company; and (iii) a financial advisor to DropCar and AYRO owned approximately 3% of the outstanding equity of the Company.
The
Merger is being treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes
since substantially all of DropCar, Inc.’s operations were disposed of as part of the consummation of the Merger and therefore
no goodwill or other intangible assets were recorded by the Company as a result of the Merger. In connection with the disposal
of DropCar, Inc. operations, AYRO assumed $186,000 of outstanding payable from DropCar plus cash of $186,000 to be used to satisfy
those obligations. AYRO Operating is treated as the accounting acquirer as its stockholders control the Company after the Merger,
even though DropCar, Inc. was the legal acquirer. As a result, the assets and liabilities and the historical operations that are
reflected in these financial statements are those of AYRO Operating as if AYRO Operating had always been the reporting company.
All reference to AYRO Operating, Inc. shares of common stock, warrants and options have been presented on a post-merger, post-reverse
split basis.
On December 19, 2019, DropCar entered
into an asset purchase agreement (the “Asset Purchase Agreement”) with DC Partners Acquisition, LLC (“DC Partners”),
Spencer Richardson and David Newman, pursuant to which DropCar agreed to sell substantially all of the assets associated with
its business of providing vehicle support, fleet logistics and concierge services for both consumers and the automotive industry
to an entity controlled by Messrs. Richardson and Newman, the Company’s Chief Executive Officer and Chief Business Development
Officer at the time, respectively. The aggregate purchase price for the purchased assets consisted of the cancellation of certain
liabilities pursuant to those certain employment agreements by and between DropCar and each of Messrs. Richardson and Newman,
plus the assumption of certain liabilities relating to, or arising out of, workers’ compensation claims that occurred prior
to the closing date of the Asset Purchase Agreement. On May 28, 2020, the parties to the Asset Purchase Agreement entered into
Amendment No. 1 to the Asset Purchase Agreement (the “Asset Purchase Agreement Amendment”), which Asset Purchase Agreement
Amendment (i) provides for the inclusion of up to $30,000 in refunds associated with certain insurance premiums as assets being
purchased by DC Partners, (ii) amends the covenant associated with the funding of the DropCar business, such that DropCar provided
the DropCar business with additional funding of $175,000 at the closing of the transactions contemplated by the Asset Purchase
Agreement and (iii) provides for a current employee of the Company being transferred to DC Partners to provide transition services
to the Company for a period of three months after the closing of the transactions contemplated by the Asset Purchase Agreement.
The Asset Purchase Agreement closed on May 28, 2020, immediately following the consummation of the Merger.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”) and in conformity with the instructions on Form 10-Q and Rule 8-03 of Regulation
S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, AYRO Operating and DropCar,
Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of such statements. The results of operations for the three and six months ended June 30, 2020
are not necessarily indicative of the results that may be expected for the entire year.
These
unaudited condensed financial statements should be read in conjunction with the annual audited financial statements of AYRO Operating
filed on the amendment to Form 8-K filed with the SEC on June 3, 2020.
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements, in conformity with GAAP, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. The Company’s most significant estimates include allowance for doubtful accounts,
valuation of inventory reserve, valuation of deferred tax asset allowance, and the measurement of stock-based compensation expenses.
Actual results could differ from these estimates.
Reclassification
Certain
reclassifications have been made to the prior period financial statements to conform to the current period financial statement
presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Liquidity
and Other Uncertainties
The
Company is subject to a number of risks similar to those of earlier stage commercial companies, including dependence on key individuals
and products, the difficulties inherent in the development of a commercial market, the potential need to obtain additional capital,
competition from larger companies, other technology companies and other technologies. At June 30, 2020, the Company had cash balances
totaling $7,918,120. The Company incurred losses and negative cash flows from operations, including operating losses of $1,405,616
and $1,736,881 for the three months ended June 30, 2020 and 2019 and operating losses of $3,095,159 and $2,904,813 for the six
months ended June 30, 2020 and 2019, respectively. In addition, overall working capital increased by $8,301,189 during the six
months ended June 30, 2020. Based on the foregoing and approximately an additional $24,800,000 raised subsequent to June 30, 2020,
management believes that the existing cash at June 30, 2020 will be sufficient to fund operations for at least the next twelve
months following the issuance of these unaudited condensed consolidated financial statements.
On
March 11, 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new coronavirus a “pandemic.”
First identified in late 2019 and now known as COVID-19, the outbreak has impacted millions of individuals worldwide. In response,
many countries have implemented measures to combat the outbreak that have impacted global business operations. As of the date
of the unaudited condensed consolidated financial statements, our operations have been impacted; and, we continue to assess and
monitor the situation. No impairments were recorded as of the consolidated balance sheet date, as the carrying amounts of our
assets are expected to be recoverable; however, due to significant uncertainty surrounding the situation, management’s judgment
regarding this could change in the future. In addition, while our results of operations, cash flows, and financial condition could
be negatively impacted, the extent of the impact cannot be reasonably estimated at this time.
Cash
Cash
consists of checking accounts. The Company considers all highly-liquid investments purchased with a maturity of three months or
less at the time of purchase to be cash equivalents. The Company maintains cash balances which may exceed federally insured limits.
Management does not believe that this results in any significant credit risk. The Company has no cash equivalents as of June 30,
2020 or December 31, 2019.
Fair
Value Measurements:
The
Company applies Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”),
which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820
defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in
the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement
date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants
would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting
entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about
the assumptions that market participants would use in pricing the asset or liability and are to be developed based on the best
information available in the circumstances.
The
carrying amounts of financial instruments reported in the accompanying unaudited condensed consolidated financial statements for
current assets and current liabilities approximate the fair value because of the immediate or short-term maturities of the financial
instruments.
The
valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level
of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:
Level
1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement
are observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level
2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar
underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable
at commonly quoted intervals.
Level
3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques
when little or no market data exists for the assets or liabilities
As
of June 30, 2020 and December 31, 2019, the Company did not have any level 2 or level 3 instruments.
Accounts
Receivable, Net
In
the normal course of business, the Company extends credit to customers. Accounts receivable, less the allowance for doubtful accounts,
reflect the net realizable value of receivables and approximate fair value. An allowance for doubtful accounts is maintained and
reflects the best estimate of probable losses determined principally on the basis of historical experience and specific allowances
for known troubled accounts. All accounts or portions thereof that are deemed to be uncollectible or that require an excessive
collection cost are written off to the allowance for doubtful accounts. As of June 30, 2020 and December 31, 2019, the company
had reserved an allowance for doubtful accounts of $41,878 and $36,084, respectively. All accounts receivable are made on an unsecured
basis.
Inventory
Inventory
consists of purchased chassis, cabs, batteries, truck beds and component parts which includes cost of raw materials, freight,
direct labor and related production overhead and are stated at the lower of cost or net realizable value, as determined using
a first-in, first-out method. Management compares the cost of inventory with the net realizable value and, if applicable, an allowance
is made for writing down the inventory to its net realizable value, if lower than cost. On an ongoing basis, inventory is reviewed
for potential write-down for estimated obsolescence or unmarketable inventory based upon forecasts for future demand and market
conditions.
Property
and Equipment, Net
Property
and equipment, net, are stated at cost, less accumulated depreciation. Depreciation is recorded over the shorter of the estimated
useful life, of three to seven years, or the lease term of the applicable assets using the straight-line method beginning on the
date an asset is placed in service. The Company regularly evaluates the estimated remaining useful lives of the Company’s
property and equipment, net, to determine whether events or changes in circumstances warrant a revision to the remaining period
of depreciation. Maintenance and repairs are charged to expense when incurred.
Long-Lived
Assets, Including Definite-Lived Intangible Assets
Intangible
assets are stated at cost less accumulated amortization. Amortization is generally recorded on a straight-line basis over estimated
useful life of 5-10 years. The Company periodically reviews the estimated useful lives of intangible assets and makes adjustments
when events indicate that a shorter life is appropriate.
