UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the quarterly period ended September 30, 2018
or
|
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from __________________ to
__________________
Commission File Number: 001-34643
DropCar, Inc.
(Exact name of registrant as specified in its charter)
Delaware
|
98-0204758
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
DropCar, Inc.
1412 Broadway, Suite 2105
New York, New York 10018
(646) 342-1595
(Registrant’s telephone number, including area
code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No
☐
Indicate by check mark whether the registrant has submitted
electronically Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
|
|
☐
|
|
Accelerated filer
|
|
☐
|
Non-accelerated filer
|
|
☒
|
|
Smaller reporting company
|
|
☒
|
|
|
|
|
Emerging
growth company
|
|
☐
|
If an emerging growth company, indicate by a check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No
☒
As of November 8, 2018, there were 9,712,444
shares of the registrant’s common stock, $0.0001 par value
per share, issued and outstanding.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
Certain statements in this report contain or may contain
forward-looking statements. These statements, identified by words
such as “plan,” “anticipate,”
“believe,” “estimate,”
“should,” “expect” and similar expressions,
include our expectations and objectives regarding our future
financial position, operating results and business strategy. These
statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were
based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results
to differ materially from those in the forward-looking statements.
These factors include, but are not limited to, our inability to
obtain adequate financing, our inability to expand our business,
existing or increased competition, stock volatility and
illiquidity, and the failure to implement our business plans or
strategies. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any
forward-looking statements that may be made herein. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Readers
should carefully review this report in its entirety, including but
not limited to our financial statements and the notes thereto and
the risks described in our Current Report on Form 8-K/A filed with
the Securities and Exchange Commission (the “SEC”) on
April 2, 2018 and other reports we file with the SEC. We advise you
to carefully review the reports and documents we file from time to
time with the SEC, particularly our quarterly reports on Form 10-Q
and our current reports on Form 8-K. Except for our ongoing
obligations to disclose material information under the Federal
securities laws, we undertake no obligation to publicly release any
revisions to any forward-looking statements, to report events or to
report the occurrence of unanticipated events.
OTHER INFORMATION
When used in this report, the terms, “we,” the
“Company,” “our,” and “us”
refer to DropCar, Inc., a Delaware corporation (previously named
WPCS International Incorporated), and its consolidated
subsidiaries.
TABLE OF CONTENTS
|
|
Page No.
|
PART I – FINANCIAL INFORMATION
|
|
|
|
|
Item 1.
|
Consolidated
Financial Statements (Unaudited)
|
|
|
Consolidated Balance Sheets as of
September 30, 2018 and December 31, 2017 (audited)
|
4
|
|
Consolidated
Statements of Operations for the three and nine months ended
September 30, 2018 and 2017
|
5
|
|
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit) for
the nine months ended September 30, 2018
|
6
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30,
2018 and 2017
|
7
|
|
Notes
to Consolidated Financial Statements
|
8
|
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
26
|
|
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
38
|
|
|
|
Item 4.
|
Controls
and Procedures.
|
38
|
|
|
|
Part II – OTHER INFORMATION
|
|
|
|
|
Item 1.
|
Legal
Proceedings.
|
38
|
|
|
|
Item 1A.
|
Risk
Factors.
|
39
|
|
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
40
|
|
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
40
|
|
|
|
Item 4.
|
Mine
Safety Disclosures.
|
40
|
|
|
|
Item 5.
|
Other
Information.
|
40
|
|
|
|
Item 6.
|
Exhibits.
|
41
|
|
|
|
|
Signatures.
|
|
DropCar,
Inc. and Subsidiaries
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash
|
$1,960,553
|
$372,011
|
Accounts
receivable, net
|
4,096,228
|
187,659
|
Contract
assets
|
427,480
|
-
|
Prepaid expenses
and other current assets
|
431,186
|
51,532
|
Total current
assets
|
6,915,447
|
611,202
|
|
|
|
Property and
equipment, net
|
323,463
|
5,981
|
Capitalized
software costs, net
|
679,304
|
589,584
|
Intangible assets,
net
|
1,680,000
|
-
|
Goodwill
|
3,410,000
|
-
|
Other
assets
|
14,484
|
3,000
|
|
|
|
TOTAL
ASSETS
|
$13,022,698
|
$1,209,767
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts payable
and accrued expenses
|
$3,330,456
|
$1,820,731
|
Deferred
income
|
23,215
|
236,433
|
Accrued
interest
|
-
|
135,715
|
Current portion of
loans payable
|
52,515
|
-
|
Contract
liabilities
|
1,961,758
|
-
|
Total current
liabilities
|
5,367,944
|
2,192,879
|
|
|
|
Loans payable, net
of current portion
|
69,373
|
-
|
Convertible note
payable, net of debt discount
|
-
|
3,506,502
|
TOTAL
LIABILITIES
|
5,437,317
|
5,699,381
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT):
|
|
|
Preferred stock,
$0.0001 par value, 5,000,000 shares authorized
|
|
|
Series seed
preferred stock, 275,691 shares authorized, zero and 275,691 issued
and outstanding as of
September 30, 2018 and December 31, 2017,
respectively
|
-
|
27
|
Series A preferred
stock, 642,728 shares authorized, zero and 611,944 issued and
outstanding as of
September 30, 2018 and December 31, 2017,
respectively
|
-
|
61
|
Convertible Series
H, 8,500 shares designated, 8 and zero shares issued and
outstanding as of
September 30, 2018 and December 31, 2017,
respectively
|
-
|
-
|
Convertible Series
H-1, 9,488 shares designated zero shares issued and
outstanding
|
-
|
-
|
Convertible Series
H-2, 3,500 shares designated zero shares issued and
outstanding
|
-
|
-
|
Convertible Series
H-3, 8,461 shares designated 2,189 and zero shares issued and
outstanding as of
September 30, 2018 and December 31, 2017,
respectively
|
-
|
-
|
Convertible Series
H-4, 30,000 shares designated 26,843 and zero shares issued and
outstanding as of
September 30, 2018 and December 31, 2017,
respectively
|
3
|
-
|
Common stock,
$0.0001 par value; 100,000,000 shares authorized, 9,712,444 and
2,245,711 issued and
outstanding as of
September 30, 2018 and December 31, 2017,
respectively
|
971
|
225
|
Additional paid in
capital
|
29,207,669
|
5,114,970
|
Accumulated
deficit
|
(21,623,262)
|
(9,604,897)
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
7,585,381
|
(4,489,614)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$13,022,698
|
$1,209,767
|
The accompanying notes are an integral part of these consolidated
financial statements.
4
DropCar,
Inc. and Subsidiaries
|
Consolidated
Statements of Operations
|
|
|
For the Three
Months Ended
September
30,
|
For the Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
REVENUES
|
$4,612,062
|
$1,269,556
|
$15,826,983
|
$2,797,409
|
|
|
|
|
|
COST
OF REVENUES, excluding depreciation and amortization
|
4,438,189
|
1,426,874
|
15,190,430
|
2,869,995
|
|
|
|
|
|
GROSS
PROFIT (LOSS)
|
173,873
|
(157,318)
|
636,553
|
(72,586)
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
Selling, general
and administrative expenses
|
3,324,874
|
2,319,433
|
10,426,604
|
4,170,450
|
Depreciation and
amortization
|
174,650
|
45,576
|
479,337
|
136,403
|
TOTAL
OPERATING EXPENSES
|
3,499,524
|
2,365,009
|
10,905,941
|
4,306,853
|
|
|
|
|
|
OPERATING
LOSS
|
(3,325,650)
|
(2,522,327)
|
(10,269,388)
|
(4,379,439)
|
|
|
|
|
|
Interest income
(expense), net
|
(3,123)
|
(380,598)
|
(413,076)
|
(708,991)
|
|
|
|
|
|
NET
LOSS
|
(3,328,774)
|
(2,902,925)
|
(10,682,464)
|
(5,088,430)
|
Deemed dividend on
exchange of warrants
|
(1,019,040)
|
-
|
(1,335,901)
|
-
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$(4,347,814)
|
$(2,902,925)
|
$(12,018,365)
|
$(5,088,430)
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON
SHARE, BASIC AND DILUTED
|
$(0.50)
|
$(1.38)
|
$(1.59)
|
$(2.77)
|
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED
|
8,609,778
|
2,106,799
|
7,574,452
|
1,839,379
|
The accompanying notes are an integral part of these consolidated
financial statements.
5
DropCar,
Inc. and Subsidiaries
Consolidated
Statement of Changes in Stockholders’ Equity
(Deficit)
(Unaudited)
|
Series Seed
Preferred Stock
|
|
|
Series H-3
Preferred Stock
|
Series H-4
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
|
Balance,
January 1, 2018
|
275,691
|
$27
|
611,944
|
$61
|
-
|
$-
|
-
|
$-
|
-
|
$-
|
2,245,711
|
$225
|
$5,114,970
|
$(9,604,897)
|
$(4,489,614)
|
Issuance of
common stock for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
60,340
|
6
|
299,994
|
-
|
300,000
|
Conversion of
debt into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
820,710
|
82
|
3,682,420
|
-
|
3,682,502
|
Conversion of
accrued interest into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
27,109
|
3
|
159,581
|
-
|
159,584
|
Exchange of
shares in connection with Merger
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,797,529
|
380
|
9,791,843
|
-
|
9,792,223
|
Conversion of
outstanding Preferred Stock in connection with
merger
|
(275,691)
|
(27)
|
(611,944)
|
(61)
|
-
|
-
|
-
|
-
|
-
|
-
|
887,635
|
88
|
-
|
-
|
-
|
Issuance of
Series H preferred stock in connection with
merger
|
-
|
-
|
-
|
-
|
8
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Issuance of
Series H-3 preferred stock in connection with
merger
|
-
|
-
|
-
|
-
|
-
|
-
|
2,189
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Issuance of
Series H-4 preferred stock and warrants in private placement net of
costs of $101,661
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
26,843
|
3
|
-
|
-
|
5,898,336
|
-
|
5,898,339
|
Issuance of
common shares in connection with exercise of H-4
warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
-
|
1,560,696
|
156
|
936,267
|
-
|
936,423
|
Stock based
compensation for options issued to employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
54,556
|
-
|
54,556
|
Stock based
compensation for restricted stock units issued to
employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,902,032
|
-
|
1,902,032
|
Stock based
compensation for common stock issued to service
provider
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
20,000
|
2
|
31,798
|
-
|
31,800
|
Deemed
dividend on exchange of merger warrants to Series I warrants and
common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
292,714
|
29
|
316,832
|
(316,861)
|
-
|
Deemed
dividend on modification of H-4 Warrants and issuance of Series J
warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,019,040
|
(1,019,040)
|
-
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(10,682,464)
|
(10,682,464)
|
Balance
September 30, 2018
|
-
|
$-
|
-
|
$-
|
8
|
$-
|
2,189
|
$-
|
26,843
|
$3
|
9,712,444
|
$971
|
$29,207,669
|
$(21,623,262)
|
$7,585,381
|
The accompanying notes are an integral part of these consolidated
financial statements.
6
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
For the Nine
Months Ended
September
30,
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(10,682,464)
|
$(5,088,430)
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation and
amortization
|
479,337
|
136,403
|
Bad debt
provision
|
-
|
42,057
|
Amortization of
debt discount
|
176,000
|
638,370
|
Stock based
compensation
|
1,988,388
|
709,000
|
Non-cash interest
expense
|
23,869
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
(218,676)
|
(138,582)
|
Contract
assets
|
(183,716)
|
-
|
Prepaid expenses
and other assets
|
(73,955)
|
(39,844)
|
Accounts payable
and accrued expenses
|
(1,029,485)
|
565,286
|
Accrued
interest
|
-
|
70,803
|
Deferred
income
|
(213,218)
|
125,174
|
Contract
liabilities
|
(332,679)
|
-
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(10,066,599)
|
(2,979,763)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Purchase of fixed
assets
|
(49,707)
|
(6,600)
|
Capitalization of
software costs
|
(340,608)
|
(317,019)
|
Cash received upon
acquisition
|
4,947,023
|
-
|
|
|
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
4,556,708
|
(323,619)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Repayment under
loan payable obligations
|
(36,329)
|
-
|
Proceeds from the
sale of common stock
|
300,000
|
-
|
Proceeds from the
sale of Series H-4 preferred stock
|
6,000,000
|
-
|
Financing costs
from the sale of Series H-4 preferred stock and
warrants
|
(101,661)
|
-
|
Proceeds from
issuance of common stock in connection with exercise of H-4
warrants
|
936,423
|
-
|
Proceeds from
issuance of Series A Preferred Stock and subscription
receivable
|
-
|
219,969
|
Proceeds from
issuance of convertible notes and warrants
|
-
|
3,340,000
|
Offering costs -
Convertible Notes
|
-
|
(263,200)
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
7,098,433
|
3,296,769
|
|
|
|
Net increase
(decrease) in cash
|
1,588,542
|
(6,613)
|
|
|
|
Cash,
beginning of period
|
372,011
|
51,366
|
|
|
|
Cash,
end of period
|
$1,960,553
|
$44,753
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
NON-CASH
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Fair value of stock
warrants issued with convertible notes
|
$-
|
$1,395,707
|
Fair value of
common stock sold to founders
|
$-
|
$684,000
|
Stock issued to
WPCS Shareholder in the merger net of cash received of
$4,947,023
|
$4,845,200
|
$-
|
Series H-4 offering
cost paid in H-4 shares and warrants
|
$568,468
|
$-
|
Stock issued for
convertible note payable
|
$3,682,502
|
$-
|
Stock issued for
accrued interest on convertible note payable
|
$159,584
|
$-
|
Deemed dividends on
warrant issuances
|
$1,335,901
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
7
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Reverse Merger and Exchange Ratio
On January 30, 2018, DC Acquisition Corporation (“Merger
Sub”), a wholly-owned subsidiary of WPCS International
Incorporated (“WPCS”), completed its merger with and
into DropCar, Inc. (“Private DropCar”), with Private
DropCar surviving as a wholly owned subsidiary of WPCS. This
transaction is referred to as the “Reverse Merger.” The
Reverse Merger was effected pursuant to an Agreement and Plan of
Merger and Reorganization (the “Merger Agreement”),
dated September 6, 2017, by and among WPCS, Private DropCar and
Merger Sub.
