Fabric.AI, Inc. Commitments Disclosure

NOTE 9. COMMITMENTS AND CONTINGENCIES

 

Manufacturing Agreement

 

On August 27, 2024, the Company partnered with Lithion Battery Inc. (“Lithion”), a manufacturer of certain iron phosphate and lithium-ion battery cells, modules and battery packs, and entered into a purchase agreement with Lithion (the “Lithion Purchase Agreement”), pursuant to which, the Company agreed to purchase batteries from Lithion for an aggregate of $1,211,150 through 2025. On June 17, 2025, Lithion filed a complaint with the Supreme Court of the State of New York Country of New York, pursuant to which, Lithion claimed the Company was in breach of contract of the Lithion Purchase Agreement for failure to pay amounts owed under the Lithion Purchase Agreement in connection with the order of certain batteries. Lithion sought damages equal to $717,120 plus interest. On July 28, 2025, the Company entered into a Settlement Agreement (as defined herein) with Lithion, pursuant to which the Company paid Lithion $540,000 on July 30, 2025, and upon payment, the Company took possession of the remaining battery cells, modules, and battery packs. Pursuant to the Settlement Agreement, all causes of action, counterclaims, and claims that were asserted or could have been asserted by the parties against each other in connection with the Lithion Purchase Agreement were settled in full, with no party having continuing liability to the other party.

 

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, other than the matters noted above, 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.

 

On October 20, 2023, Club Car filed a complaint against the Company in the Superior Court of Columbia County, Georgia (Civil Action File No.2023ECV0838) (the “Club Car Complaint”), alleging that the Company had breached its contractual obligations to Club Car under a master procurement agreement (the “MPA”) entered into by and among AYRO Operating Company, Inc., the Company’s subsidiary (“AYRO Operating”), and Club Car on March 5, 2019 due to alleged defects in the vehicles sold to Club Car and the Company’s termination of warranty support following termination of the MPA. During December 2024, the Company entered into a $1.5 million settlement agreement with Club Car, resolving all claims asserted in or arising from the litigation. As of December 31, 2024, the related accrued warranty reserve balance of $403,778 was no longer required and applied against the $1.5 million legal settlement. The warranty reserve was for Club Car product warranty, and upon the legal settlement, all claims were released against future warranties.

 

In February of 2024, Inventus Power, Inc. filed a complaint against the Company in the Circuit Court of the Eighteenth Judicial Circuit, County of DuPage, Illinois, alleging that the Company failed to pay invoices for certain battery packs and related equipment. In April of 2024, the Company filed counterclaims asserting that the battery packs in question were defective and not in compliance with contractual specifications. In August of 2024, the parties entered into a confidential settlement agreement, pursuant to which they agreed to dismiss with prejudice the claims and counterclaims in this lawsuit. The settlement agreement did not have a material impact on the Company’s results of operations or financial condition.

 

Executive Compensation Agreement

 

On August 14, 2025, the Company entered into an executive compensation agreement (the “Employment Agreement”) with Joshua Silverman, who served as the Company’s Executive Chairman, to become the Company’s Chief Executive Officer. The Employment Agreement has a three-year initial term commencing on August 14, 2025, which term automatically renews each year for successive one-year terms, unless earlier terminated by either party in accordance with the terms of the Employment Agreement. Pursuant to the Employment Agreement Mr. Silverman is entitled to receive an annual base salary of three hundred thousand dollars ($300,000) (“Base Salary”) effective as of January 1, 2025, payable in accordance with the Company’s normal payroll practices. For each fiscal year during the employment period, Mr. Silverman is eligible to receive an annual bonus upon achievement of target objectives and performance criteria, payable on or before March 15 of the fiscal year following the fiscal year to which the bonus relates. The Employment Agreement also entitles Mr. Silverman to receive customary benefits and reimbursement for ordinary business expenses. In addition, the Company agreed to grant Mr. Silverman long-term incentive awards under the Company’s long-term equity incentive plan (the “LTIP”) on such terms and conditions as determined by the Board and the Compensation Committee in their sole discretion. For each fiscal year during the employment period, Mr. Silverman shall receive annual long-term incentive awards under the LTIP of up to 300% of his Base Salary upon achievement of target objectives and performance criteria established by the Board in their sole discretion, subject to and governed by the terms and provisions of the LTIP as in effect from time to time and the award agreements evidencing such awards.

 

 

In the event Mr. Silverman’s employment is terminated by the Company for Cause (as defined in the Employment Agreement) or by Mr. Silverman without Good Reason (as defined in the Employment Agreement) , Mr. Silverman will be entitled to: (i) any earned but unpaid Base Salary earned during his employment and applicable to all pay periods prior to the termination date, and (ii) any unpaid expense reimbursements and vested amounts and benefits in accordance with the terms of any applicable plan, program, corporate governance document, policy, agreement or arrangement of the Company (collectively, “Accrued Compensation”).