Long-lived
assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be recoverable through the estimated undiscounted future cash flows derived from such assets.
Factors
that the Company considers in deciding when to perform an impairment review include significant changes in the Company’s
forecasted projections for the asset or asset group for reasons including, but not limited to, significant under-performance of
a product in relation to expectations, significant changes, or planned changes in the Company’s use of the assets, significant
negative industry or economic trends, and new or competing products that enter the marketplace. The impairment test is based on
a comparison of the undiscounted cash flows expected to be generated from the use of the asset group. If impairment is indicated,
the asset is written down by the amount by which the carrying value of the asset exceeds the related fair value of the asset with
the related impairment charge recognized within the statements of operations. No impairment losses were identified or recorded
in the three or six months ended June 30, 2020 and 2019 on the Company’s long lives assets.
Leases
Operating
lease assets are included within operating lease right-of-use assets, and the corresponding operating lease obligation on the
unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019. The Company has elected not to present
short-term leases as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options
or renewal terms that the Company is reasonably certain to exercise. All other lease assets and lease liabilities are recognized
based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases
do not provide an implicit rate of return, the Company used an incremental borrowing rate based on the information available at
adoption date in determining the present value of lease payments.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which
is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve
this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer;
(2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price
to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.
Nature
of goods and services
The
following is a description of the Company’s products and services from which the Company generates revenue, as well as the
nature, timing of satisfaction of performance obligations, and significant payment terms for each:
Product
revenue
Product
revenue from customer contracts is recognized on the sale of each electric vehicle as vehicles are shipped to customers. The majority
of the Company’s vehicle sales orders generally have only one performance obligation: sale of complete vehicles. Ownership
and risk of loss transfers to the customer based on FOB shipping point and freight charges are the responsibility of the customer.
Revenue is typically recognized at the point control transfers or in accordance with payment terms customary to the business.
The Company provides product warranties to assure that the product assembly complies with agreed upon specifications. The Company’s
product warranty is identical to the product warranties provided by the Company’s suppliers, therefore minimizing the warranty
liability to the standard labor rates associated with the defective part replacement. Customers do not have the option to purchase
a warranty separately; as such, warranty is not accounted for as a separate performance obligation.
Shipping
revenue
Amounts
billed to customers related to shipping and handling are classified as shipping revenue. The Company has elected to recognize
the cost for freight and shipping when control over vehicles has transferred to the customer as an operating expense. The Company’s
policy is to exclude taxes collected from a customer from the transaction price of automotive contracts.
Subscription
revenue
Subscription
revenue from revenue sharing with Destination Fleet Operators (“DFO’s”) and other vehicle rental agreements
is recorded in the month the vehicles in the Company’s fleet is rented. The Company established its rental fleet in late
March 2019 which is recorded in the property and equipment section of the balance sheet – see Note 6. For the rental fleet,
the Company retains title and ownership to the vehicles and places them in DFO’s in resort communities that typically rent
golf cars for use in those communities.
Services
and other revenue
Services
and other revenue consist of non-warranty after-sales vehicle services. Revenue is typically recognized at a point in time when
services and replacement parts are provided.
Segment
Reporting
The
Company operates in one business segment which focuses on the manufacturing and sales of environmentally-conscious, minimal-footprint
EVs. The Company’s business offerings have similar economic and other characteristics, including the nature of products,
manufacturing, types of customers, and distribution methods. The chief operating decision maker (“CODM”) reviews profit
and loss information on a consolidated basis to assess performance and make overall operating decisions. The unaudited condensed
consolidated financial statements reflect the financial results of the Company’s one reportable operating segment. The Company
has no significant revenues or tangible assets outside of the United States.
Income
Taxes
The
Company accounts for income tax using an asset and liability approach, which allows for the recognition of deferred tax benefits
in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The accounting for deferred income tax calculation represents management’s best estimate on the most likely future tax consequences
of events that have been recognized in the financial statements or tax returns and related future anticipation. A valuation allowance
is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to
realize their benefits, or that future realization is uncertain. As of June 30, 2020 and December 31, 2019, there were no accruals
for uncertain tax positions.
Warrants
and Preferred Shares
The
accounting treatment of warrants and preferred share series issued is determined pursuant to the guidance provided by ASC 470,
Debt, ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging, as applicable.
Each feature of a freestanding financial instruments including, without limitation, any rights relating to subsequent dilutive
issuances, dividend issuances, equity sales, rights offerings, forced conversions, optional redemptions, automatic monthly conversions,
dividends and exercise are assessed with determinations made regarding the proper classification in the Company’s financial
statements.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”).
Under the fair value recognition provisions, stock-based compensation cost is measured at the grant date based on the fair value
of the award and is recognized as compensation expense on a straight-line basis over the requisite service period, based on the
terms of the awards. The Company calculates the fair value of option grants utilizing the Black-Scholes pricing model and estimates
the fair value of the stock based upon the estimated fair value of the common stock.
In
June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07, Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the
guidance in ASC 718 to include share-based payments for goods and services to non-employees and generally aligns it with the guidance
for share-based payments to employees. In accordance with ASU 2018-07, these stock options and warrants issued as compensation
for services provided to the Company are accounted for based upon the fair value of the underlying equity instrument. The fair
value of the equity instrument is charged directly to compensation expense and additional-paid-in capital over the period during
which services are rendered.
Basic
and Diluted Loss Per Share
Basic
and diluted net loss per share is determined by dividing net loss by the weighted average ordinary shares outstanding during the
period. For all periods presented with a net loss, the shares underlying the ordinary share options and warrants have been excluded
from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate
both basic and diluted loss per share are the same for periods with a net loss. “Penny warrants” were included in
the calculation of outstanding shares for purposes of basic earnings per share.
The
following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding
as they would be anti-dilutive:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Options
to purchase common stock
|
|
|
1,060,254
|
|
|
|
1,585,634
|
|
|
|
1,060,254
|
|
|
|
1,585,634
|
|
Series
H-1, H-3, H-4, H-5, I, J, pre-merger AYRO and Merger common stock purchase warrants
|
|
|
4,006,205
|
|
|
|
341,941
|
|
|
|
4,006,205
|
|
|
|
341,941
|
|
Series
H, H-3, H-6, and pre-merger AYRO Seed Preferred Stock
|
|
|
278,862
|
|
|
|
1,477,567
|
|
|
|
278,862
|
|
|
|
1,477,567
|
|
Totals
|
|
|
5,345,321
|
|
|
|
3,405,142
|
|
|
|
5,345,321
|
|
|
|
3,405,142
|
|
Recent
Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13 - Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments.
Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November
2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02)
that provided additional guidance on this Topic. This guidance replaces the current incurred loss impairment methodology with
a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable
information to inform credit loss estimates. For SEC filers meeting certain criteria, the amendments in this ASU are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For SEC filers that meet the
criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations,
the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The Company is currently in the process of its analysis of the impact of this guidance on its
financial statements and does not expect the adoption of this guidance to have a material impact on the Company’s financial
statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional
disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December
15, 2019. Early adoption is permitted. The Company adopted the new standard on January 1, 2020, and the adoption did not have
a material impact on its unaudited condensed consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11—Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic
480), and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features
and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 eliminates the requirement
that a down round feature precludes equity classification when assessing whether an instrument is indexed to an entity’s
own stock. A freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. The Company adopted the new standard on January 1, 2020, and the adoption
did not have a material impact on its unaudited condensed consolidated financial statements.