As a result of the Reverse Merger, each outstanding share of
Private DropCar share capital (including shares of Private DropCar
share capital issued upon the conversion of outstanding convertible
debt) automatically converted into the right to receive
approximately 0.3273 shares of WPCS’s common stock, par value
$0.0001 per share (the “Exchange Ratio”). Following the
closing of the Reverse Merger, holders of WPCS’s common stock
immediately prior to the Reverse Merger owned approximately 22.9%
on a fully diluted basis, and holders of Private DropCar common
stock immediately prior to the Reverse Merger owned approximately
77.1% on a fully diluted basis, of WPCS’s common
stock.
The Reverse Merger has been accounted for as a reverse acquisition
under the acquisition method of accounting where Private DropCar is
considered the accounting acquirer and WPCS is the acquired company
for financial reporting purposes. Private DropCar was determined to
be the accounting acquirer based on the terms of the Merger
Agreement and other factors, such as relative voting rights and the
composition of the combined company’s board of directors and
senior management, which was deemed to have control. The
pre-acquisition financial statements of Private DropCar became the
historical financial statements of WPCS following the Reverse
Merger. The historical financial statements, outstanding shares and all other
historical share information have been adjusted by multiplying the
respective share amount by the Exchange Ratio as if the Exchange
Ratio had been in effect for all periods
presented.
Immediately following the Reverse Merger, the combined company
changed its name from WPCS International Incorporation to DropCar,
Inc. The combined company following the Reverse Merger may be
referred to herein as “the combined company,”
“DropCar,” or the “Company.”
The Company’s shares of common stock listed on The Nasdaq
Capital Market, previously trading through the close of business on
January 30, 2018 under the ticker symbol “WPCS,”
commenced trading on The Nasdaq Capital Market, on a post-Reverse
Stock Split adjusted basis, under the ticker symbol
“DCAR” on January 31, 2018.
On September 25, 2018, the Company received a notification letter
from The Nasdaq Stock Market ("Nasdaq") informing the Company that
for the last 30 consecutive business days, the bid price of the
Company’s securities had closed below $1.00 per share, which
is the minimum required closing bid price for continued listing on
The Nasdaq Capital Market pursuant to Listing Rule
5550(a)(2).
This notice has no immediate effect on the Company's Nasdaq
listing; the Company has 180 calendar days, or until March 25,
2019, to regain compliance. To regain compliance, the closing bid
price of the Company’s securities must be at least $1.00 per
share for a minimum of ten consecutive business days. If the
Company does not regain compliance by March 25, 2019, the Company
may be eligible for additional time to regain compliance or if the
Company is otherwise not eligible, the Company may request a
hearing before a Hearings Panel.
Acquisition Accounting
The fair value of WPCS assets acquired and liabilities assumed was
based upon management’s estimates assisted by an independent
third-party valuation firm. The assumptions are subject to change
within the measurement period up to one year from date of
acquisition. Critical estimates in valuing certain intangible
assets include, but are not limited to, future expected cash flows
from customer relationships and the trade name, present value and
discount rates. Management’s estimates of fair value are
based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable and, as a result, actual
results may differ from estimates.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
The purchase price allocation of $9.8 million was as
follows:
Fair value of
equity consideration, 4,685,164 common shares
|
$9,792,000
|
Liability assumed:
notes payable
|
158,000
|
Total purchase
price consideration
|
$9,950,000
|
|
|
Tangible
assets
|
|
Net working capital
(1)
|
$6,664,000
|
Deferred
revenue
|
(2,300,000)
|
Fixed assets &
equipment
|
376,000
|
|
|
Intangible assets
(2)
|
|
Customer
contracts
|
1,200,000
|
Trade
name
|
600,000
|
Goodwill
|
3,410,000
|
|
|
Total allocation of
purchase price consideration
|
$9,950,000
|
(1)
Net
working capital consists of cash of $4,947,000; accounts receivable
and contract assets of $3,934,000; other assets of $318,000; and
accrued liabilities of $2,535,000.
(2)
The useful lives related to
the acquired customer
relationships and trade name are expected to be
approximately 10 years.
The following summarized unaudited consolidated pro forma
information shows the results of operations of the Company had the
reverse acquisition occurred on January 1, 2018 and 2017,
respectively:
|
|
Pro Forma
(Unaudited) nine months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
Total
revenues
|
|
$
|
17,185,956
|
|
|
$
|
14,570,015
|
|
|
Net
loss
|
|
$
|
(11,401,488
|
)
|
|
$
|
(6,817,755
|
)
|
|
Net
loss per common share, basic and diluted
|
|
$
|
(1.51
|
)
|
|
$
|
(3.71
|
)
|
|
The summarized unaudited consolidated pro forma results are not
necessarily indicative of results which would have occurred if the
acquisition had been in effect for the periods presented. Further,
the summarized unaudited consolidated pro forma results are not
intended to be a projection of future results.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Unaudited Interim Consolidated Financial Information
The accompanying consolidated balance sheets as of September 30,
2018, the consolidated statements of operations for the three and
nine months ended September 30, 2018 and 2017, the consolidated
statements of cash flows for the nine months ended September 30,
2018 and 2017, and the consolidated statement of
stockholders’ equity (deficit) for the nine months ended
September 30, 2018 are unaudited. These financial statements should
be read in conjunction with the DropCar, Inc’s. 2017
financial statements included in the Company’s Form 8-K/A
filed on April 2, 2018. The unaudited interim consolidated
financial statements have been prepared on the same basis as the
audited annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal
recurring adjustments, necessary for the fair statement of the
Company’s financial position as of September 30, 2018, and
the results of its operations for the three and nine months ended
September 30, 2018 and 2017, and its cash flows for the nine months
ended September 30, 2018 and 2017. The financial data and other
information disclosed in the notes to the consolidated financial
statements related to the nine months ended September 30, 2018 and
2017 are unaudited.
The Company has two reportable operating segments: DropCar
Operating Company, Inc. (“DropCar Operating”) and WPCS
International Suisun City, Inc. and related subsidiaries
(“WPCS”).
DropCar Operating
DropCar Operating is a provider of automotive vehicle support,
fleet logistics, and concierge services for both consumers and the
automotive industry. Its cloud-based Enterprise Vehicle Assistance
and Logistics (“VAL”) platform and mobile application
(“app”) assists consumers and automotive-related
companies to reduce the costs, hassles and inefficiencies of owning
a car, or fleet of cars, in urban centers. In July 2018, DropCar
Operating launched its Mobility Cloud platform which provides
automotive-related businesses with a 100% self-serve SaaS version
of its VAL platform to manage their own operations and drivers, as
well as customer relationship management (“CRM”) tools
that enable their clients to schedule and track their vehicles for
service pickup and delivery. DropCar Operating’s Mobility
Cloud also provides access to private APIs (application programming
interface) which automotive-businesses can use to integrate DropCar
Operating’s logistics and field support directly into their
own applications and processes natively, to create more seamless
client experiences.
On the enterprise side, OEMs, dealers, and other service providers
in the automotive space are increasingly being challenged with
consumers who have limited time to bring in their vehicles for
maintenance and service, making it difficult to retain valuable
post-sale service contracts or scheduled consumer maintenance and
service appointments. Additionally, many of the vehicle support
centers for automotive providers (i.e., dealerships, including body
work and diagnostic shops) have moved out of urban areas thus
making it more challenging for OEMs and dealers in urban areas to
provide convenient and efficient service for their consumer and
business clientele. Similarly, shared mobility providers and other
fleet managers, such as rental car companies and car share
programs, face a similar urban mobility challenge: getting cars to
and from service bays, rebalancing vehicle availability to meet
demand in fleeting and de-fleeting vehicles to and from dealer
lots, auction sites and to other locations.
While DropCar Operating’s business-to-business
(“B2B”) and business-to-consumer (“B2C”)
services generate revenue and help meet the unmet demand for
vehicle support services, DropCar Operating is also building-out a
platform and customer base that it believes positions it well for
developments in the automotive space when vehicles become partially
to fully autonomous and vehicle ownership becomes more subscription
based with transportation services and concierge options
well-suited to match a customer’s immediate
needs.
To date, the Company operates primarily in the New York
metropolitan area. In May 2018, the Company expanded
operations with its B2B business in San Francisco. In June 2018 the
Company expanded its B2B operations in Washington DC. In August
2018, the Company expanded B2B operations to Los Angeles. These
three new market expansions are with a major original equipment
manufacturer (“OEM”) customer.
WPCS
WPCS provides low voltage communication infrastructure services.
WPCS specializes in the installation and service of low voltage
communications, voice and data networks, security systems,
audio-visual solutions, and distributed antenna systems and provide
experienced project management and deliver complex projects to key
vertical markets that include healthcare, education,
transportation, energy and utilities, oil and gas, manufacturing,
commercial real estate, financial, and government,
etc.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
2.
|
Summary of Significant Accounting Policies
|
Liquidity and Basis of Presentation
The Company has a limited operating history and the sales and
income potential of its business and market are unproven. As of
September 30, 2018, the Company has an accumulated deficit of $21.6
million and has experienced net losses each year since its
inception. The Company anticipates that it will continue to incur
net losses into the foreseeable future and will need to raise
additional capital to continue. The Company’s cash is
sufficient to fund its operations into the first quarter of 2019.
These factors raise substantial doubt about the Company’s
ability to continue as a going concern for the twelve months
following the date of the filing of this Form 10-Q.
Management’s plan includes raising funds from outside
investors, and through the potential sale of the Company’s
subsidiary, WPCS International Suisan City, Inc. However, there is
no assurance that outside funding will be available to the Company,
outside funding will be obtained on favorable terms or will provide
the Company with sufficient capital to meet its objectives. These
financial statements do not include any adjustments relating to the
recoverability and classification of assets, carrying amounts or
the amount and classification of liabilities that may be required
should the Company be unable to continue as a going
concern.
The accompanying unaudited consolidated financial statements should
be read in conjunction with the audited financial statements and
notes thereto included in the Company’s Form 8-K/A filed with
the SEC on April 2, 2018. The accompanying consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States
(“GAAP”) for interim financial information, the
instructions for Form 10-Q and the rules and regulations of
the SEC. Accordingly, since they are interim statements, the
accompanying consolidated financial statements do not include all
of the information and notes required by GAAP for annual financial
statements, but reflect all adjustments consisting of normal,
recurring adjustments, that are necessary for a fair presentation
of the financial position, results of operations and cash flows for
the interim periods presented. Interim results are not necessarily
indicative of the results that may be expected for any future
periods. The December 31, 2017 balance sheet information
was derived from the audited financial statements as of that
date.
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
The unaudited consolidated financial statements represent the
consolidation of the accounts of the Company and its subsidiaries
in conformity with GAAP. All intercompany accounts and transactions
have been eliminated in consolidation.
Segment Reporting
In accordance with Accounting Standard Codification
(“ASC”) 280 “Segment Reporting” (“ASC
280”), the Company has two operating segments, DropCar
Operating and WPCS. The Company reviews the operating results of
the two different segments in order to allocate resources and
assess performance for the Company as a whole.
Revenue Recognition
The Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09,
codified as ASC 606: Revenue from Contracts with Customers, which
provides a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers. The
Company adopted ASC 606 effective January 1, 2018 using modified
retrospective basis and the cumulative effect was immaterial to the
financial statements.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Revenue from contracts with customers is recognized when, or as,
the Company satisfies its performance obligations by transferring
the promised goods or services to the customers. A good or service
is transferred to a customer when, or as, the customer obtains
control of that good or service. A performance obligation may be
satisfied over time or at a point in time. Revenue from a
performance obligation satisfied over time is recognized by
measuring the Company’s progress in satisfying the
performance obligation in a manner that depicts the transfer of the
goods or services to the customer. Revenue from a performance
obligation satisfied at a point in time is recognized at the point
in time that the Company determines the customer obtains control
over the promised good or service. The amount of revenue recognized
reflects the consideration the Company expects to be entitled to in
exchange for those promised goods or services (i.e., the
“transaction price”). In determining the transaction
price, the Company considers multiple factors, including the
effects of variable consideration. Variable consideration is
included in the transaction price only to the extent it is probable
that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainties with respect to
the amount are resolved. In determining when to include variable
consideration in the transaction price, the Company considers the
range of possible outcomes, the predictive value of its past
experiences, the time period of when uncertainties expect to be
resolved and the amount of consideration that is susceptible to
factors outside of the Company’s influence, such as the
judgment and actions of third parties.