 

If Mr. Silverman’s employment is terminated prior to the end of the term by the Company without Cause or by Mr. Silverman for Good Reason, then, subject to certain conditions set forth in the Employment Agreement (including the execution and non-revocation of a general release of claims), Mr. Silverman will be entitled to: (i) Accrued Compensation; (ii) severance equal to two times the sum of (A) Mr. Silverman’s Base Salary in effect at the time his employment terminates and (B) the target bonus for the year of termination prorated based upon the number of days worked for the year of termination; and (iii) accelerated vesting of the unvested portion of any outstanding equity awards.

 

If Mr. Silverman’s employment is terminated prior to the end of the term by the Company without Cause or by Mr. Silverman for Good Reason within two (2) years after a Change in Control (as defined in the Employment Agreement) or within six (6) months prior to a Change in Control, Mr. Silverman will be entitled to: (i) Accrued Compensation; (ii) severance equal to three times the sum of (A) Mr. Silverman’s Base Salary in effect at the time his employment terminates and (B) the target bonus for the year of termination prorated based upon the number of days worked for the year of termination; and (iii) accelerated vesting of the unvested portion of any outstanding equity awards.

 

Lease Agreements

 

In 2019, the Company entered into a new lease agreement for office and manufacturing space (the “2019 Lease”). The 2019 Lease commencement date was January 16, 2020. Prior to the commencement date of the 2019 Lease, the Company leased other office and manufacturing space on a short-term basis. The Company determined if an arrangement is a lease at commencement 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. These leases provide 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 (ASC 842), the Company has elected to treat the lease and non-lease components as a single component.

 

Leases were classified as an operating lease at commencement. 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 an 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 terms, 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 Company currently has no finance leases.

 

The Company’s sole operating lease has a one-time option to renew the lease term for an additional sixty months. In accordance with ASC 842, the lease term excludes the renewal option period, as the Company is not reasonably certain to exercise the option.

 

During the second quarter of 2025, the Company entered into a sublease arrangement with a third party for the remaining term of the head lease, as the underlying facility is no longer being utilized due to the pause in the Company’s electric vehicle manufacturing operations. The sublease term does not extend beyond the noncancelable period of the head lease.

 

As of December 31, 2025, the Company has concluded that it does not have an economic incentive to exercise the renewal option. Accordingly, the renewal period has not been included in the measurement of the lease liability or right-of-use asset. The Company will continue to reassess this conclusion if facts and circumstances change.

 

During the year ended December 31, 2025, the Company recognized sublease income of $274,623, which is recorded as a reduction of general and administrative expense within the consolidated statement of operations. No sublease income was recognized during the year ended December 31, 2024. The Company does not have any sublease arrangements that extend beyond the remaining term of the head lease, and accordingly, no additional future sublease income has been included beyond the contractual sublease term.

 

During the year ended December 31, 2024, the Company reassessed the carrying value of its right-of-use asset due to a sublease arrangement and concluded that the carrying amount of the right-of-use asset exceeded its estimated recoverable amount. Consequently, an impairment charge of $44,175 was recognized in the consolidated statement of operations for the year ended December 31, 2024. 

 

During the years ended December 31, 2025 and 2024, cash paid for amounts included in the measurement of lease liabilities - operating cash flows from operating lease were $261,223 and $254,277, respectively. Total lease expense is allocated to selling, general and administration expense, and cost of goods sold. The components of lease expense (within different expense groupings) consist of the following: 

 

SCHEDULE OF LEASE COST 

		Years Ended December 31,
		2025				2024
Operating lease expense		$	244,785			$	244,785
Variable lease expense			91,719				-
Short-term lease expense			327,305				190,203
Total lease cost		$	663,809			$	434,988
Sublease income		$	(274,623	)		$	-

 

Variable lease expense consists primarily of the Company’s proportionate share of common area maintenance, real estate taxes, insurance, utilities, and other operating costs under its real estate lease, which are recognized as incurred.

 

Sublease income includes fixed rental payments as well as reimbursements from the subtenant for common area maintenance, taxes, insurance, and other operating expenses.

 

Sublease income exceeded operating lease expense for the year ended December 31, 2025, due to the timing and structure of the sublease arrangement. The Company remains obligated under the head lease and recognized an impairment of the related ROU asset related to the sublease during the year ended December 31, 2024, based on expected future cash flows over the remaining lease term.

 

Balance sheet information related to leases consists of the following:

 

SCHEDULE OF BALANCE SHEET INFORMATION RELATED TO LEASES 

		December 31,
		2025				2024
Assets
Operating lease – right-of-use asset		$	227,171			$	429,819
Total lease assets		$	227,171			$	429,819
Liabilities
Current liabilities:
Lease obligation – operating lease		$	250,517			$	219,085
Noncurrent liabilities:
Lease obligation - operating lease, net of current portion			33,225				283,742
Total lease liability		$	283,742			$	502,827

 

As of December 31, 2025, the weighted-average remaining lease term and discount rate is as follows:

 

SCHEDULE OF WEIGHTED AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE 

Weighted average remaining lease term (in years) – operating lease			1.20
Weighted average discount rate – operating lease			10.41	%

 

Future minimum lease payment under non-cancellable leases as of December 31, 2025, are as follows:

 

 SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

		Operating Leases
2026		$	268,378
2027			44,929
Total minimum lease payments			313,307
Less: effects of discounting			(29,565	)
Present value of future minimum lease payments		$	283,742