NOTE
3. REVENUES
Disaggregation
of Revenue
Revenue
by type was as follows:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
263,465
|
|
|
$
|
353,081
|
|
|
$
|
393,091
|
|
|
$
|
429,924
|
|
Shipping revenue
|
|
|
22,462
|
|
|
|
34,017
|
|
|
|
37,867
|
|
|
|
40,507
|
|
Subscription revenue
|
|
|
-
|
|
|
|
7,457
|
|
|
|
1,785
|
|
|
|
8,075
|
|
Service income
|
|
|
-
|
|
|
|
1,543
|
|
|
|
-
|
|
|
|
1,543
|
|
|
|
$
|
285,927
|
|
|
$
|
396,098
|
|
|
$
|
432,743
|
|
|
$
|
480,049
|
|
Contract
Liabilities
The
Company recognizes a contract liability when a consideration is received, or if the Company has the unconditional right to receive
consideration, in advance of satisfying the performance obligation. A contract liability is the Company’s obligation to
transfer goods or services to a customer for which the Company has received consideration, or an amount of consideration is due
from the customer. The table below details the activity in the Company’s contract liabilities during the six months ended
June 30, 2020 and as of December 31, 2019, and the balance at the end of each period is reported as deferred revenue in
the Company’s consolidated balance sheet.
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Balance, beginning of year
|
|
$
|
-
|
|
|
$
|
9,999
|
|
Additions
|
|
|
71,404
|
|
|
|
-
|
|
Transfer to revenue
|
|
|
(7,500
|
)
|
|
|
(9,999
|
)
|
Balance, end of period
|
|
$
|
63,904
|
|
|
$
|
-
|
|
Warranty
Reserve
The
Company records a reserve for warranty repairs upon the initial delivery of vehicles to its dealer network. The Company provides
a product warranty on each vehicle including powertrain, battery pack and electronics package. Such warranty matches the product
warranty provided by its supply chain for warranty parts for all unaltered vehicles and is not considered a separate performance
obligation. The supply chain warranty does not cover warranty-based labor needed to replace a part under warranty. Warranty reserves
include management’s best estimate of the projected cost of labor to repair/replace all items under warranty. The Company
reserves a percentage of all dealer-based sales to cover an industry-standard warranty fund to support dealer labor warranty repairs.
Such percentage is recorded as a component of cost of revenues in the statement of operations. As of June 30, 2020 and December
31, 2019, warranty reserves were recorded within accrued expenses of $33,099 and $27,375, respectively.
NOTE
4. ACCOUNTS RECEIVABLE
Accounts
receivable, net, consists of amounts due from invoiced customers and product deliveries and were as follows:
|
|
June
30,
2020
|
|
|
December
31,
2019
|
|
Trade receivables
|
|
$
|
354,938
|
|
|
$
|
107,230
|
|
Less: Allowance for doubtful accounts
|
|
|
(41,878
|
)
|
|
|
(36,084
|
)
|
|
|
$
|
313,060
|
|
|
$
|
71,146
|
|
NOTE
5. INVENTORY
Inventory
consisted of the following:
|
|
June
30,
2020
|
|
|
December
31,
2019
|
|
Finished goods
|
|
$
|
608,632
|
|
|
$
|
498,972
|
|
Work-in-progress
|
|
|
18,511
|
|
|
|
64,631
|
|
Raw materials
|
|
|
431,483
|
|
|
|
554,913
|
|
|
|
$
|
1,058,626
|
|
|
$
|
1,118,516
|
|
Management
has determined that no reserve for inventory obsolescence was required as of June 30, 2020 and December 31, 2019.
NOTE
6. PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
June
30,
2020
|
|
|
December
31,
2019
|
|
Computer and equipment
|
|
$
|
669,494
|
|
|
$
|
520,586
|
|
Furniture and fixtures
|
|
|
115,716
|
|
|
|
111,347
|
|
Lease improvements
|
|
|
198,644
|
|
|
|
117,897
|
|
Prototypes
|
|
|
228,586
|
|
|
|
218,682
|
|
Rental fleet
|
|
|
272,116
|
|
|
|
272,116
|
|
Computer software
|
|
|
54,516
|
|
|
|
54,516
|
|
|
|
|
1,539,072
|
|
|
|
1,295,144
|
|
Less: Accumulated depreciation
|
|
|
(977,390
|
)
|
|
|
(805,778
|
)
|
|
|
$
|
561,682
|
|
|
$
|
489,366
|
|
Depreciation
expense for the three and six months ended June 30, 2020 was $85,554 and $171,612 and for the three and six months ended June
30, 2019 was $124,500 and $207,780, respectively.
NOTE
7. INTANGIBLE ASSETS, NET
Intangible
assets consisted of the following:
|
|
June 30, 2020
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted-
Average
Amortization
Period
|
|
Supply chain development
|
|
$
|
395,249
|
|
|
$
|
(242,532
|
)
|
|
$
|
152,717
|
|
|
|
1.58 yrs.
|
|
Patents and trademarks
|
|
|
64,566
|
|
|
|
(21,490
|
)
|
|
|
43,076
|
|
|
|
3.12 yrs.
|
|
|
|
$
|
459,815
|
|
|
$
|
(264,022
|
)
|
|
$
|
195,793
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Weighted-
Average
Amortization
Period
|
Supply chain development
|
|
$
|
395,249
|
|
|
$
|
(193,127
|
)
|
|
$
|
202,122
|
|
|
2.07 yrs.
|
Patents
|
|
|
56,047
|
|
|
|
(14,044
|
)
|
|
|
42,003
|
|
|
3.42 yrs.
|
|
|
$
|
451,296
|
|
|
$
|
(207,171
|
)
|
|
$
|
244,125
|
|
|
|
Amortization
expense for the three and six months ended June 30, 2020 was $28,635 and $56,852 and for the three and six months ended June 30,
2019 was $26,512 and $51,499, respectively. The definite lived intangible assets have no residual value at the end of their useful
lives.
NOTE
8. FINANCING ARRANGEMENTS
The
composition of the Company’s debt and financing obligations was as follows:
|
|
June
30,
2020
|
|
|
December
31, 2019
|
|
2019 $500,000 Founder Bridge Note
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
2019 Vendor Payable Conversion Note
|
|
|
137,729
|
|
|
|
137,729
|
|
2019 $1,000,000 Convertible Bridge Notes
|
|
|
-
|
|
|
|
1,000,000
|
|
2020 Paycheck Protection Program Term Note
|
|
|
218,000
|
|
|
|
-
|
|
Note payable – auto financing
|
|
|
25,153
|
|
|
|
28,555
|
|
|
|
|
880,882
|
|
|
|
1,666,284
|
|
Less: debt discount
|
|
|
(280,359
|
)
|
|
|
(341,310
|
)
|
|
|
|
600,523
|
|
|
|
1,324,974
|
|
Less: current portion
|
|
|
(364,610
|
)
|
|
|
(1,006,947
|
)
|
Long-term debt
|
|
$
|
235,913
|
|
|
$
|
318,027
|
|
2019
$500,000 Founder Bridge Note
In
October 2019, the Company received $500,000 under a 120-day bridge term loan, bearing interest at the rate of 14% per annum, payable
quarterly, from Mark Adams, a founding board member. As an inducement for the bridge loan, the Company granted Mr. Adams 143,975
shares of common stock. On December 13, 2019, Mr. Adams agreed to modify the terms of the note and extend the maturity date until
April 30, 2021 in exchange for the issuance of 136,340 shares of common stock. A discount on debt of $343,746 was recorded and
is being amortized over the life of the loan as a component of interest expense on the accompanying unaudited condensed consolidated
statements of operations. The discount was calculated by allocating the relative fair value of the underlying equity grant, determined
using the relative fair market value method to ascribe the value of the common stock at the time of the grant, relative to the
face value of the loan to arrive at the total debt discount. Interest expense for the three and six months ended June 30, 2020
was $17,500 and $35,000, respectively, and $0 for the three and six months ended June 30, 2019. Amortization expense on the discount
on debt for the three and six months ended June 30, 2020 was $(10,795) and $44,947, respectively, and $0 for the three and six
months ended June 30, 2019.