DropCar Operating
DropCar Operating contracts are generally designed to provide cash
fees to us on a monthly basis or an agreed upfront rate based upon
demand services. The Company’s performance obligation is
satisfied over time as the service is provided continuously
throughout the service period. The Company recognizes revenue
evenly over the service period using a time-based measure because
the Company is providing a continuous service to the customer.
Contracts with minimum performance guarantees or price concessions
include variable consideration and are subject to the revenue
constraint. The Company uses an expected value method to estimate
variable consideration for minimum performance guarantees and price
concessions. The Company has constrained revenue for expected price
concessions during the period ended September 30,
2018.
Monthly Subscriptions
DropCar Operating offers a selection of subscriptions and on-demand
services which include parking, valet, and access to other
services. The contract terms are on a month-to-month subscription
contract with fixed monthly or contract term fees. These
subscription services include a fixed number of round-trip
deliveries of the customer’s vehicle to a designated
location. The Company allocates the purchase price among the
performance obligations which results in deferring revenue until
the service is utilized or the service period has expired. In July
2018, DropCar Operating began assessing demand for a Self-Park
Spaces monthly parking plan whereby consumers could designate
specific garages for their vehicles to be stored at a base monthly
rate, with personal 24/7 access for picking up and returning their
vehicle directly, and the option to pay a la carte on a per hour
basis for a driver to perform functions such as picking up and
returning their vehicle to their front door. This model aligns more
directly with how the Company has structured the enterprise B2B
side of its business, where an interaction with a vehicle on behalf
of its drivers typically generates net new revenue. The DropCar
Operating consumer Self-Park Spaces plan combined with its
on-demand hourly valet service are the only consumer plans offered
from September 1, 2018 onwards. Subscriber plans prior to this date
continued to receive service on a prorated basis through the end of
August 2018. Additionally, the Company is scaling back its 360
Services for the Consumer portion of the market. As a result of
this shift, in August 2018, the Company began to significantly
streamline its field teams, operations and back office support tied
to its pre-September 1, 2018 consumer subscription
plans.
On
Demand Valet and Parking Services
DropCar Operating offers to consumers certain on demand services
through its mobile application. The customer is billed at an hourly
rate upon completion of the services. Revenue is recognized when
the Company had satisfied all performance obligations which is upon
completion of the service.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
DropCar 360 Services
DropCar Operating offers to consumers certain services upon request
including vehicle inspection, maintenance, car washes or to fill up
with gas. The customers are charged a fee in addition to the cost
of the third-party services provided. Revenue is recognized when
the Company had satisfied all performance obligations which is upon
completion of the service.
On Demand Business-To-Business
DropCar Operating also has contracts with car dealerships, car
share programs and others in the automotive industry transporting
vehicles. Revenue is recognized at the point in time all
performance obligations are satisfied which is when the Company
provide the delivery service of the vehicles.
WPCS generates its revenue by offering low voltage communications
infrastructure contracting services.
WPCS recognizes revenue and profit from long term contracts when it
satisfies a performance obligation by transferring control of
promised goods or service to a customer. Revenue is recognized over
time by measuring progress toward complete satisfaction of the
performance obligation.
WPCS uses an input method which recognizes revenue over time based
on WPCS’s labor and materials costs expended for a period as
a percentage of total labor and materials costs expected to satisfy
the performance obligation of delivering the overall infrastructure
project. Input method is used because management believes it is the
best available method that measures revenue on the basis of the
company’s inputs toward satisfaction of the performance
obligation. Inputs costs include direct materials, direct labor,
third party subcontractor services and those indirect costs related
to contract performance.
WPCS has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the
appropriate cost and revenue recognition. Cost estimates are
reviewed monthly on a contract-by-contract basis and are revised
periodically throughout the life of the contract such that
adjustments to profit resulting from revisions are made cumulative
to the date of the revision. Significant management judgments and
estimates, including the estimated cost to complete projects, which
determines the project’s percent complete, must be made and
used in connection with the revenue recognized in the accounting
period. Current estimates may be revised as additional information
becomes available. If estimates of costs to complete long-term
contracts indicate a loss, provision is made currently for the
total loss anticipated.
The length of WPCS’s contracts varies but is typically
between three months and two years. Assets and liabilities related
to long-term contracts are included in current assets and current
liabilities in the accompanying consolidated balance sheets, as
they will be liquidated in the normal course of contract
completion, although this may require more than one year. Contract
assets represents revenue recognized in excess of amounts billed.
Contract liabilities represents billings in excess of revenue
recognized.
WPCS also recognizes revenue from short-term contracts at a point
in time when the services have been provided to the
customer.
For maintenance contracts, revenue is recognized ratably over the
service period.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Disaggregated Revenues
The following table presents our revenues from contracts with
customers disaggregated by revenue source.
|
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|
|
|
|
|
DropCar Operating
Subscription Services
|
$1,118,544
|
$1,061,865
|
$
3,758,099
|
$2,165,793
|
DropCar Operating
Services On-Demand
|
270,590
|
207,691
|
1,197,107
|
631,616
|
DropCar Operating
Revenue (1)
|
1,389,134
|
1,269,556
|
4,955,206
|
2,797,409
|
|
|
|
|
|
WPCS
Revenue
|
3,222,928
|
-
|
10,871,777
|
-
|
|
|
|
|
|
Total Revenues
(2)
|
$4,612,062
|
$1,269,556
|
$15,826,983
|
$2,797,409
|
|
(1)
|
Represents
revenues recognized by type of services.
|
|
(2)
|
All
revenues are generated in the United States.
|
The
following presents our revenues from B2C and B2B
customers.
●
For
the three months ended September 30, 2018 and 2017, the DropCar
Operating B2C segment revenue was $1,164,093 and $1,170,859,
respectively
●
For
the three months ended September 30, 2018 and 2017, the DropCar
Operating B2B segment revenue was $225,041 and $98,697,
respectively
●
For
the nine months ended September 30, 2018 and 2017, the DropCar
Operating B2C segment revenue was $4,244,682 and $2,492,362,
respectively
●
For
the nine months ended September 30, 2018 and 2017, the DropCar
Operating B2B segment revenue was $710,524 and $305,047,
respectively
WPCS Net Contract Liabilities
As of
September 30, 2018, and January 31, 2018 (date of acquisition),
WPCS net contract liabilities consisted of the
following:
|
|
|
Contract
Assets
|
$427,480
|
$243,764
|
Contract
Liabilities, current
|
(1,961,758)
|
(2,533,501)
|
Purchase price
adjustment on date of acquisition for contract
liabilities
|
-
|
239,064
|
Contract
Liabilities, non-current
|
-
|
-
|
Contract
liabilities, net
|
$(1,534,278)
|
$(2,050,673)
|
The
$516,395 decrease in net contract liabilities for the eight month
period from January 31, 2018 ending September 30, 2018 is
attributable to the decrease in the net contract liability balances
of WPCS’s uncompleted long and short-term contracts due to
completion or substantial completion of various projects which were
previously billed in advance. In WPCS’s contracts, amounts
are billed as work progresses in accordance with agreed-upon
contractual terms which are either at periodic intervals or upon
satisfaction of contractual obligation. These progressive billings
sometimes occur subsequent to recognition of revenue resulting in
contract assets. However, some progressive billings occur before
recognition of revenue which results into contract liabilities.
These liabilities are liquidated when revenues are recognized by
satisfying the performance obligations. There was no impairment of
any contract assets recognized during the period.
WPCS Backlog
The following table summarizes changes in the WPCS backlog during
the nine months ended September 30, 2018:
|
|
|
|
|
|
Backlog —
date of acquisition
|
$13,262,563
|
New
awards
|
14,115,811
|
Adjustments and
cancellations, net (1)
|
1,454,725
|
Work
performed
|
(10,871,777)
|
Backlog — end
of period
|
$17,961,322
|
(1)
The
net adjustments and cancellation for the period are primarily due
to change orders and other project scope adjustments.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
WPCS Remaining Unsatisfied Performance Obligations
WPCS’s remaining or unsatisfied performance obligation at
September 30, 2018 was approximately $18 million. Remaining or
unsatisfied performance obligation are comprised of original
contract amounts and change orders for which WPCS has obtained
written confirmations. These remaining unsatisfied performance
obligation increases with awards of new contracts and decreases as
WPCS performs work and recognize revenue on existing contracts. The
table below includes an estimate as to when WPCS anticipates
recognizing revenue from these unsatisfied performance
obligations.
|
|
|
Remaining
performance obligations:
|
|
|
Unsatisfied
Performance Obligation
|
14,278,413
|
3,682,909
|
Total remaining
performance obligation
|
$14,278,413
|
$3,682,909
|
Employee Stock-Based Compensation
The Company recognizes all employee share-based compensation as a
cost in the financial statements. Equity-classified awards
principally related to stock options, restricted stock units
(“RSUs”) and equity-based compensation, are measured at
the grant date fair value of the award. The Company determines
grant date fair value of stock option awards using the
Black-Scholes option-pricing model. The fair value of RSUs are
determined using the closing price of the Company’s common
stock on the grant date. For service-based vesting grants, expense
is recognized ratably over the requisite service period based on
the number of options or shares expected to ultimately vest.
Stock-based compensation is reversed for forfeitures in the period
of forfeiture.
The Company has one equity incentive plan, the 2014 Equity
Incentive Plan (the “Plan”). As of September 30, 2018,
there were 38,875 shares reserved for future issuance under the
Plan.
On
September 26, 2018 the Company’s Board of Directors resolved
to increase the options under this plan. The resolution is subject
to approval from the stockholders on the adoption of an amendment
to the WPCS International Incorporated Amended and Restated 2014
Equity Incentive Plan at the annual meeting on November 15, 2018.
If this proposal is approved, the number of shares authorized for
issuance of awards under the Plan will be increased from 2,527,272
to an aggregate of 4,239,772 shares of common stock. In connection
with this amendment, the Company is changing the name of the Plan
to the “DropCar, Inc. Amended and Restated 2014 Equity
Incentive Plan” to reflect the name change.
Intangible Assets
Intangible assets consist of purchased customer contracts and the
WPCS tradename that were acquired in the Reverse Merger. Intangible
assets with definite lives are amortized on a straight-line basis
over their estimated useful lives and are reviewed for impairment
when indications of impairment are present or when events occur
indicating a potential impairment.
Goodwill
Goodwill represents the excess of purchase price over fair value of
net assets acquired in the Reverse Merger and is not amortized.
Goodwill is subject to impairment testing at least annually or when
a triggering event occurs that could indicate a potential
impairment. In accordance with ASC 350, the Company assesses
goodwill for impairment at the reporting unit level. A reporting
unit is an operating segment or one level below the operating
segment. The Company has determined that it has two operating
segments as its reporting units, DropCar Operating and WPCS. All of
the goodwill is recorded at the WPCS reporting unit.
Property and Equipment
The Company accounts for property and equipment at cost less
accumulated depreciation. The Company computes depreciation using
the straight-line method over the estimated useful lives of the
assets. The Company generally depreciates property and equipment
over a period of three to seven years. Depreciation for property
and equipment commences once they are ready for its intended
use.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Capitalized Software
Costs related to website and internal-use software development are
accounted for in accordance with Accounting Standards Codification
(“ASC”) Topic
350-50 — Intangibles — Website
Development Costs. Such software is primarily related to our
websites and mobile apps, including support systems. We begin to
capitalize our costs to develop software when preliminary
development efforts are successfully completed, management has
authorized and committed project funding, it is probable that the
project will be completed, and the software will be used as
intended. Costs incurred prior to meeting these criteria are
expensed as incurred and recorded within General and administrative
expenses within the accompanying statements of operations. Costs
incurred for enhancements that are expected to result in additional
features or functionality are capitalized. Capitalized costs are
amortized over the estimated useful life of the enhancements,
generally between two and three years.
Impairment of Long-Lived Assets
Long-lived assets are primarily comprised of intangible assets,
property and equipment, and capitalized software costs. The Company
evaluates its Long-Lived Assets for impairment whenever events or
changes in circumstances indicate the carrying value of an asset or
group of assets may not be recoverable. If these circumstances
exist, recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset group to future
undiscounted net cash flows expected to be generated by the asset
group. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. There
were no impairments to long-lived assets for the periods ended
September 30, 2018 and 2017.
Income Taxes
The Company provides for income taxes using the asset and liability
approach. Deferred tax assets and liabilities are recorded based on
the differences between the financial statement and tax bases of
assets and liabilities and the tax rates in effect when these
differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. As of September 30,
2018, and December 31, 2017, the Company had a full valuation
allowance against deferred tax assets.
The Tax Cuts and Jobs Act (the “Tax Act”), enacted on
December 22, 2017, among other things, permanently lowered the
statutory federal corporate tax rate from 35% to 21%, effective for
tax years including or beginning January 1, 2018. Under the
guidance of ASC 740, “Income Taxes” (“ASC
740”), the Company revalued its net deferred tax assets on
the date of enactment based on the reduction in the overall future
tax benefit expected to be realized at the lower tax rate
implemented by the new legislation. Although in the normal course
of business the Company is required to make estimates and
assumptions for certain tax items which cannot be fully determined
at period end, the Company did not identify items for which the
income tax effects of the Tax Act have not been completed as of
September 30, 2018 and, therefore, considers its accounting for the
tax effects of the Tax Act on its deferred tax assets and
liabilities to be complete as of September 30, 2018.
Fair Value Measurements
The Company accounts for financial instruments in accordance with
ASC 820, “Fair Value Measurements and Disclosures”
(“ASC 820”). ASC 820 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy under ASC 820 are described
below:
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Level 1 – Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2 – Quoted prices in markets that are not active or
financial instruments for which all significant inputs are
observable, either directly or indirectly; and
Level 3 – Prices or valuations that require inputs that are
both significant to the fair value measurement and
unobservable.
Financial instruments with carrying values approximating fair value
include cash, accounts receivable, accounts payable and accrued
expenses, deferred income, accrued interest and loans payable, due
to their short-term nature.
Loss Per Share
Basic loss per share is computed by dividing net loss attributable
to common shareholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) for the
period. Diluted loss per share are computed by assuming that any
dilutive convertible securities outstanding were converted, with
related preferred stock dividend requirements and outstanding
common shares adjusted accordingly. It also assumes that
outstanding common shares were increased by shares issuable upon
exercise of those stock options for which market price exceeds the
exercise price, less shares which could have been purchased by us
with the related proceeds. In periods of losses, diluted loss per
share is computed on the same basis as basic loss per share as the
inclusion of any other potential shares outstanding would be
anti-dilutive.
The following securities were excluded from weighted average
diluted common shares outstanding because their inclusion would
have been antidilutive.
|
|
|
|
|
Common stock
equivalents:
|
|
|
Common stock
options
|
941,282
|
-
|
Series A, H-1, H-3,
H-4, I, J and Merger common stock purchase warrants
|
3,511,840
|
-
|
Series H, H-3, and
H-4 Convertible Preferred Stock
|
2,739,225
|
-
|
Restricted shares
(unvested)
|
1,467,858
|
-
|
Convertible
notes
|
-
|
549,415
|
Series seed
preferred stock
|
-
|
275,691
|
Series A preferred
stock
|
-
|
611,944
|
Totals
|
8,660,205
|
1,437,050
|
Adoption of New Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers. Under the new standard, revenue is
recognized at the time a good or service is transferred to a
customer for the amount of consideration for which the entity
expects to be entitled for that specific good or
service. Entities may use a full retrospective approach or on
a prospective basis and report the cumulative effect as of the date
of adoption. The Company adopted the new standard on January 1,
2018 using prospective basis and the cumulative effect was
immaterial to the financial statements. The new standard also
requires enhanced disclosures about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer
contracts.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share
(Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for
Certain Financial Instruments with Down Round Features. These
amendments simplify the accounting for certain financial
instruments with down round features. The amendments require
companies to disregard the down round feature when assessing
whether the instrument is indexed to its own stock, for purposes of
determining liability or equity classification. The adoption of
this standard on January 1, 2018 did not have a material effect on
the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business.
The new guidance dictates that, when substantially all of the fair
value of the gross assets acquired (or disposed of) is concentrated
in a single identifiable asset or a group of similar identifiable
assets, it should be treated as an acquisition or disposal of an
asset. The guidance was adopted as of January 1, 2018 and did not
have a material effect on the Company’s financial
statements.
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the
FASB or other standard setting bodies. Unless otherwise discussed,
the Company believes that the impact of recently issued standards
that are not yet effective will not have a material impact on its
consolidated financial position or results of operations upon
adoption.
In
February 2016, the FASB established Topic 842, as amended, Leases,
by Issuing Accounting Standards Update (ASU) No. 2016-02, which
requires lessees to recognize leases on-balance sheet and disclose
key information about leasing arrangements. The new standard
establishes a right-of-use model (ROU) that requires a lessor to
recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be
classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the income
statement. The new standard is effective for us on January 1, 2019
with early adoption permitted. We expect to adopt the new standard
on its effective date. A modified retrospective transition approach
is required, applying the new standard to all leases existing at
the date of initial application. An entity may choose to use either
(1) its effective date or (2) the beginning of the earliest
comparative period presented in the financial statements as its
date of initial application. We expect that this standard will have
a material effect on our financial statements. While we continue to
assess all of the effects of adoption, we currently believe the
most significant effects relate to (1) the recognition of new ROU
assets and lease liabilities on our balance sheet for our office
and equipment operating leases and providing significant new
disclosures about our leasing activities.
In January 2017, the FASB issued Accounting Standards Update No.
2017-04 (ASU 2017-04), Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. ASU 2017-04
eliminates step two of the goodwill impairment test and specifies
that goodwill impairment should be measured by comparing the fair
value of a reporting unit with its carrying amount. Additionally,
the amount of goodwill allocated to each reporting unit with a zero
or negative carrying amount of net assets should be disclosed. ASU
2017-04 is effective for annual or interim goodwill impairment
tests performed in fiscal years beginning after December 15, 2019;
early adoption is permitted. The Company currently anticipates that
the adoption of ASU 2017-04 will not have a material impact on its
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Changes to
Disclosure Requirements for Fair Value Measurements, which will
improve the effectiveness of disclosure requirements for recurring
and nonrecurring fair value measurements. The standard removes,
modifies, and adds certain disclosure requirements, and is
effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. The Company is currently
evaluating the impact this standard will have on the
Company’s consolidated financial statements.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Accounts Receivable
The concentration of WPCS accounts receivable are as
follows:
|
|
|
|
|
Customer
A
|
21%
|
-
|
Customer
B
|
21%
|
-
|
Customer
C
|
15%
|
-
|
Revenue Recognition
The concentration of WPCS revenue recognition are as
follows:
|
For the three
months ended September 30,
|
For the nine
months ended September 30,
|
|
|
|
|
|
Customer
A
|
13%
|
-
|
14%
|
-
|
Customer
B
|
8%
|
-
|
10%
|
-
|
Customer
C
|
2%
|
-
|
9%
|
-
|
For the nine months ended September 30, 2018 and 2017, the DropCar
Operating segment did not have any customers in excess of 10% of
accounts receivable or revenue.
Capitalized software consists of the following as of September 30,
2018 and December 31, 2017:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Software
|
|
$
|
1,244,991
|
|
|
$
|
904,383
|
|
Accumulated
amortization
|
|
|
(565,687
|
)
|
|
|
(314,799
|
)
|
Total
|
|
$
|
679,304
|
|
|
$
|
589,584
|
|
Amortization expense charged to capitalized software for the three
months ended September 30, 2018 and 2017, was $91,312 and $45,340,
respectively. Amortization expense for the nine months ended
September 30, 2018 and 2017 was $250,888 and $136,020,
respectively.
|
5.
|
Convertible Notes Payable
|
During the year ended December 31, 2017, the Company issued
convertible notes totaling $4,840,000 and warrants to acquire
878,146 shares of common stock at an exercise price of $9.84 per
share in connection with the convertible notes (the
“Notes”). The Notes all had a maturity date of one year
from the date of issuance, and accrued interest at a rate of 6% per
annum, compounded annually. The Notes were convertible at $5.90 per
share and, including accrued interest, were converted into 847,819
shares of common stock in connection with the Reverse Merger. At
September 30, 2018 and December 31, 2017, the aggregate
carrying value of the Notes was $0 and $3,506,502,
respectively.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Loans payable relate to vehicles. These loans mature at various
times from 2018 through 2023. The stated interest rate on the loans
range from 0% to 5%. As of September 30, 2018, and December 31,
2017 the carrying value of loans payable was $121,888 and $0
respectively.
Estimated future minimum payments over the next five years
are:
Year
1
|
$52,514
|
Year
2
|
35,866
|
Year
3
|
25,137
|
Year
4
|
6,670
|
Year
5
|
1,701
|
Thereafter
|
-
|
|
$121,888
|
|
7.
|
Commitments & Contingencies
|
Lease Agreements
The Company has short term leases for office space in New York City
that expires on November 30, 2018.
The Company leases its office facilities in California for WPCS
pursuant to a noncancelable operating lease expiring in February
2021. WPCS remaining lease commitments for the years 2019,
2020 and 2021 are $80,208, $80,208 and $13,368
respectively.
For the three months ended September 30, 2018 and 2017, rent
expense for the Company’s facilities was $69,000 and $15,000,
respectively. For the nine months ended September 30, 2018 and
2017, rent expense for the Company’s facilities was $178,000
and $33,000, respectively.
Litigation
The Company’s DropCar Operating segment 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.
In February 2018, DropCar was served an Amended Summons and
Complaint in the Supreme Court of the City of New York, Bronx
county originally served solely on an individual, a former DropCar
customer, for injuries sustained by plaintiffs alleging such
injuries were caused by either the customer, a DropCar valet
operating the customer’s vehicle or an unknown driver
operating customer’s vehicle. DropCar to date has cooperated
with the NYC Police Department and no charges have been brought
against any employee of DropCar. DropCar has referred the matter to
its insurance carrier.
On February 9, 2016, a DropCar employee was transporting a
customer’s vehicle when the vehicle caught fire. On
November 22, 2016, an insurance company (as subrogee of the
vehicle’s owner) filed for indemnification and subrogation
against the Company in the Supreme Court of the State of New York
County of New York. Management believes that it is not responsible
for the damage caused by the vehicle fire and that the fire was not
due to any negligence on the part of the DropCar and that the
resolution will not have a material outcome.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Other
As of December 31, 2017, the Company had accrued approximately
$96,000 for the potential settlement of multiple employment
disputes. During the nine months ended September 30, 2018,
approximately $44,000 of this amount was settled upon payment. An
additional $117,000 was expensed and accrued for potential
settlements during the nine months ended September 30, 2018. As of
September 30, 2018, approximately $169,000 remains accrued for the
potential settlement of employment disputes. As of September 30,
2018, the Company has entered into multiple settlement agreements
with former employees for which it has agreed to make monthly
settlement payments which will extend through the year ended
December 31, 2019.
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 DropCar’s
business, consolidated financial position, results of operations or
cash flows. As of September 30, 2018, the Company has accrued
approximately $60,000 in relation to this matter.
Common Stock
On January 18, 2018, the Company sold 60,340 shares of common stock
for proceeds of $300,000.
On January 30, 2018, the Company converted $3,682,502, the net
carrying value of the principal balance of $4,840,000 convertible
notes payable, into 820,710 shares of common stock just prior to
the Reverse Merger.
During the nine months ended September 30, 2018, the Company
converted $159,584 of accrued interest related to the convertible
notes into 27,109 shares of common stock.
During the nine months ended September 30, 2018, the Company
granted 20,000 shares of common stock to a service provider and
recorded $31,800 as general and administrative expense in the
Company’s consolidated statements of operations.
On September 4, 2018, the Company issued 1,560,696 shares of common
stock from the exercise of Series H-4 Warrants.
Preferred Stock
Series Seed
On January 30, 2018, the Company converted 275,691 shares of Series
Seed Preferred Stock into common stock in connection with the
Reverse Merger.
Series A
On January 30, 2018, the Company converted 611,944 shares of Series
A Preferred Stock into common stock in connection with the Reverse
Merger.
Series H Convertible
On January 30, 2018, in accordance with the Merger the Company
issued 8 shares of Series H Convertible Preferred
Stock.
Series H-1 and H-2 Convertible
The Company has designated 9,488 Series H-1 Preferred Stock and
designated 3,500 Series H-2 Preferred Stock, none of which are
outstanding.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Series H-3 Convertible
On January 30, 2018, in accordance with the Merger the Company
issued 2,189 shares of Series H-3 Convertible Preferred
Stock.
Series H-4 Convertible
On March 8, 2018, the Company entered into a Securities Purchase
Agreement (the “Securities Purchase Agreement”) with
investors pursuant to which the Company issued to the Investors an
aggregate of 25,472 shares of the Company’s newly designated
Series H-4 Convertible Preferred Stock, par value $0.0001 per share
(the “Series H-4 Shares”) convertible into 2,547,200
shares of common stock of the Company, and warrants to purchase
2,547,200 shares of common stock of the Company, with an exercise
price of $2.60 per share, subject to adjustments (the
“Warrants”). The purchase price per Series H-4 Share
and warrant was $235.50, equal to (i) the closing price of the
Common Stock on the Nasdaq Capital Market on March 7, 2018, plus
$0.125 multiplied by (ii) 100. The aggregate purchase price for the
Series H-4 Shares and Warrants was approximately $6.0 million.
Subject to certain ownership limitations, the Warrants are
immediately exercisable from the issuance date and are exercisable
for a period of five years from the issuance date.
On March 8, 2018, the Company filed the Certificate of
Designations, Preferences and Rights of the Series H-4 Convertible
Preferred Stock (the “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-4
Convertible Preferred Stock (the “Series H-4 Stock”).
The Company designated up to 30,000 shares of Series H-4 Stock and
each share has a stated value of $235.50 (the “Stated
Value”). Each share of Series H-4 Stock is convertible at any
time at the option of the holder thereof, into a number of shares
of Common Stock determined by dividing the Stated Value by the
initial conversion price of $2.355 per share, subject to a 9.99%
blocker provision. The Series H-4 Stock has the same dividend
rights as the Common Stock, and no voting rights except as provided
for in the Certificate of Designation or as otherwise required by
law. In the event of any liquidation or dissolution of the Company,
the Series H-4 Stock ranks senior to the Common Stock in the
distribution of assets, to the extent legally available for
distribution.