2019
Vendor Payable Conversion Note
In
December 2019, a marketing firm agreed to convert 90% of trade accounts payable the Company owed that firm to a term loan with
a principal amount of $137,729 and bearing interest at the rate of 15% per annum, payable quarterly, with a maturity date of May
31, 2021. The Company also issued the marketing firm 17,997 shares of common stock in conjunction with this term loan. A discount
on debt of $46,683 was recorded and is being amortized over the life of the loan as a component of interest expense on the accompanying
unaudited condensed consolidated statements of operations. The discount was calculated by allocating the relative fair value of
the underlying equity issuance, determined using the relative fair market value method to ascribe the value of the common stock
at the time of the issuance, relative to the face value of the loan to arrive at the total debt discount. Interest expense for
the three and six months ended June 30, 2020 was $5,165 and $10,330, respectively, and $0 for the three and six months ended June
30, 2019. Amortization expense on the discount on debt for the three and six months ended June 30, 2020 was $8,003 and $16,006,
respectively, and $0 for the three and six months ended June 30, 2019.
2020
Paycheck Protection Program Term Note
In
May 2020, the Company entered into a Paycheck Protection Program Term Note (the “PPP Note”) with Pacific Western Bank,
NA in the amount of $218,000. The PPP Note was issued to the Company pursuant to the Coronavirus, Aid, Relief, and Economic Security
Act’s (the “CARES Act”) (P.L. 116-136) Paycheck Protection Program (the “Program”). Under the Program,
all or a portion of the PPP Note may be forgiven in accordance with the Program requirements. The PPP Note carries a maturity
date of May 20, 2022, at a 1% interest rate. No payments are required for six months from the date of issuance. The amount of
the forgiveness shall be calculated (and may be reduced) in accordance with the requirements of the Program, including the provisions
of the CARES Act. No more than 25% of the amount forgiven can be attributable to non-payroll costs, as defined in the Program.
Financing
arrangements settled during the periods presented are as follows:
2019
$1,000,000 Convertible Bridge Notes
In
December of 2019, the Company received cash in exchange for convertible promissory notes from five institutional lenders totaling
$1,000,000. The maturity date of the notes was the earlier of (1) the closing of the Merger, (2) May 31, 2020, and (3) ninety
(90) days if the Company determined not to proceed with the Merger. The notes accrued interest at five percent (5%). Immediately
prior to the consummation of the Merger, the outstanding principal was converted into 1,030,585 shares of common stock. Interest
expense for the three and six months ended June 30, 2020 was $8,333 and $20,833, respectively, and $0 for the three and six months
ended June 30, 2019.
2019
$800,000 Convertible Notes
During
the first quarter of 2019, the Company received cash in exchange for convertible promissory notes from seven individual lenders,
totaling $800,000. The terms for the notes were sixty (60) days with an additional sixty-day extension to be exercised at the
discretion of the Company. The notes accrued interest at twelve (12%) for the first sixty days and at fifteen percent (15%) for
the sixty-day extension. The lenders had the option to convert the notes and accrued interest into AYRO Seed Preferred Stock (see
Note 9) at $1.75 per share before the sixty-day extension period has expired. In May 2019, four lenders converted $350,000 of
principle and $9,062 of accrued interest into 205,178 of AYRO Seed Preferred Stock. In September 2019, one lender converted $100,000
of convertible notes to a twelve-month term loan (see 2019 $250,000 Bridge Notes). Additionally, two lenders redeemed $60,000
in principal from their outstanding note. Warrants to purchase up to 26,586 of common stock at a price of $7.33 per share were
issued in connection with the notes. The warrants issued have a five-year life. A discount on debt related to the warrant issuance
of $69,174 was recorded and was amortized over the life of the notes as a component of interest expense on the accompanying unaudited
condensed consolidated statements of operations. The discount was calculated by allocating the relative fair value of the underlying
equity issuance, determined using the relative fair market value method to ascribe the value of the common stock at the time of
the issuance, relative to the face value of the loan to arrive at the total debt discount. In December 2019, the remaining $290,000
in principal and associated accrued interest was converted to 343,482 shares of AYRO Seed Preferred Stock. Interest expense for
the six months ended June 30, 2020 was $0 and for three and six months ended June 30, 2019 was $20,220 and $35,574, respectively.
2019
$250,000 Bridge Notes
During
the third quarter of 2019, the Company received cash in exchange for term loans from five individual lenders, totaling $250,000.
Additionally, one lender holding convertible debt, converted $100,000 in principal amount to a term loan (see 2019 $800,000
Convertible Notes). In the fourth quarter of 2019, the Company received cash of $75,000 in exchange for a term loan from an
individual lender. The terms for the notes were for twelve months, with twelve percent (12%) interest payable quarterly. The Company
issued 0.2880 shares of common stock to the lenders for each dollar borrowed for an aggregate of 122,379 shares of common stock.
A discount on debt related to the common stock issuance of $187,675 was recorded and is being amortized over the life of the notes
as a component of interest expense on the accompanying unaudited condensed consolidated statements of operations. The discount
was calculated by allocating the relative fair value of the underlying equity grant, determined using the relative fair market
value method to ascribe the value of the common stock at the time of the grant, relative to the face value of the loan to arrive
at the total debt discount. In December 2019, $425,000 of principal and associated interest were converted to 433,820 shares of
AYRO Seed Preferred Stock.
2020
$500,000 Bridge Notes
In
February 2020, the Company received cash in exchange for promissory notes from three institutional lenders totaling $500,000.
The maturity date of the notes was the earlier of (1) the closing of the Merger, (2) May 31, 2020, and (3) ninety (90) days the
Company determines not to proceed with the Merger. The notes accrued interest at seven percent (7%). Immediately after the consummation
of the Merger, the notes were redeemed for cash. Interest expense for the three and six months ended June 30, 2020 was $5,833
and $9,373, respectively, and $0 for the six months ended June 30, 2019.
2020
$600,000 Bridge Notes
In
April 2020, the Company issued a secured promissory note payable to an individual investor providing $600,000 of short-term financing.
The notes carried an interest rate of fifteen percent (15%) and were to be repaid upon the earlier of (1) closing date of the
pending the Merger and (2) July 14, 2020. Fifty percent (50%) of the principal amount was personally guaranteed by Mark Adams,
a founding board member. In conjunction with the notes, 553,330 (276,665 shares of common stock representing two percent (2%)
of the combined company’s post-merger outstanding common stock each) was issued to the lender and to Mr. Adams as compensation
for his personal guarantee. A discount on debt of $462,013 was recorded in the transaction and was being amortized over the life
of the note as a component of interest expense on the accompanying unaudited condensed consolidated statements of operations.
The discount was calculated by allocating the relative fair value of the underlying equity issuance, determined using the relative
fair market value method to ascribe the value of the common stock at the time of the issuance, relative to the face value of the
loan to arrive at the total debt discount. Amortization expense for the discount on debt for the three and six months ended June
30, 2020 was $108,788 for both periods and $0 for the six months ended June 30, 2019. The note was fully repaid upon closing of
the Merger. Interest expense for the three and six months ended June 30, 2020 was $10,233 for both periods and $0 for the three
and six months ended June 30, 2019. The Company reported a loss on the debt extinguishment related to the unamortized discount
on debt of $353,225.
NOTE
9. STOCKHOLDERS’ EQUITY
Common
Stock
During
the third quarter of 2019, the Company issued 122,379 shares of common stock in connection with the 2019 $250,000 Bridge Notes.
In
October 2019, the Company issued 143,975 shares of common stock in connection with the 2019 $500,000 Founder Bridge Note.
In
October 2019, the Company issued 231,778 shares of common stock in connection with the termination of the royalty-based agreement
with Sustainability Initiatives, LLC (“SI”).
In
December 2019, the Company issued 136,340 shares of common stock in connection with the extension of the 2019 $500,000 Founder
Bridge Note.
In
December 2019, the Company issued 434,529 shares of common stock in connection with the cancellation of 477,190 stock options
originally granted with the amendment of the royalty agreement with Sustainability
Initiatives, LLC.
In
December 2019, the Company issued 67,488 shares of common stock in connection with the fee-for-service consulting agreement with
Sustainability Consultants, LLC.
In
December 2019, the Company issued 17,997 shares of common stock in connection with the conversion of outstanding accounts payable
to a promissory note with a local marketing firm.
In
April 2020, the Company issued 553,330 shares of common stock in connection with the issuance of the 2020 $600,000 Bridge Note.
On
June 17, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the
Company sold, in a registered public offering by the Company directly to the investors an aggregate of 2,200,000 shares of common
stock, par value $0.0001 per share, at an offering price of $2.50 per share for gross proceeds of $5,500,000 before offering
expenses of $435,000.
During
the six months ended June 30, 2020, the Company issued 477,190 shares of common stock from the exercise of a nominal stock purchase
warrant and received cash proceeds of $1,575.
During
the six months ended June 30, 2020, the Company issued 679,965 shares of common stock from the exercise of Prefunded Bridge Loan
Warrants and received cash proceeds of $250.
During
the six months ended June 30, 2020, the Company issued 674,578 shares of common stock from the exercise of Bridge Loan Warrants
and received cash proceeds of $513,515.
During
the six months ended June 30, 2020, the Company issued 1,030,585 shares of common stock from the conversion of the 2019
$1,000,000 Convertible Bridge Notes – See Note 8.
During
the six months ended June 30, 2020, the Company issued 2,332,396 shares of common stock from the closing of the Merger
in consideration for $3,060,740 of cash and equity of Merger Sub.
During
the six months ended June 30, 2020, the Company issued 1,573,218 shares of common stock, par value $0.0001 per share, for proceeds
of $2,000,000 net of offering fees and expenses of $611,557, pursuant to Stock Purchase Agreements entered into on December 19,
2019 as a component of the merger agreement and contingent upon closing of the Merger.
During
the six months ended June 30, 2020, the Company issued 1,037,496 shares of common stock to advisors in connection with the Merger.
Additionally, the Company recorded $611,557 in fees and expenses paid in connection with the merger during the six months ended
June 30, 2020.
During
the six months ended June 30, 2020, the Company issued 2,007,194 shares of the common stock from the conversion of AYRO Seed Preferred
Stock.
Preferred
Stock
Upon
closing of the Merger, the Company assumed the Series H, H-3 and H-6 preferred stock of DropCar, Inc., which respective conversion
prices have been adjusted to reflect the May 2020 one-for-five reverse split.
Series
H Convertible Preferred Stock
Under
the terms of the Series H Certificate of Designation, each share of the Company’s Series H Convertible Preferred Stock (the
“Series H Preferred Stock”) has a stated value of $154 and is convertible into shares of the Company’s Common
Stock, equal to the stated value divided by the conversion price of $184.80 per share (subject to adjustment in the event of stock
splits or dividends). The Company is prohibited from effecting the conversion of the Series H Preferred Stock to the extent that,
as a result of such conversion, the holder would beneficially own more than 9.99%, in the aggregate, of the issued and outstanding
shares of the Company’s common stock calculated immediately after giving effect to the issuance of shares of common stock
upon such conversion. In the event of liquidation, the holders of the Series H Preferred Stock are entitled, pari passu with the
holders of common stock, to receive a payment in the amount the holder would receive if such holder converted the Series H Preferred
Stock into common stock immediately prior to the date of such payment. As of June 30, 2020, such payment would be calculated as
follows:
Number of Series H Preferred Stock outstanding as of June 30, 2020
|
|
|
8
|
|
Multiplied by the stated value
|
|
$
|
154
|
|
Equals the gross stated value
|
|
$
|
1,232
|
|
Divided by the conversion price
|
|
$
|
184.80
|
|
Equals the convertible shares of Company Common Stock
|
|
|
7
|
|
Multiplied by the fair market value of Company Common Stock as of June 30, 2020
|
|
$
|
2.80
|
|
Equals the payment
|
|
$
|
20
|
|
Series
H-3 Convertible Preferred Stock
Pursuant
to the Series H-3 Certificate of Designation (as defined below), the holders of the Company’s Series H-3 Convertible Preferred
Stock (the “Series H-3 Preferred Stock”) are entitled to elect up to two members of a seven member Board, subject
to certain step downs; pursuant to the Series H-3 securities purchase agreement, the Company agreed to effectuate the appointment
of the designees specified by the Series H-3 investors as directors of the Company.
Under
the terms of the Series H-3 Certificate of Designation, each share of the Series H-3 Preferred Stock has a stated value of $138
and is convertible into shares of common stock, equal to the stated value divided by the conversion price of $165.60 per share
(subject to adjustment in the event of stock splits and dividends). The Company is prohibited from effecting the conversion of
the Series H-3 Preferred Stock to the extent that, as a result of such conversion, the holder or any of its affiliates would beneficially
own more than 9.99%, in the aggregate, of the issued and outstanding shares of common stock calculated immediately after giving
effect to the issuance of shares of common stock upon the conversion of the Series H-3 Preferred Stock.
In
the event of liquidation, the holders of the Series H-3 Preferred Stock are entitled, pari passu with the holders of common stock,
to receive a payment in the amount the holder would receive if such holder converted the Series H-3 Preferred Stock into common
stock immediately prior to the date of such payment. As of June 30, 2020, such payment would be calculated as follows:
Number of Series H-3 Preferred Stock outstanding as of June 30, 2020
|
|
|
2,189
|
|
Multiplied by the stated value
|
|
$
|
138
|
|
Equals the gross stated value
|
|
$
|
302,082
|
|
Divided by the conversion price
|
|
$
|
165.60
|
|
Equals the convertible shares of Company Common Stock
|
|
|
1,825
|
|
Multiplied by the fair market value of Company Common Stock as of June 30, 2020
|
|
$
|
2.80
|
|
Equals the payment
|
|
$
|
5,110
|
|
Series
H-6 Convertible Preferred Stock
On
February 5, 2020, the Company filed the Certificate of Designations, Preferences and Rights of the Series H-6 Preferred Stock
(the “Series H-6 Certificate of Designation”) with the Secretary of State of the State of Delaware, establishing and
designating the rights, powers and preferences of the Series H-6 Preferred Stock. The Company designated up to 50,000 shares of
Series H-6 Preferred Stock and each share has a stated value of $72.00 (the “H-6 Stated Value”). Each share of Series
H-6 Preferred Stock is convertible at any time at the option of the holder thereof, into a number of shares of common stock of
the Company determined by dividing the H-6 Stated Value by the initial conversion price of $3.60 per share, subject to
a 9.99% blocker provision. The Series H-6 Preferred Stock has the same dividend rights as the common stock, except as provided
for in the Series H-6 Certificate of Designation or as otherwise required by law. The Series H-6 Preferred Stock also has the
same voting rights as the common stock, except that in no event shall a holder of Series H-6 Preferred Stock be permitted to exercise
a greater number of votes than such holder would have been entitled to cast if the Series H-6 Preferred Stock had immediately
been converted into shares of common stock at a conversion price equal to $3.60, which was then further reduced to $2.50
upon the pre-merger modification of the terms of the Series H-4 preferred stock. In addition, a holder (together with its affiliates)
may not be permitted to vote Series H-6 Preferred Stock held by such holder to the extent that such holder would beneficially
own more than 9.99% of our common stock. In the event of any liquidation or dissolution, the Series H-6 Preferred Stock ranks
senior to the common stock in the distribution of assets, to the extent legally available for distribution.
The
holders of Series H-6 Preferred Stock are entitled to certain anti-dilution adjustments if the Company issues shares of its common
stock at a lower price per share than the applicable conversion price of the Series H-6 Preferred Stock. If any such dilutive
issuance occurs prior to the conversion of the Series H-6 Preferred Stock, the conversion price will be adjusted downward to a
price that cannot be less than 20% of the exercise price or $0.792.