On September 5, 2018, the Company received a request from The
Nasdaq Stock Market (“Nasdaq”) to amend the Certificate
of Designation to provide that the Series H-4 Shares may not be
converted into shares of Common Stock until the Company has
obtained stockholder approval of the issuance of the Common Stock
underlying the Series H-4 Shares pursuant to the applicable rules
and regulations of Nasdaq. In response to the request, on September
10, 2018, the Company filed a Certificate of Amendment (the
“COD Amendment”) to the Certificate of Designation to
provide for stockholder approval as described above prior to the
conversion of the Series H-4 Shares.
Stock Based Compensation
Service Based Restricted Stock Units
On February 28, 2018, the Company issued 1,467,858 restricted stock
units (“RSUs”) to two members of management. The RSUs
vest on the one-year anniversary from the grant date. The RSUs were
valued using the fair market value of the Company’s closing
stock price on the date of grant totaling $3,243,966 which is being
amortized over the vesting period.
At September 30, 2018, unamortized stock compensation for the RSUs
was $1,341,934, which will be recognized over the next five
months.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Service Based Warrants
On March 8, 2018, in connection with the financing discussed above,
the Company issued 1,371 Series H-4 Shares and 137,100 common stock
warrants to a service provider. The Company valued these warrants
using the Black-Scholes option pricing model with the following
inputs: exercise price of $2.60; fair market value of underlying
stock of $2.20; expected term of 5 years; risk free rate of 2.63%;
volatility of 120.63%; and dividend yield of 0%. For the nine
months ended September 30, 2018, the Company recorded the fair
market value of the Series H-4 Shares and warrants as an increase
and decrease to additional paid in capital in the amount of
$568,648 as these services were provided in connection with the
sale of the Series H-4 shares.
Employee and Non-employee Stock Options
The following table summarizes stock option activity during the
nine months ended September 30, 2018:
|
Shares
Underlying Options
|
Weighted Average
Exercise Price
|
Weighted average
Remaining Contractual Life (years)
|
Aggregate
Intrinsic Value
|
Outstanding at
December 31, 2017
|
-
|
$-
|
-
|
-
|
Acquired in Reverse
Merger
|
802,268
|
5.44
|
4.13
|
-
|
Granted
|
410,081
|
2.04
|
9.51
|
-
|
Forfeited
|
(271,067)
|
1.94
|
-
|
-
|
Outstanding at
September 30, 2018
|
941,282
|
$5.50
|
4.91
|
-
|
At September 30, 2018, unamortized stock compensation for stock
options was approximately $225,000, with a weighted-average
recognition period of 2.5 years.
Share Based Compensation
The following table sets forth total non-cash stock-based
compensation for RSUs and options issued to employees and
non-employees by operating statement classification for the three
and nine months ended September 30, 2018 and 2017:
|
Three Months ended September 30,
|
Nine Months ended September 30,
|
|
|
|
|
|
Sales and
marketing
|
$382,812
|
$144,154
|
$982,816
|
$342,000
|
Research
and development
|
2,127
|
-
|
8,837
|
-
|
General and
administrative
|
402,797
|
144,154
|
996,735
|
367,000
|
Total
|
$787,736
|
$288,308
|
$1,988,388
|
$709,000
|
Stock option pricing model
The fair value of the stock options granted during the nine months
ended September 30, 2018, was estimated at the date of grant using
the Black-Scholes options pricing model with the following
assumptions:
Fair
value of common stock
|
|
$1.82 -
$2.21
|
Expected
volatility
|
|
118.10%
- 143.50%
|
Dividend
yield
|
|
$0
|
Risk-free
interest
|
|
2.85% -
3.00%
|
Expected
life (years)
|
|
5.125 -
5.33
|
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Warrants
Warrant Exchange
On April 19, 2018, the Company entered into separate Warrant
Exchange Agreements (the “Exchange Agreements”) with
the holders (the “Merger Warrant Holders”) of existing
warrants issued in the Reverse Merger (the “Merger
Warrants”) to purchase shares of Common Stock, pursuant to
which, on the closing date, the Merger Warrant Holders exchanged
each Merger Warrant for 1/3rd of a share of Common Stock and
½ of a warrant to purchase a share of Common Stock
(collectively, the “Series I Warrants”). The Series I
Warrants have an exercise price of $2.30 per share. In connection
with the Exchange Agreements, the Company issued an aggregate of
(i) 292,714 new shares of common stock and (ii) Series I Warrants
to purchase an aggregate of 439,070 shares of common stock. The
Company valued the (a) stock and warrants issued in the amount of
$972,368, (b) the warrants retired in the amount of $655,507, and
(c) recorded the difference as deemed dividend in the amount of
$316,861. The warrants were valued using the Black-Scholes
option-pricing model on the date of the exchange using the
following assumptions: (a) fair value of common stock $1.72, (b)
expected volatility of 103% and 110%, (c) dividend yield of $0, (d)
risk-free interest rate of 2.76% and 2.94%, (e) expected life of 3
years and 4.13 years.
Exercise of Series H-4 Warrants and Issuance of Series J
Warrants
On August 31, 2018, the Company offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of the
Company’s outstanding Series H-4 Warrants to purchase common
stock of the Company issued on March 8, 2018 (the “Series H-4
Warrants”) the opportunity to exercise such Series H-4
Warrants for cash at a reduced exercise price of $0.60 per share
(the “Reduced Exercise Price”) provided such Series H-4
Warrants were exercised for cash on or before September 4, 2018
(the “End Date”). In addition, the Company issued a
“reload” warrant (the “Series J Warrants”)
to each Holder who exercised their Series H-4 Warrants prior to the
End Date, covering one share for each Series H-4 Warrant exercised
during that period. 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 $1.00, (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
VWAP (as defined in the Series J Warrant) for the Company’s
common stock equals or exceeds $1.50 for not less than ten
consecutive trading days.
On September 4, 2018, the Company received executed Repricing Offer
Letters from a majority of the Holders, which resulted in the
issuance of 1,560,696 shares of the Company’s common stock
and Series J Warrants to purchase up to 1,560,696 shares of the
Company’s common stock. The Company received gross proceeds
of approximately $936,000 from the exercise of the Series H-4
Warrants pursuant to the terms of the Repricing Offer
Letter.
On September 5, 2018, the Company received a request from Nasdaq to
amend our Series H-4 Warrants to provide that the Series H-4
Warrants may not be exercised until the Company has obtained
stockholder approval of the issuance of Common Stock underlying the
Series H-4 Warrants pursuant to the applicable rules and
regulations of Nasdaq. In response to the request, on September 10,
2018, the Company entered into an amendment (the “Warrant
Amendment”) with the holders of the Series H-4 Stock to
provide for stockholder approval as described above prior to the
exercise of the Series H-4 Warrants.
The Company
considers the warrant amendment for the Reduced Exercise Price and
issuance of the Series J Warrants to be of an equity nature as the
amendment and issuance allowed the warrant holders to exercise
warrants and receive a share of Common Stock and warrant which,
represents an equity for equity exchange. Therefore, the change in
the fair value before and after the modification and the fair value
of the Series J warrants will be treated as a deemed dividend in
the amount of $1,019,040. The cash received upon exercise in excess
of par is accounted through additional paid in
capital.
The Company
valued the deemed dividend as the sum of: (a) the difference
between the fair value of the modified award and the fair value of
the original award at the time of modification of $129,476, and (b)
the fair value of the Series J Warrants in the amount of $889,564.
The warrants were valued using the Black-Scholes option-pricing
model on the date of the modification and issuance using the
following assumptions: (a) fair value of common stock $0.65, (b)
expected volatility of 144.3%, (c) dividend yield of $0, (d)
risk-free interest rate of 2.77% and 2.78%, (e) expected life of
4.51 years and 5 years.
At the March
8, 2018 closing, the Company issued Series H-4
Warrants that entitled the holders to purchase, in aggregate,
up to 2,684,300 shares of its common stock. As referenced above, on
September 4, 2018, the Company received executed Repricing Offer
Letters from a majority of the investors resulting in the exercise
of Series H-4 Warrants to purchase 1,560,696 shares of common
stock. The Series H-4 Warrants were initially exercisable at an
exercise price equal to $2.60 per share, which is now subject to
adjustment at a reduced exercise price of $0.60 per share pending
stockholder approval as proposed in the Company’s Notice of
2018 Annual Meeting of Stockholders. If this proposal is approved
by the stockholders, the exercise price of the remaining Series H-4
Warrants will be reduced to $0.60 per share which will entitle the
holders of the remaining Series H-4 Warrants to purchase, in
aggregate, up to 1,122,704 additional shares of common
stock.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
A summary of the Company’s warrants to purchase common stock
activity is as follows:
|
|
Weighted Average
Exercise Price
|
Outstanding,
December 31, 2017
|
878,146
|
$9.84
|
Acquired, H-1
warrants
|
304,466
|
4.84
|
Acquired, H-3
warrants
|
84,004
|
5.52
|
Granted, H-4
warrants
|
2,684,300
|
2.60
|
Granted, I
warrants
|
439,070
|
2.30
|
Granted, J
warrants
|
1,560,696
|
1.00
|
Exercised, H-4
warrants
|
(1,560,696)
|
0.60
|
Retired, Merger
warrants
|
(878,146)
|
9.84
|
Outstanding,
September 30, 2018
|
3,511,840
|
$2.12
|
The warrants expire through the years 2020-2024.
In accordance with FASB ASC 280, “Segment Reporting”
("ASC 280"), the Company discloses financial and descriptive
information about its reportable operating segments. Operating
segments are components of an enterprise about which separate
financial information is available and regularly evaluated by the
Company in deciding how to allocate resources and in assessing
performance.
The Company follows ASC 280, which establishes standards for
reporting information about operating segments in annual and
interim financial statements and requires that companies report
financial and descriptive information about their reportable
segments based on a management approach. ASC 280 also establishes
standards for related disclosures about products and services,
geographic areas and major customers. The Company currently divides
its operations into two operating segments: DropCar, Inc. which
delivers its VAL platform and mobile application; and WPCS which
specializes in the installation and service of low voltage
communications.
The accounting policies of each of the segments are the same as
those described in the Summary of Significant Accounting Policies.
The Company evaluates performance based on revenue, gross profit
contribution and assets employed. Corporate level operating costs
are allocated to each segment in which they are incurred. These
costs include corporate costs such as legal, audit, tax and other
professional fees including those related to being a public
company.
|
As
of and For the Nine Months Ended September 30,
|
|
|
|
DropCar
Operating
|
|
|
Net
Sales
|
$4,955,206
|
$797,409
|
Gross Profit
(Loss)
|
(1,658,377)
|
(72,586)
|
Net
(Loss)
|
(11,059,671)
|
(5,088,430)
|
Assets
|
2,199,606
|
898,988
|
|
|
|
WPCS
|
|
|
Net
Sales
|
10,871,777
|
-
|
Gross
Profit
|
2,294,930
|
-
|
Net
Income
|
377,207
|
-
|
Assets
|
10,823,092
|
-
|
|
|
|
Consolidated
|
|
|
Net
Sales
|
$15,826,983
|
$2,797,409
|
Gross
Profit
|
636,553
|
(72,586)
|
Net
(Loss)
|
(10,682,464)
|
(5,088,430)
|
Assets
|
13,022,698
|
898,988
|
On July
11, 2018, the Company entered into a consulting agreement (the
“Consulting Agreement”) with Ascentaur, LLC
(“Ascentaur”). Sebastian Giordano is the Chief
Executive Officer of Ascentaur. Mr. Giordano has served on the
board of directors of the Company since February 2013 and served as
the Company’s Interim Chief Executive Officer from August
2013 through April 2016 and as the Company’s Chief Executive
Officer from April 2016 through January 2018.
Pursuant
to the terms of the Consulting Agreement, Ascentaur has agreed to
provide advisory services with respect to the strategic development
and growth of the Company, including advising the Company on market
strategy and overall Company strategy, advising the Company on the
sale of the Company’s WPCS International business segment,
providing assistance to the Company in identifying and recruiting
prospective employees, customers, business partners, investors and
advisors that offer desirable administrative, financing,
investment, technical, marketing and/or strategic expertise, and
performing such other services pertaining to the Company’s
business as the Company and Ascentaur may from time to time
mutually agree. The term of the Consulting Agreement commenced on
July 11, 2018 and will continue until April 9, 2019 or until
terminated in accordance with the terms of the Consulting
Agreement.
The
amount recorded for the three months and nine months ended
September 30, 2018, was $30 thousand before related reimbursement
expense of $838. Of this amount, $18 thousand was disbursed, and
the balance of approximately $13 thousand remains in accounts
payable at September 30, 2018.