In
the event of liquidation, the holders of the Series H-6 Preferred Stock are entitled, pari passu with the holders of common stock,
to receive a payment in the amount the holder would receive if such holder converted the Series H-6 Preferred Stock into common
stock immediately prior to the date of such payment. As of June 30, 2020, such payment would be calculated as follows:
Number of Series H-6 Preferred Stock outstanding as of June 30, 2020
|
|
|
7,883
|
|
Multiplied by the stated value
|
|
$
|
72
|
|
Equals the gross stated value
|
|
$
|
567,576
|
|
Divided by the conversion price
|
|
$
|
2.50
|
|
Equals the convertible shares of Company Common Stock
|
|
|
227,030
|
|
Multiplied by the fair market value of Company Common Stock as of June 30, 2020
|
|
$
|
2.80
|
|
Equals the payment
|
|
$
|
635,685
|
|
AYRO
Series Seed Preferred Stock
Prior
to the Merger, the Company was authorized to issue 8,472,500 shares of preferred stock, no par value, of which all were designated
as Series Seed Preferred Stock. As of June 30, 2020, no shares of Series Seed Preferred Stock were issued and outstanding.
The
Series Seed Preferred Stock was convertible at any time after issuance at the option of the holder into the Company’s Common
Stock on a 1-for-1 basis, subject to any exchange ratios, reverse splits or stock dividends. The Series Seed Preferred Stock was
also subject to mandatory conversion provisions upon either (i) immediately prior to the closing off a firm commitment underwritten
initial public offering pursuant to an effective registration statement filed under the Securities Act of 1933, as amended covering
the offer and sale of the Company’s Common Stock; or, (ii) upon the receipt by the Company of a written request for such
conversion from the holders of a majority of the Preferred Stock then outstanding. In the event the outstanding shares of Common
Stock are subdivided (by stock split, stock dividend, reverse split or otherwise), the shares of Series Seed Preferred Stock will
be adjusted ratably to maintain each share’s ownership percentage. The Series Seed Preferred Stock Stockholders are entitled
to equal voting rights to common stockholders on an as-converted basis and receive preference to common stockholders upon liquidation.
During the first half of 2019, 1,092,215 shares of Series Seed Preferred Stock were sold for $1.75 per share for a cash proceeds
of $1,911,375. During the second quarter of 2019, 238,500 shares of Series Seed Preferred Stock were sold for $2.00 per share
for a cash proceeds of $477,000. Additionally, during the second quarter of 2019, 205,178 shares of Series Seed Preferred Stock
were issued from the conversion of debt and related interest – See Note 8. During the third quarter of 2019, 65,000 shares
of Series Seed Preferred Stock were sold for $2.00 per share for a cash proceeds of $130,000. During the fourth quarter of 2019,
777,301 shares of Series Seed 3 Preferred Stock were issued at $1.00 per share in exchange for cancellation of $777,301 of notes
payable and accrued interest. Additionally, during the fourth quarter of 2019, 1,100,000 shares of Series Seed 3 Preferred Stock
were issued at $1.00 per share in exchange for cancellation of $1,100,000 of trade accounts payable from a single supplier. In
conjunction with the Merger, all 7,360,985 shares of AYRO Series Seed Preferred Stock were converted into approximately 2,007,193
shares of the Company Common Stock after taking into account the Exchange Ratio, Reverse Stock Split and Stock Dividend.
Warrants
Series
I, J, H, H-1, H-3, H-4 and H-5 warrants transferred to AYRO pursuant to the Merger.
Series
I Warrants
The
Series I Warrants transferred to AYRO as a result of the Merger and have an exercise price of $69.00 per share. If at any time
(i) the volume weighted average price (“VWAP”) of the Common Stock exceeds $138.00 for not less than the mandatory
exercise measuring period; (ii) the daily average number of shares of Common Stock traded during the mandatory exercise measuring
period equals or exceeds 25,000; and (iii) no equity conditions failure has occurred as of such date, then the Company shall have
the right to require the holder to exercise all or any portion of the Series I Warrants still unexercised for a cash exercise.
Series
H-1 Warrants
The
Series H-1 warrants transferred to AYRO as a result of the Merger and have an exercise price $145.20 per share, subject to adjustments
(the “Series H-1 Warrants”) which transferred to AYRO as a result of the Merger. Subject to certain ownership limitations,
the Series H-1 Warrants are immediately exercisable from the issuance date and will be exercisable for a period of five (5) years
from the issuance date.
Series
H-3 Warrants
The
Series H-1 warrants transferred to AYRO as a result of the Merger and have an exercise price of $165.60 per share, subject to
adjustments (the “Series H-3 Warrants”) . Subject to certain ownership limitations, the Series H-3 Warrants are immediately
exercisable from the issuance date and will be exercisable for a period of five (5) years from the issuance date.
Exercise
of Series H-4 Warrants and Issuance of Series
J Warrants
Series
H-4 Warrants
The
Series H-4 Warrants transferred to AYRO as a result of the Merger and have an exercise price of $15.60. The Series H-4 Warrants
contain anti-dilution price protection that was trigger and cannot be less than $15.60 per share.
The
terms of the Series J Warrants are substantially identical to the terms of the Series H-4 Warrants except that (i) the exercise
price is equal to $6.00, (ii) the Series J Warrants may be exercised at all times beginning on the 6-month anniversary of the
issuance date on a cash basis and also on a cashless basis, (iii) the Series J Warrants do not contain any provisions for anti-dilution
adjustment and (iv) the Company has the right to require the Holders to exercise all or any portion of the Series J Warrants still
unexercised for a cash exercise if the volume-weighted average price (as defined in the Series J Warrant) for the Company’s
common stock equals or exceeds $45.00 for not less than ten consecutive trading days.
If
at any time (i) the VWAP of the Common Stock exceeds $9.00 for not less than the mandatory exercise measuring period; (ii) the
daily average number of shares of Common Stock traded during the mandatory exercise measuring period equals or exceeds 25,000;
and (iii) no equity conditions failure has occurred as of such date, then the Company shall have the right to require the holder
to exercise all or any portion of the Series J Warrants still unexercised for a cash exercise.
Series
H-5 Warrants
The
Series H-5 warrants were transferred to AYRO as a result of the Merger and have an exercise price of $2.50. Subject to certain
ownership limitations, the H-5 Warrants will be exercisable beginning six months from the issuance date and will be exercisable
for a period of five years from the initial exercise date.
Upon
the receipt of approval of the Company’s stockholders, which approval has not yet been obtained, the holders of the H-5
Warrants will be entitled to certain anti-dilution adjustments if the Company issues shares of its common stock at a lower price
per share than the applicable exercise price (subject to a floor of $0.792 per share). The H-5 Warrants contain a blocker that
prohibits the holder from exercising the warrants if such exercise will result in the beneficial ownership by the holder of more
than 9.99% of the Company’s outstanding shares.
The
Series H-5 warrants were exercisable beginning June 6, 2020.
The
Series I, H-1, H-3,H-4, J and H-5 Warrants expire through the years 2020-2024
Bridge
Loan Warrants
In
December of 2019, the Company entered in a convertible bridge loan with five institutional lenders totaling $1,000,000 (see Note
8). On May 28, 2020, immediately prior to the closing of the Merger, the five lenders received warrants (the “Bridge Loan
Warrants”) to purchase 1,030,585 shares of common stock at an exercise price of $1.1159 per share. The Bridge Loan Warrants
have full ratchet anti-dilution price protection with respect to future issuances of securities at an effective price below the
exercise price with the exercise price per share reducing to such exercise price and the number of shares deliverable upon exercise
of the warrants increasing such that the aggregate exercise price under each warrant remains constant. The Bridge Loan Warrants
terminate after a period of 5 years on May 28, 2025.
Secured
Loan Warrants
In
February 2020, the Company entered into secured promissory notes with three institutional lenders totaling $500,000 (see Note
8). On May 28, 2020, immediately after the closing of the Merger, pursuant to and in connection with the issuance of the notes,
the Company issued warrants (the “Secured Loan Warrants”) to purchase an aggregate of 100,000 shares of common stock
to the three lenders for an aggregate additional purchase price of $10,000. The Secured Loan Warrants were exercised in full during
the three months ended June 30, 2020.
AYRO
Private Placement Warrants
On
May 28, 2020, the Company entered into the first AYRO Operating Private Placement SPA with current stockholders of the Company
and AYRO Operating, pursuant to which such stockholders agreed to purchase, prior to the consummation of the Merger, shares of
AYRO Operating Common Stock and warrants (the “First Private Placement Warrants”) to purchase AYRO Operating’s
common stock for an aggregate purchase price of $1,150,000. Prior to the closing of the Merger, AYRO Operating issued to the investors
party to this first AYRO Private Placement SPA (i) an aggregate of approximately 543,179 shares of common stock and pre-funded
warrants to purchase 429,305 shares of Company Common Stock at an exercise price of $0.000367 per share, and (ii) First Private
Placement Warrants to purchase 972,486 shares of common stock at an exercise price of $1.3599 per share. The First Private Placement
Warrants issued pursuant to the first AYRO Operating Private Placement SPA have full ratchet anti-dilution price protection with
respect to future issuances of securities at an effective price below the exercise price with the exercise price per share reducing
to such exercise price and the number of shares deliverable upon exercise of the warrant increasing such that the aggregate exercise
price under each warrant remains constant. The First Private Placement Warrants terminate after a period of 5 years on May 28,
2025.
On
May 28, 2020, the Company entered into the second AYRO Operating Private Placement SPA with current investors of the Company and
AYRO Operating, pursuant to which such investors agreed to purchase, prior to the consummation of the Merger, shares of AYRO Operating
Common Stock and warrants (the “Second Private Placement Warrants”) to purchase AYRO Operating Common Stock for an
aggregate purchase price of $850,000. On the closing date of the Merger, AYRO Operating issued to the investors party to this
second AYRO Operating Private Placement SPA (i) an aggregate of approximately 1,030,584 shares of common stock and pre-funded
warrants to purchase 286,896 shares of Company Common Stock at an exercise price of $0.000367 per share, and (ii) Second Private
Placement Warrants to purchase 1,316,936 shares of common stock at an exercise price of $0.7423 per share. The Second Private
Placement Warrants issued pursuant to the second AYRO Operating Private Placement SPA have full ratchet anti-dilution price protection
with respect to future issuances of securities at an effective price below the exercise price with the exercise price per share
reducing to such exercise price and the number of shares deliverable upon exercise of the warrant increasing such that the aggregate
exercise price under each warrant remains constant. The Second Private Placement Warrants terminate after a period of 5 years
on May 28, 2025.
Other
AYRO Operating Warrants
At
the effective time of the Merger, each AYRO Operating warrant that was outstanding and unexercised immediately prior to the effective
time was converted pursuant to its terms and became a warrant to purchase Company Common Stock, including the following:
On
May 28, 2020, the Company entered into Common Stock Purchase Warrant Agreements with Palladium Capital Advisors, LLC (“Palladium”)
in connection with Palladium’s role as placement agent to AYRO Operating. The Common Stock Purchase Warrant Agreements included
the right to purchase an aggregate of 232,404 shares of common stock, of which 72,142 have an exercise price per share of $1.1159,
68,076 have an exercise price per share of $1.3599, and 92,186 have an exercise price per share of $0.7423 and
all of the above warrants terminate after a period of 5 years on May 28, 2025.
On
May 28, 2020, the Company entered into a Common Stock Purchase Warrant Agreement with an investor. The Common Stock Purchase Warrant
Agreement included the right to purchase an aggregate 477,190 shares of common stock in connection with a nominal stock subscription
agreement entered into December 31, 2019. The warrants contained an exercise price of $0.000367 per share and were exercised during
the three months ended June 30, 2020.
Other
AYRO Warrants
On
June 19, 2020, the Company agreed to issue finder warrants (the “Finder Warrants”) to purchase 27,273 shares of the
Company’s common stock at an exercise price of $2.75 per share to a finder or its designees, and the Company agreed to issue
warrants to Palladium (the “Placement Agent Warrants”) to purchase 126,000 shares of the Company’s common stock
at an exercise price of $2.875 per share to a previous placement agent. The Finder Warrants and Placement Agent Warrants terminate
after a period of 5 years on June 19, 2020.
A
summary of the Company’s warrants to purchase common stock activity is as follows:
|
|
Shares Underlying Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (in years)
|
|
Outstanding at December 31, 2019
|
|
|
461,647
|
|
|
$
|
7.33
|
|
|
|
3.50
|
|
Assumed as part of the Merger
|
|
|
413,450
|
|
|
$
|
14.11
|
|
|
|
|
|
Granted
|
|
|
4,999,077
|
|
|
$
|
0.76
|
|
|
|
|
|
Exercised
|
|
|
1,831,733
|
|
|
$
|
0.28
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
4,042,441
|
|
|
$
|
5.11
|
|
|
|
4.67
|
|
NOTE
10. STOCK BASED COMPENSATION
AYRO
2020 Long Term Incentive Plan
On
May 28, 2020, the Company’s shareholders approved the 2020 Long Term Incentive Plan for future grants of stock options and
warrants. As of June 30, 2020, 38,211 shares of restricted stock units were awarded to the directors of DropCar
prior to the Merger and 25,000 shares of restricted stock have been granted to the former DropCar principals as final consideration
pursuant to the AYRO 2020 Long Term Incentive Plan. The value of the services underlying the RSU grants were recorded prior to
the Merger. The Company has reserved a total of 2,289,650 shares of its common stock pursuant to the Long-Term Incentive Plan
(“2020 LTIP”), including shares of restricted stock that have been issued. The Company has 2,226,438 stock options
remaining under this plan as of June 30, 2020.
AYRO
2017 Long Term Incentive Plan
Prior
to the Merger, the Company granted stock options and warrants pursuant to the 2017 Long Term Incentive Plan (“2017 LTIP”)
effective January 1, 2017.
DropCar
Amended and Restated 2014 Equity Incentive Plan
The
DropCar Amended and Restated 2014 Equity Incentive Plan was amended in 2018 to increase the number of shares of Company common
stock available for issuance, the 2014 Equity Incentive Plan (the “2014 Plan”), with 141,326 shares of common stock
reserved for issuance. and there are options to purchase 76,069 shares outstanding as of June 30, 2020. As of June 30, 2020, there
were zero shares available for grant under the Plan.
Determining
the appropriate fair value of the stock-based awards requires the input of subjective assumptions, including the fair value of
the Company’s common stock, and for stock options, the expected life of the option, and the expected stock price volatility.
The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation
expense could be materially different for future awards.
The
Company uses the following inputs when valuing stock-based awards.
|
|
Period Ending June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Expected life (years)
|
|
|
5.0
|
|
|
|
3.0
|
|
Risk-free interest rate
|
|
|
0.70
|
%
|
|
|
1.71
|
%
|
Expected volatility
|
|
|
4.40
|
%
|
|
|
64.4
|
%
|
Total grant date fair value
|
|
$
|
3.84
|
|
|
$
|
1.47
to $3.48
|
|
The
expected life of the employee stock options was estimated using the “simplified method”, as the Company has no historical
information to develop reasonable expectations about future exercise patterns and employment duration for its stock option grants.
The simplified method is based on the average of the vesting tranches and the contractual life of each grant. The expected life
of awards that vest immediately use the contractual maturity since they are vested when issued. For stock price volatility, the
Company uses public company compatibles and historical private placement data as a basis for its expected volatility to calculate
the fair value of option grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected
life of the option at the grant-date.