On November 14, 2018, the
Company entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with an existing investor,
pursuant to which the Company agreed to issue and sell, in a
registered direct offering (the “Offering”), Pre-Funded
Series K Warrants (the “Pre-Funded Series K Warrants”)
to purchase 1,666,666 shares of common stock (and the shares of
Common Stock issuable upon exercise of the Pre-Funded Series K
Warrants (the “Warrant Shares”)), in lieu of shares of
common stock because the purchase of common stock would have caused
the beneficial ownership of the Purchaser, together with its
affiliates and certain related parties, to exceed 9.99% of the
Company’s outstanding common stock. The price to
the Purchaser for each Pre-Funded Series K Warrant was $0.59 and
the Pre-Funded Series K Warrants are immediately exercisable at a
price of $0.01 per share of common stock. The Company
received approximately $0.983 million in gross proceeds from the
Offering before the deduction of fees and offering expenses. The
Pre-Funded Series K Warrants and the Warrant Shares are being
offered by the Company pursuant to a registration statement on Form
S-3 (File No. 333-227858), which was initially filed with the
Securities and Exchange Commission (the “Commission”)
on October 16, 2018 and was declared effective by the Commission on
November 9, 2018 (the “Registration
Statement”).
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following management’s discussion and analysis should be
read in conjunction with our historical financial statements and
the related notes thereto. This management’s discussion and
analysis contains forward-looking statements, such as statements of
our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking
statements. When used, the words “believe,”
“plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect”
and the like, and/or future tense or conditional constructions
(“will,” “may,” “could,”
“should,” etc.), or similar expressions, identify
certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those
under “Risk Factors” in our filings with the Securities
and Exchange Commission that could cause actual results or events
to differ materially from those expressed or implied by the
forward-looking statements. Our actual results and the timing of
events could differ materially from those anticipated in these
forward-looking statements as a result of several
factors.
Recent Developments
Consumer Services Product Offering Change
In July 2018, DropCar Operating began assessing demand for a
Self-Park Spaces monthly parking plan whereby consumers could
designate specific garages for their vehicles to be stored at a
base monthly rate, with personal 24/7 access for picking up and
returning their vehicle directly, and the option to pay a la carte
on a per hour basis for a driver to perform functions such as
picking up and returning their vehicle to their front door. This
model aligns more directly with how the Company has structured the
enterprise B2B side of its business, where an interaction with a
vehicle on behalf of its drivers typically generates net new
revenue. The DropCar Operating consumer Self-Park Spaces plan
combined with its on-demand hourly valet service are the only
consumer plans offered from September 1, 2018 onwards. Subscriber
plans prior to this date continued to receive service on a prorated
basis through the end of August 2018. Additionally, the Company is
scaling back its 360 Services for the Consumer portion of the
market. As a result of this shift, in August 2018, the Company
began to significantly streamline its field teams, operations and
back office support tied to its pre-September 1, 2018 consumer
subscription plans.
Binding Term Sheet for Sale of WPCS Business
On August 9, 2018 the Company entered into a binding term sheet
with the management of WPCS International Suisun City, Inc. for the
sale of select assets and liabilities of the Company’s WPCS
business for $3.5 million. The binding nature of this term sheet
expired on September 21, 2018 due to the failure of the management
of WPCS International Suisun City, Inc. to obtain adequate
financing. However, the Company and the management of WPCS
International Suisun City, Inc. have continued to work together
towards completing this transaction and a new source of financing
has been identified. It is anticipated that the transaction will
close in the 4th quarter
of 2018, however, there can be no assurance that the sale will be
consummated on the terms previously negotiated or at all. The
contemplated sales price is expected to be below the carrying value
of the Company's goodwill and intangibles. In the event the
transaction is consummated under its current terms, the Company
would record a material impairment charge.
Warrant Repricing
On August 31, 2018, the Company offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of the
Company’s outstanding Series H-4 Warrants to purchase common
stock of the Company issued on March 8, 2018 (the “Series H-4
Warrants”) the opportunity to exercise such Series H-4
Warrants for cash at a reduced exercise price of $0.60 per share
(the “Reduced Exercise Price”) provided such Series H-4
Warrants were exercised for cash on or before September 4, 2018
(the “End Date”). In addition, the Company issued a
“reload” warrant (the “Series J Warrants”)
to each Holder who exercised their Series H-4 Warrants prior to the
End Date, covering one share for each Series H-4 Warrant exercised
during that period. 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 $1.00, (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
VWAP (as defined in the Series J Warrant) for the Company’s
common stock equals or exceeds $1.50 for not less than ten
consecutive trading days.
On September 4, 2018, the Company received executed Repricing Offer
Letters from a majority of the Holders, which resulted in the
issuance of 1,560,696 shares of the Company’s common stock
and Series J Warrants to purchase up to 1,560,696 shares of the
Company’s common stock. The Company received gross proceeds
of approximately $936,000 from the exercise of the Series H-4
Warrants pursuant to the terms of the Repricing Offer
Letter.
On September 5, 2018, the Company received a request from Nasdaq to
amend our Series H-4 Warrants to provide that the Series H-4
Warrants may not be exercised until the Company has obtained
stockholder approval of the issuance of Common Stock underlying the
Series H-4 Warrants pursuant to the applicable rules and
regulations of Nasdaq. In response to the request, on September 10,
2018, the Company entered into an amendment (the “Warrant
Amendment”) with the holders of the Series H-4 Stock to
provide for stockholder approval as described above prior to the
exercise of the Series H-4 Warrants.
Consulting Agreement, Related Party
On July 11, 2018, the Company entered into a consulting agreement
(the “Consulting Agreement”) with Ascentaur, LLC
(“Ascentaur”). Sebastian Giordano is the Chief
Executive Officer of Ascentaur, LLC. Mr. Giordano has served on the
board of directors of WPCS since February 2013 and served as
WPCS’s Interim Chief Executive Officer from August 2013
through April 2016 and as WPCS’s Chief Executive Officer from
April 2016 through January 2018.
Pursuant to the terms of the Consulting Agreement, Ascentaur has
agreed to provide advisory services with respect to the strategic
development and growth of the Company, including advising the
Company on market strategy and overall Company strategy, advising
the Company on the sale of the Company’s WPCS International
business segment, providing assistance to the Company in
identifying and recruiting prospective employees, customers,
business partners, investors and advisors that offer desirable
administrative, financing, investment, technical, marketing and/or
strategic expertise, and performing such other services pertaining
to the Company’s business as the Company and Ascentaur may
from time to time mutually agree. As consideration for its services
under the Consulting Agreement, Ascentaur shall be entitled to
receive (i) a fee of $10,000 per month for a period of nine months
from the effective date of the Consulting Agreement, (ii) a lump
sum fee of $90,000 upon the closing of the sale of the
Company’s WPCS International business segment and (iii)
reimbursement for reasonable and customary business expenses
incurred in connection with Ascentaur’s performance under the
Consulting Agreement. The term of the Consulting Agreement
commenced on July 11, 2018 and will continue until April 9, 2019 or
until terminated in accordance with the terms of the Consulting
Agreement.
Change in Bylaws
Effective July 26, 2018, the Board of Directors (the
“Board”) of the “Company amended and restated the
Company’s Amended and Restated Bylaws (the
“Bylaws”) by amending Section 4.06. As amended, Section
4.06 provides that the Chairman of the Board need not be an officer
of the Company.
Reverse Merger and Exchange
Ratio
On January 30, 2018, DC Acquisition Corporation (“Merger
Sub”), a wholly-owned subsidiary of WPCS International
Incorporated (“WPCS”), completed its merger with and
into DropCar, Inc. (“Private DropCar”), with Private
DropCar surviving as a wholly owned subsidiary of WPCS. This
transaction is referred to as the “Reverse Merger.” The
Reverse Merger was effected pursuant to an Agreement and Plan of
Merger and Reorganization (the “Merger Agreement”),
dated September 6, 2017, by and among WPCS, Private DropCar and
Merger Sub.
As a result of the Reverse Merger, each outstanding share of
Private DropCar share capital (including shares of Private DropCar
share capital to be issued upon the conversion of outstanding
convertible debt) automatically converted into the right to receive
approximately 0.3273 shares of WPCS’s common stock, par value
$0.0001 per share (the “Exchange Ratio”). Following the
closing of the Reverse Merger, holders of WPCS’s common stock
immediately prior to the Reverse Merger owned approximately 22.9%
on a fully diluted basis, and holders of Private DropCar common
stock immediately prior to the Reverse Merger owned approximately
77.1% on a fully diluted basis, of WPCS’s common
stock.
The Reverse Merger has been accounted for as a reverse acquisition
under the acquisition method of accounting where Private DropCar is
considered the accounting acquirer and WPCS is the acquired company
for financial reporting purposes. Private DropCar was determined to
be the accounting acquirer based on the terms of the Merger
Agreement and other factors, such as relative voting rights and the
composition of the combined company’s board of directors and
senior management, which was deemed to have control. The
pre-acquisition financial statements of Private DropCar became the
historical financial statements of WPCS following the Reverse
Merger. The historical financial statement, outstanding shares and
all other historical share information have been adjusted by
multiplying the respective share amount by the Exchange Ratio as if
the Exchange Ratio had been in effect for all periods
presented.
Immediately following the Reverse Merger, the combined company
changed its name from WPCS International Incorporation to DropCar,
Inc. The combined company following the Reverse Merger may be
referred to herein as “the combined company,”
“DropCar,” or the “Company.”
The Company’s shares of common stock listed on The Nasdaq
Capital Market, previously trading through the close of business on
January 30, 2018 under the ticker symbol “WPCS,”
commenced trading on The Nasdaq Capital Market, on a post-Reverse
Stock Split adjusted basis, under the ticker symbol
“DCAR” on January 31, 2018.
Private Placement
On March 8, 2018, we entered into a Securities Purchase Agreement
(the “Securities Purchase Agreement”) with
institutional and accredited investors (collectively, the
“Investors”), pursuant to which we issued to the
Investors an aggregate of 26,843 shares of our newly designated
Series H-4 Convertible Preferred Stock, par value $0.0001 per share
(the “Series H-4 Shares”), and warrants to purchase
2,684,300 shares of our Series H-4 Preferred Stock, with an
exercise price of $2.60 per share, subject to adjustments (the
“Warrants”). The purchase price per Series H-4 Share
and warrant was $235.50, equal to (i) the closing price of the
Common Stock on the Nasdaq Capital Market on March 7, 2018, plus
$0.125 multiplied by (ii) 100. The aggregate purchase price for the
Series H-4 Shares and Warrants was approximately $6.0 million.
Subject to certain ownership limitations, the Warrants will be
immediately exercisable from the issuance date and will be
exercisable for a period of five years from the issuance date. The
Series H-4 Shares are convertible into 2,684,300 shares of Common
Stock.
On March 8, 2018, we filed the Certificate of Designations,
Preferences and Rights of the Series H-4 Convertible Preferred
Stock (the “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-4
Convertible Preferred Stock (the “Series H-4 Stock”).
We designated up to 30,000 shares of Series H-4 Stock and each
share has a stated value of $235.50 (the “Stated
Value”). Each share of Series H-4 Stock is convertible at any
time at the option of the holder thereof, into a number of shares
of Common Stock determined by dividing the Stated Value by the
initial conversion price of $2.355 per share, subject to a 9.99%
blocker provision. The Series H-4 Stock has the same dividend
rights as the Common Stock, and no voting rights except as provided
for in the Certificate of Designation or as otherwise required by
law. In the event of any liquidation or dissolution of the Company,
the Series H-4 Stock ranks senior to the Common Stock in the
distribution of assets, to the extent legally available for
distribution.
On September 5, 2018, we received a request from The Nasdaq Stock
Market (“Nasdaq”) to amend the Certificate of
Designation to provide that the Series H-4 Shares may not be
converted into shares of Common Stock until we have obtained
stockholder approval of the issuance of the Common Stock underlying
the Series H-4 Shares pursuant to the applicable rules and
regulations of Nasdaq. In response to the request, on September 10,
2018, we filed a Certificate of Amendment (the “COD
Amendment”) to the Certificate of Designation to provide for
stockholder approval as described above prior to the conversion of
the Series H-4 Shares.
Warrants
On April 19, 2018, we entered into separate Warrant Exchange
Agreements (the “Exchange Agreements”) with the holders
(the “Merger Warrant Holders”) of existing merger
warrants (the “Merger Warrants”) to purchase shares of
Common Stock, pursuant to which, on the closing date, the Merger
Warrant Holders exchanged each Merger Warrant for 1/3rd of a
share of Common Stock and ½ of a warrant to purchase a share
of Common Stock (collectively, the “Series I
Warrants”). The Series I Warrants have an exercise price of
$2.30 per share. In connection with the Exchange Agreements, we
issued an aggregate of (i) 292,714 new shares of common stock and
(ii) Series I Warrants to purchase an aggregate of 439,070 shares
of common stock.
On August 31, 2018, we offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of our
outstanding Series H-4 Warrants to purchase common stock issued on
March 8, 2018 (the “Series H-4 Warrants”) the
opportunity to exercise such Series H-4 Warrants for cash at a
reduced exercise price of $0.60 per share (the “Reduced
Exercise Price”) provided such Series H-4 Warrants were
exercised for cash on or before September 4, 2018 (the “End
Date”). In addition, we issued a “reload” warrant
(the “Series J Warrants”) to each Holder who exercised
their Series H-4 Warrants prior to the End Date, covering one share
for each Series H-4 Warrant exercised during that period. 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 $1.00, (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) we have 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 VWAP (as defined in the Series J Warrant) for
our common stock equals or exceeds $1.50 for not less than ten
consecutive trading days.
On September 4, 2018, we received executed Repricing Offer Letters
from a majority of the Holders, which resulted in the issuance of
1,560,696 shares of our common stock and Series J Warrants to
purchase up to 1,560,696 shares of our common stock. We received
gross proceeds of approximately $936,000 from the exercise of the
Series H-4 Warrants pursuant to the terms of the Repricing Offer
Letter.
On September 5, 2018, we received a request from Nasdaq to amend
our Series H-4 Warrants to provide that the Series H-4 Warrants may
not be exercised until we have obtained stockholder approval of the
issuance of Common Stock underlying the Series H-4 Warrants
pursuant to the applicable rules and regulations of Nasdaq. In
response to the request, on September 10, 2018, we entered into an
amendment (the “Warrant Amendment”) with the holders of
the Series H-4 Stock to provide for stockholder approval as
described above prior to the exercise of the Series H-4
Warrants.
Overview
Operating Segments
We have two reportable operating segments: DropCar Operating and
WPCS.
DropCar Operating
DropCar Operating provides automotive vehicle support, fleet
logistics, and concierge services for both consumers and the
automotive industry. Our cloud-based Enterprise Vehicle Assistance
and Logistics (“VAL”) platform and mobile application
(“app”) assists consumers and automotive-related
companies reduce the costs, hassles and inefficiencies of owning a
car, or fleet of cars, in urban centers. In July 2018, we launched
our Mobility Cloud platform which provides automotive-related
businesses with a 100% self-serve SaaS version of its VAL platform
to manage their own operations and drivers, as well as customer
relationship management (“CRM”) tools that enable their
clients to schedule and track their vehicles for service pickup and
delivery. Our Mobility Cloud also provides access to private APIs
(application programming interface) which automotive-businesses can
use to integrate our logistics and field support directly into
their own applications and processes natively, to create more
seamless client experiences.
On the enterprise side, OEMs, dealers, and other service providers
in the automotive space are increasingly being challenged with
consumers who have limited time to bring in their vehicles for
maintenance and service, making it difficult to retain valuable
post-sale service contracts or scheduled consumer maintenance and
service appointments. Additionally, many of the vehicle support
centers for automotive providers (i.e., dealerships, including body
work and diagnostic shops) have moved out of urban areas thus
making it more challenging for OEMs and dealers in urban areas to
provide convenient and efficient service for their consumer and
business clientele. Similarly, shared mobility providers and other
fleet managers, such as rental car companies and car share
programs, face a similar urban mobility challenge: getting cars to
and from service bays, rebalancing vehicle availability to meet
demand and in-fleeting and de-fleeting vehicles to and from dealer
lots, auction sites and other locations.
While our business-to-business (“B2B”) and
business-to-consumer (“B2C”) services generate revenue
and help meet the unmet demand for vehicle support services, we are
also building-out a platform and customer base that positions us
well for developments in the automotive space when vehicles
become partially to fully autonomous and vehicle ownership becomes more subscription based
with transportation services and concierge options well-suited to
match a customer’s immediate needs. For example, certain car
manufacturers are testing new services in which customers pay the
manufacturer a flat fee per month to drive a number of different
models for any length of time.
The Company operates primarily in the New York metropolitan area.
In May 2018, the Company expanded operations with its B2B business
in San Francisco. In June 2018,
the Company expanded its B2B operations in Washington DC. In August
2018, the Company expanded B2B operations to Los Angeles. The three
new market expansions are with a major original equipment
manufacturer (“OEM”) customer.
WPCS
WPCS provides low voltage communication infrastructure services.
The Company specializes in the installation and service of low
voltage communications, voice and data networks, security systems,
audio-visual solutions, and distributed antenna systems and provide
experienced project management and deliver complex projects to key
vertical markets that include healthcare, education,
transportation, energy and utilities, oil and gas, manufacturing,
commercial real estate, financial, and government,
etc.
Results of Operations
We have never been profitable and have incurred operating losses in
each year since inception. Net losses for nine months ended
September 30, 2018 and 2017 were approximately $10.7 million and
$5.0 million, respectively. Substantially all of our operating
losses resulted from expenses incurred in connection with our valet
workforce, parking and technology development programs and from
general and administrative costs associated with our operations.
During the third quarter of 2018, we took significant steps to
reduce our cost of goods sold on the consumer side of the business.
These efforts have generated significant costs savings which will
start to appear in our fourth quarter results. We are focusing on
achieving a positive gross margin on the DropCar Operating segment
of the business and growing the overall revenue to a point of
overall profitability in the long term. As of September 30, 2018,
we had net working capital of approximately $1.5 million. We expect
to continue to incur significant expenses and increasing operating
losses for at least the next several years as we continue the
development of our comprehensive Vehicle Support Platform across
business-to-consumer and business-to-business clientele.
Accordingly, we will continue to require substantial additional
capital to continue our commercialization activities. The amount
and timing of our future funding requirements will depend on many
factors, including the timing and results of our commercialization
efforts.
Components of Statements of Operations
Net Services Revenue
We generate revenue from on-demand vehicle pick-up, parking and
delivery services, providing automobile maintenance, care and
refueling services, and through our business-to-business fleet
management services, and from infrastructure contracting
services.
Cost of Services
Cost of services consists of the aggregate costs incurred in
delivering the services to our customers, including, expenses for
personnel costs, parking lot costs, technology hosting and
third-party licensing costs, vehicle repair and damage costs,
insurance, merchant processor fees, uniforms, customer and
transportation expenses associated with providing a
service.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of
technology, sales and marketing and general and administrative
expenses.
Technology. Technology
expenses consist primarily of labor-related costs incurred in
coding, testing, maintaining and modifying our technology platform.
We have focused our technology development efforts on both
improving ease of use and functionality of our reservation,
back-end system and mobile (i.e., iOS, Android) applications. We
expect technology expenses to increase as we continue to enhance
and expand our technological capabilities but to decrease over time
as a percentage of revenue as we leverage our technology
platform over a larger membership base. We anticipate increasing
investment in research and development, notably with respect to
integrating our services into vehicles natively, machine learning
based process automation and virtual
assistance.
Sales and
Marketing. Sales and marketing expenses
consist primarily of labor-related costs, online search and
advertising, trade shows, marketing agency fees, public relations,
physical mailers, and other promotional expenses. Online search and
advertising costs, which are expensed as incurred, include online
advertising media such as banner ads and pay-per-click payments to
search engines. We expect to continue to invest in sales and
marketing activities to increase our membership base and brand
awareness. We expect that sales and marketing expenses will
continue to increase in the future but decrease as
a percentage of revenue as certain fixed costs are leveraged
over a larger revenue base.
General and
Administrative. General and administrative
expenses consist primarily of labor-related expenses for
administrative, human resources, internal information technology
support, legal, finance and accounting personnel, professional
fees, training costs, insurance and other corporate expenses. We
expect that general and administrative expenses will increase as we
continue to add personnel to support the growth of our business. In
addition, we anticipate that we will incur additional personnel
expenses, professional service fees, including audit and legal,
investor relations, costs of compliance with securities laws and
regulations, and higher director and officer insurance costs
related to operating as a public company. As a result, we expect
that our general and administrative expenses will continue to
increase in the future but decrease as a percentage of revenue
over time as our membership base and related revenue
increases.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of our financial statements and related disclosures requires us to
make estimates, assumptions and judgments that affect the reported
amount of assets, liabilities, revenue, costs and expenses and
related disclosures. We believe that the estimates, assumptions and
judgments involved in the accounting policies described below have
the greatest potential impact on our financial statements and,
therefore, we consider these to be our critical accounting
policies. Accordingly, we evaluate our estimates and assumptions on
an ongoing basis. Our actual results may differ from these
estimates under different assumptions and conditions. See Note 2 to
our financial statements for the nine months ended September 30,
2018 and 2017 for information about these critical accounting
policies, as well as a description of our other significant
accounting policies.
Our interim consolidated financial statements should be read in
conjunction with the audited financial statements included in our
Current Report on Form 8-K/A filed with the SEC on April 2, 2018,
which includes a description of our critical accounting policies
that involve subjective and complex judgments that could
potentially affect reported results.
Accounts receivable
Accounts receivable are carried at original invoice amount less an
estimate made for holdbacks and doubtful receivables based on a
review of all outstanding amounts. We determine the allowance for
doubtful accounts by regularly evaluating individual customer
receivables and considering a customer’s financial condition,
credit history and current economic conditions and set up an
allowance for doubtful accounts when collection is uncertain.
Customers’ accounts are written off when all attempts to
collect have been exhausted. Recoveries of accounts receivable
previously written off are recorded as income when received. For
Dropcar Operating, at September 30, 2018 and December 31, 2017, the
accounts receivable reserve was approximately $17,000 and $42,000,
respectively. For WPCS, at September 30, 2018 and December 31,
2017, the accounts receivable reserve was approximately $264,000
and $0, respectively.
Capitalized software
Costs related to website and internal-use software development are
accounted for in accordance with Accounting Standards Codification
(“ASC”) Topic
350-50 — Intangibles — Website
Development Costs. Such software is primarily related to our
websites and mobile apps, including support systems. We begin to
capitalize our costs to develop software when preliminary
development efforts are successfully completed, management has
authorized and committed project funding, it is probable that the
project will be completed, and the software will be used as
intended. Costs incurred prior to meeting these criteria are
expensed as incurred and recorded within General and administrative
expenses within the accompanying statements of operations. Costs
incurred for enhancements that are expected to result in additional
features or functionality are capitalized. Capitalized costs are
amortized over the estimated useful life of the enhancements,
generally between two and three years.
We evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset group to future undiscounted net cash flows expected to be
generated by the asset group. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value
of the assets.
Revenue Recognition
The FASB issued ASU No. 2014-09, codified as ASC 606: Revenue from
Contracts with Customers, which provides a single comprehensive
model for entities to use in accounting for revenue arising from
contracts with customers. The Company adopted ASC 606 effective
January 1, 2018 using modified retrospective basis and the
cumulative effect was immaterial to the financial
statements.
Revenue from contracts with customers is recognized when, or as, we
satisfy our performance obligations by transferring the promised
goods or services to the customers. A good or service is
transferred to a customer when, or as, the customer obtains control
of that good or service. A performance obligation may be satisfied
over time or at a point in time. Revenue from a performance
obligation satisfied over time is recognized by measuring our
progress in satisfying the performance obligation in a manner that
depicts the transfer of the goods or services to the customer.
Revenue from a performance obligation satisfied at a point in time
is recognized at the point in time that we determine the customer
obtains control over the promised good or service. The amount of
revenue recognized reflects the consideration we expect to be
entitled to in exchange for those promised goods or services (i.e.,
the “transaction price”). In determining the
transaction price, we consider multiple factors, including the
effects of variable consideration. Variable consideration is
included in the transaction price only to the extent it is probable
that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainties with respect to
the amount are resolved. In determining when to include variable
consideration in the transaction price, we consider the range of
possible outcomes, the predictive value of our past experiences,
the time period of when uncertainties expect to be resolved and the
amount of consideration that is susceptible to factors outside of
our influence, such as the judgment and actions of third
parties.
DropCar Operating
DropCar Operating offers a selection of subscriptions and on-demand
services which include parking, valet, and access to other
services. The contract terms are on a month-to-month subscription
contract with fixed monthly or contract term fees. These
subscription services include a fixed number of round-trip
deliveries of the customer’s vehicle to a designated
location. The Company allocates the purchase price among the
performance obligations which results in deferring revenue until
the service is utilized or the service period has expired. In July
2018, DropCar Operating began assessing demand for a Self-Park
Spaces monthly parking plan whereby consumers could designate
specific garages for their vehicles to be stored at a base monthly
rate, with personal 24/7 access for picking up and returning their
vehicle directly, and the option to pay a la carte on a per hour
basis for a driver to perform functions such as picking up and
returning the vehicle to their front door. This model aligns more
directly with how the Company has structured the enterprise B2B
side of its business, where an interaction with a vehicle on behalf
of its drivers typically generates net new revenue. The DropCar
Operating consumer Self-Park Spaces plan combined with its
on-demand hourly valet service are the only consumer plans offered
from September 1, 2018 onwards. Subscriber plans prior to this date
continued to receive service on a prorated basis through the end of
August 2018. Additionally, the Company is scaling back its 360
Services for the Consumer portion of the market. As a result of
this shift, in August 2018, the Company began to significantly
streamline its field teams, operations and back office support tied
to its pre-September 1, 2018 consumer subscription
plans.
On Demand Valet and Parking Services
DropCar Operating offers to consumers certain on demand services
through its mobile application. The customer is billed at an hourly
rate upon completion of the services. Revenue is recognized when
the Company had satisfied all performance obligations which is upon
completion of the service.
DropCar 360 Services
DropCar Operating offers to consumers certain services upon request
including vehicle inspection, maintenance, car washes or to fill up
with gas. The customers are charged a fee in addition to the cost
of the third-party services provided. Revenue is recognized when
the Company had satisfied all performance obligations which is upon
completion of the service.