Stock-based
compensation, including stock options and warrants is included in the unaudited condensed consolidated statement of operations
as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
15,873
|
|
|
$
|
44,648
|
|
|
$
|
31,745
|
|
|
$
|
76,306
|
|
Sales and marketing
|
|
$
|
38,120
|
|
|
$
|
10,457
|
|
|
$
|
72,705
|
|
|
$
|
11,873
|
|
General and administrative
|
|
$
|
96,956
|
|
|
$
|
421,109
|
|
|
$
|
202,958
|
|
|
$
|
519,478
|
|
Total
|
|
$
|
150,949
|
|
|
$
|
476,214
|
|
|
$
|
307,408
|
|
|
$
|
607,657
|
|
Total
compensation cost related to non-vested awards not yet recognized as of June 30, 2020 was $637,081 and will be recognized on a
straight-line basis through the end of the vesting periods September 2022. The amount of future stock option compensation expense
could be affected by any future option grants or by any forfeitures.
The
following table reflects the stock option activity for the six months ended June 30, 2020:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Contractual Life (Years)
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
996,646
|
|
|
$
|
3.249
|
|
|
5.73
|
Assumed as part of the Merger
|
|
|
61,440
|
|
|
|
46.95
|
|
|
2.50
|
Granted
|
|
|
8,985
|
|
|
|
3.447
|
|
|
7.00
|
Forfeitures
|
|
|
(6,817
|
)
|
|
|
2.446
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
1,060,254
|
|
|
$
|
5.478
|
|
|
5.67
|
Of
the outstanding options, 706,905 were vested and exercisable as of June 30, 2020.
Restricted
Stock Units
Pursuant
to the Rodney Keller employment agreement, Mr. Keller is entitled to a grant of restricted stock units (RSUs) based on achievement
of certain milestones. As of June 30, 2020, no milestones have been achieved and no RSUs have been granted.
NOTE
11. CONCENTRATIONS AND CREDIT RISK
Revenues
One
customer accounted for approximately 68% and 78% of the Company’s revenues for the six months ended June 30, 2020 and 2019,
respectively. One customer accounted for approximately 74% and 80% of the Company’s revenues for the for the three months
ended June 30, 2020 and 2019, respectively.
Accounts
Receivable
One
customer accounted for approximately 64% the Company’s gross accounts receivable as of June 30, 2020. One customer accounted
for approximately 69% the Company’s gross accounts receivable as of December 31, 2019.
Purchasing
One
supplier, a related party – see Note 12 – accounted for approximately 95% of the Company’s purchases of raw
materials for the three and six months ended June 30, 2020 and 2019.
NOTE
12. RELATED PARTY TRANSACTIONS
The
Company had received short-term expense advances from its founders. As of June 30, 2020 and December 31, 2019, the amounts outstanding
were $15,000 and recorded as a component of accounts payable on the accompanying unaudited condensed consolidated balance sheets.
In
October 2019, the Company received $500,000 and issued a term loan from a founding board member. Furthermore, the Company granted
143,975 shares of the Company’s common stock as and in December, 2019, the Company granted an additional 136,340 shares
of the Company’s common stock to as consideration for extending the term date of the loan to April 30, 2021 (see 2019
$500,000 Founder Bridge Note – Note 8).
On
March 1, 2017, the Company entered into a royalty-based agreement with Sustainability Initiatives, LLC (“SI”) an entity
that is controlled by certain Company board members in the effort to accelerate the Company’s operations. Royalties accrued
were included as a component of research and development expense in the accompanying condensed consolidated statements of operations.
In return for acceleration assistance and for serving the Chief Visionary Officer role, the agreement provided for a monthly retainer
of $6,000 per month. On a quarterly basis, the Company remitted a royalty of a percentage (see table below) of company revenues
less the retainer amounts.
Revenues
|
|
Royalty Percentage
|
|
$0 - $25,000,000
|
|
|
3.0
|
%
|
$25,000,000 - $50,000,000
|
|
|
2.0
|
%
|
$50,000,000 - $100,000,000
|
|
|
1.0
|
%
|
Over $100,000,001
|
|
|
0.5
|
%
|
Effective
January 1, 2019, the Company agreed to an amendment with SI to reduce the royalty percentage to 0.5%. In relation to this amendment,
the Company granted the SI members an additional 381,752 stock options to vest over a six-month vesting term. On October 15, 2019,
the Company and the SI members agreed to terminate the agreement in full in exchange for 231,778 shares of the Company’s
common stock. Stock-based compensation of $908,650 was recorded on the transaction in October 2019.
On
December 9, 2019, the Company and the SI members agreed to cancel the outstanding options to purchase 477,190 shares of the Company’s
common stock in exchange for 434,529 shares of the Company’s common stock. Stock-based compensation of $1,496,343 was recorded
for the transaction in December 2019.
On
April 1, 2017, the Company entered into a fee-for-service agreement with SI. In return for accounting, marketing, graphics and
other services, the Company pays fixed, market-standard hourly rates under the shared services agreement as services are rendered.
As of June 30, 2020 and December 31, 2019, the Company had a balance outstanding to SI for $12,150 for both periods included in
accounts payable. Total expenses paid or payable SI were $0 and $36,000 for the six months ended June 30, 2020 and 2019, respectively.
Total expenses paid or payable to SI were $0 and $18,000 for the three months ended June 30, 2020 and 2019, respectively.
In
January 2019, the Company entered into a fee-for-service consulting agreement with Sustainability Consultants, LLC, an entity
that is controlled by principal stockholders of the Company. In exchange for consulting services provided, the Company paid $189,238
in consulting fees to the firm during the six months ended June 30, 2019. Additionally, the Company granted warrants to purchase
177,924 shares of the Company’s common stock. The warrants have an exercise price of $7.33 per share with a five-year life.
Stock-based compensation consulting expense of $260,733 was recorded in the general and administrative expenses on the statement
of operations in the fourth quarter of 2019 in conjunction with the warrant grant – see Note 9. The Company also granted
67,488 shares of the Company’s common stock and recorded stock-based compensation of $232,403 in the general and administrative
expenses on the statement of operations for the fourth quarter of 2019 related to the common stock transaction.
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.
NOTE
14. SUBSEQUENT EVENTS
On
July 6, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the
Company sold, in a registered public offering by the Company directly to the investors an aggregate of 3,157,895 shares of Company
Common Stock, par value $0.0001 per share, at an offering price of $4.75 per share for proceeds of $15,000,000 before broker fees
of $1,175,000.
In
connection with the Securities Purchase Agreement entered into on July 6, 2020, the Company issued warrants to purchase 71,770
and 147,368 shares of Company Common Stock at an exercise price of $5.225 and $5.4525 per share, respectively, to two financial
advisors. Neither the warrants nor the issuance of the shares of Company Common Stock deliverable upon exercise of the warrants
will be registered under the Securities Act or any state securities act.
On
July 21, 2020, the Company entered into a Securities Purchase Agreement with certain existing investors, pursuant to which the
Company sold, in a registered public offering by the Company directly to the investors, an aggregate of 1,850,000 shares of Company
Common Stock, par value $0.0001 per share, at an offering price of $5.00 per share for proceeds of $9,250,000 before broker fees
of $740,000. Each purchaser also has the right to purchase, on or before October 19, 2020, additional shares of Company Common
Stock equal to the full amount of 75% of the Company Common Stock it purchased at the initial closing, or an aggregate of 1,387,500
shares, at a price of $5.00 per share.
In
connection with the Securities Purchase Agreement entered into on July 21, 2020, the Company issued warrants to purchase 129,500
shares of the Company Common Stock at an exercise price of $5.75 per share to a financial advisor. Neither the warrants nor the
issuance of the shares of common stock deliverable upon exercise of the warrants will be registered under the Securities Act or
any state securities act.
During
July 2020, the Company received $2,468,189, net of fees of $248,854 upon the exercise of warrants. The Company issued 2,539,769
shares of common stock in connection with the exercises.
During
July 2020, the Company issued 225,590 shares of common stock upon the conversion of 7,833 shares of the Company’s H-6 preferred
stock.