On Demand Business-To-Business
DropCar Operating also has contracts with car dealerships, car
share programs and others in the automotive industry transporting
vehicles. Revenue is recognized at the point in time all
performance obligations are satisfied which is when the Company
provides the delivery service of the vehicles.
WPCS
WPCS generates its revenue by offering low voltage communications
infrastructure contracting services.
WPCS recognizes revenue and profit from long term contracts when it
satisfies a performance obligation by transferring a promised goods
or service to a customer. Revenue is recognized over time by
measuring progress toward complete satisfaction of the performance
obligation.
WPCS uses an input method which recognizes revenue over time based
on WPCS’s labor and materials costs expended for a period as
a percentage of total labor and materials costs expected to satisfy
the performance obligation of delivering the overall infrastructure
project. Input method is used because management believes it is the
best available method that measures revenue on the basis of the
company’s inputs toward satisfaction of the performance
obligation. Inputs costs include direct materials, direct labor,
third party subcontractor services and those indirect costs related
to contract performance.
WPCS has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the
appropriate cost and revenue recognition. Cost estimates are
reviewed monthly on a contract-by-contract basis and are revised
periodically throughout the life of the contract such that
adjustments to profit resulting from revisions are made cumulative
to the date of the revision. Significant management judgments and
estimates, including the estimated cost to complete projects, which
determines the project’s percent complete, must be made and
used in connection with the revenue recognized in the accounting
period. Current estimates may be revised as additional information
becomes available. If estimates of costs to complete long-term
contracts indicate a loss, provision is made currently for the
total loss anticipated.
The length of WPCS’s contracts varies but is typically
between three months and two years. Assets and liabilities related
to long-term contracts are included in current assets and current
liabilities in the accompanying consolidated balance sheets, as
they will be liquidated in the normal course of contract
completion, although this may require more than one
year.
WPCS also recognizes certain revenue from short-term contracts at a
point in time when the services have been provided to the customer.
For maintenance contracts, revenue is recognized ratably over the
service period.
Sales and marketing
Sales and marketing costs are expensed as incurred.
Stock-based compensation
We account for all stock options using a fair value-based method.
The fair value of each stock option granted to employees is
estimated on the date of the grant using the Black-Scholes
option-pricing model and the related stock-based compensation
expense is recognized over the vesting period during which an
employee is required to provide service in exchange for the award.
The fair value of the options granted to non-employees is measured
and expensed as the options vest.
On an ongoing basis, we evaluate our estimates and judgments,
including those related to accrued expenses and stock-based
compensation. We based our estimates on historical experience and
on various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and
the reported amounts of revenues and expenses that are not readily
apparent from other sources. Actual results may differ from these
estimates.
Results of Operations
Comparison of the Three Months Ended September 30, 2018 and
2017
The Company's approximate $3.3 million net loss for the three
months ended September 30, 2018 was comprised of the $0.1 million
net loss from WPCS and a $3.2 million net loss from DropCar
Operating. This compared to a net loss of $2.9 million for the same
period in 2017.
The net loss attributable to common stockholders for the
three-month period totaled approximately $4.3 million, due to the
$3.3 million net loss and $1.1 million of deemed dividends on the
exchange of warrants.
Revenues.
The components of revenues are as follows
(thousands):
|
Three Months Ended September
30,
|
|
|
|
|
DropCar
|
$1,389
|
$1,270
|
9%
|
WPCS
|
3,223
|
-
|
100%
|
Total
revenues
|
$4,612
|
$1,270
|
263%
|
Revenue
for the three months ended September 30, 2018 increased
approximately $3.3 million, or 263%, to $4.6 million as compared to
$1.3 million for the same period in 2017, as: (i) DropCar Operating
revenue increased by $0.1 million, or 9%, due to an increase in
on-demand services and an increase in subscription revenue of $0.1
million and (ii) WPCS revenue increased $3.2 million, or 100%, as
there was no comparative information reported for the prior
period.
DropCar Operating
Net Services Revenues
Net services revenues during the three months ended September 30,
2018 totaled $1.4 million, an increase of $0.1 million, or 9%,
compared to $1.3 million recorded for the three months ended
September 30, 2017. The increase was primarily due to our continued
efforts to increase monthly consumer subscriptions. Revenue has
increased as a result of marketing and promotion campaigns,
word-of-mouth referrals, and adding coverage in the additional
markets of Los Angeles, San Francisco and Washington
D.C.
Cost of Services
Cost of services during the three months ended September 30, 2018
totaled $1.8 million, an increase of approximately $0.4 million, or
29%, compared to $1.4 million recorded for the three months ended
September 30, 2017. The increase was primarily attributable to
increases of $0.2 million in wages and related costs, $0.1
million in parking garage fees, and $0.1 million in repairs and
damages. During the quarter, the Company significantly reduced its
costs on the consumer services side. These cost actions should
start to improve the gross margin in the fourth quarter of the
year.
Selling, General and Administrative
Selling, general and administrative expenses during the three
months ended September 30, 2018 totaled $2.7 million, an increase
of $0.4 million, or 17%, compared to $2.3 million recorded for the
three months ended September 30, 2017. This was primarily
attributable to an increase of $0.8 million in stock based
compensation for wages and related, and $0.2 million in other,
offset by a decrease of $0.3 million in cash wages and related, and
$0.3 in professional consulting.
Depreciation and amortization
Depreciation and amortization during the three months ended
September 30, 2018 totaled $92 thousand, an increase of $46
thousand, or 100%, compared to $46 thousand recorded for the three
months ended September 30, 2017. This increase was primarily
attributable to our increased capitalization of software costs
related to our software platform.
Interest expense, net
Interest expense, net during the three months ended September 30,
2018 totaled $0, a decrease of $0.1 million or 100% compared to the
$0.1 million recorded for the three months ended September 30,
2017. This decrease is a result of the outstanding convertible
notes being converted into equity upon the Reverse Merger. There
were no outstanding convertible notes as of September 30,
2018.
Comparison of Nine Months Ended September 30, 2018 and
2017
The Company's approximate $10.7 million net loss for the nine
months ended September 30, 2018 was comprised of the $0.4 million
net income from WPCS offset by the $11.1 million net loss from
DropCar Operating. This compared to a net loss of $5.1 million for
the same period in 2017.
Net loss attributable to common stockholders for the nine-month
period totaled $12.0 million, due to the $10.7 million net loss and
$1.3 million of deemed dividends on the exchange of
warrants.
Revenues. The components
of revenues are as follows (thousands):
|
Nine Months Ended September
30
|
|
|
|
|
DropCar
|
$4,955
|
$2,797
|
77%
|
WPCS
|
10,872
|
-
|
100%
|
Total
revenues
|
$15,827
|
$2,797
|
466%
|
Revenue for the nine months ended September 30, 2018 increased
approximately $13.0 million, or 466%, to $15.9 million as compared
to $2.8 million for the same period in 2017, as: (i) DropCar
Operating revenue increased by $2.2 million, or 77%, due to
increases in subscription revenue of $1.6 million and on-demand
service revenue of $0.6
million and (ii) WPCS revenue increased $10.9 million, or 100%, as
there was no comparative information reported for the prior
period.
DropCar Operating
Net Services Revenues
Net services revenues during the nine months ended September 30,
2018 totaled $5.0 million, an increase of approximately $2.2
million, or 77%, compared to $2.8 million recorded for the nine
months ended September 30, 2017. The increase was primarily due to
our continued efforts to increase monthly consumer subscriptions.
Revenue has increased as a result of marketing and promotion
campaigns, word-of-mouth referrals, and
adding coverage in the additional markets of Los Angeles, San
Francisco and Washington D.C.
Cost of Services
Cost of services during the nine months ended September 30, 2018
totaled $6.6 million, an increase of $3.7 million, or 128%,
compared to $2.9 million recorded for the nine months ended
September 30, 2017. The increase was primarily attributable to
increases of $2.7 million in wages and related cost, $0.4 million
in parking garage fees, $0.3 million in repairs and damages, $0.1
million in insurance, and $0.2 million in other costs.
Selling, General and Administrative
Selling, general and administrative expenses during the nine months
ended September 30, 2018 totaled $8.7 million, an increase of $4.5
million, or 107%, compared to $4.2 million recorded for the nine
months ended September 30, 2017. This was primarily attributable to
an increase of $0.6 million in cash wages and related, $2.0 million
in stock based compensation for wages and related, $0.2 million in
professional and consulting, $0.2 in insurance, and $1.5 million in
other costs.
Depreciation and amortization
Depreciation and amortization during the nine months ended
September 30, 2018 totaled $0.2 million, an increase of $0.1
million, or 100%, compared to $0.1 million recorded for the nine
months ended September 30, 2017. This increase was primarily
attributable to our increased capitalization of software costs
related to our software platform.
Interest expense, net
Interest expense, net during the nine months ended September 30,
2018 totaled $0.4 million, a decrease of $0.3 million, or 43%
compared to the $0.7 million recorded for the nine months ended
September 30, 2017. This decrease is a result of the outstanding
convertible notes being converted into equity upon the Reverse
Merger. There were no outstanding convertible notes as of September
30, 2018.
WPCS
For the three and nine months ended September 30, 2018, there is no
comparative information for the prior periods, due to the
acquisition of WPCS on January 30, 2018; therefore, no variance
detail is discussed.
Net revenues for the three and nine months ended September 30, 2018
were approximately $3.2
million and $10.9 million, respectively. Cost of revenues
for the three and nine months ended September 30, 2018 were
approximately $2.6
million and $8.6 million, respectively. Selling, general and
administrative expenses for the three and nine months ended
September 30, 2018 were approximately $0.6
million and $1.7 million, respectively. Depreciation and
amortization for the three and nine months ended September 30, 2018
were approximately $0.08
million and $0.2 million, respectively. Net interest expense
for the three and nine months ended September 30, 2018 were
approximately $3
thousand and $4 thousand, respectively.
Liquidity and Capital Resources
Since our inception in September 12, 2014, we have incurred
net losses and negative cash flows from operations. For
the nine months ended September 30, 2018 and 2017, we had net
losses of approximately $10.7 million and $5.0 million,
respectively. At September 30, 2018, we had an accumulated deficit
of $21.6 million. At September 30, 2018, we had cash of $2.0
million. As discussed above, on March 8, 2018, we entered into the
Securities Purchase Agreement with the Investors, pursuant to which
we issued to the Investors an aggregate of 26,843 shares of our
newly designated Series H-4 Convertible Preferred Stock and
warrants to purchase 2,684,300 shares of our common stock (the
“Private Placement”). We received proceeds of
approximately $6.0 million in connection with the Private
Placement.
On January 18, 2018, we sold 60,340 shares of common stock for
proceeds of $300,000 to Alpha Capital.
On September 4, 2018, we issued 1,560,696 shares of common stock
upon the exercise of 1,560,696 series H-4 warrant for proceeds of
approximately $936,000.
We have limited operating history and the sales and income
potential of our business and market is unproven. As of September
30, 2018, we had an accumulated deficit of $21.6 million and have
experienced net losses each year since our inception. We anticipate
that we will continue to incur net losses into the foreseeable
future and will need to raise additional capital to continue. Our
cash is sufficient to fund our operations into the first quarter of
2019. These factors raise substantial doubt about our ability to
continue as a going concern for the twelve months following the
date of the filing of this Form 10-Q.
Our plans include raising funds from outside investors reduce
annual operating and corporate over expenses, and through the
potential sale of our subsidiary, WPCS International Suisan City,
Inc. However, there is no assurance that outside funding will be
available to us, outside funding will be obtained on favorable
terms or will provide us with sufficient capital to meet our
objectives. Our financial statements do not include any adjustments
relating to the recoverability and classification of assets,
carrying amounts or the amount and classification of liabilities
that may be required should we be unable to continue as a going
concern. Upon the potential sale of our subsidiary, WPCS, and in
the event the transaction is consummated under its anticipated
current terms, we would record a material impairment charge to our
intangible assets and goodwill.
Our future capital requirements and the period for which we expect
our existing resources to support our operations may vary
significantly from what we currently expect. Our monthly spending
levels vary based on new and ongoing technology developments and
corporate activities. The Company’s cash is sufficient to
fund its operations into the first quarter of 2019.
We have historically financed our activities through the sale of
our equity securities (including convertible preferred stock) and
the issuance of convertible notes. We will need to raise
significant additional capital and we plan to continue to fund our
current operations, and the associated losses from operations,
through future issuances of debt and/or equity securities and
potential collaborations or strategic partnerships with other
entities. The capital raises from issuances of convertible debt and
equity securities could result in additional dilution to our
stockholders. In addition, to the extent we determine to incur
additional indebtedness, our incurrence of additional debt could
result in debt service obligations and operating and financing
covenants that would restrict our operations. We can provide no
assurance that financing will be available in the amounts we need
or on terms acceptable to us, if at all. If we are not able to
secure adequate additional working capital when it becomes needed,
we may be required to make reductions in spending, extend payment
terms with suppliers, liquidate assets where possible and/or
suspend or curtail operations. Any of these actions could
materially harm our business.
Cash Flows
Operating Activities
We have historically experienced negative cash outflows as we have
developed and expanded our business. Our primary source of cash
flow from operating activities has been recurring subscription
receipts from customers and, to a lesser extent, monthly invoice
payments from business-to-business customers. Our primary uses of
cash from operating activities are the recruiting, training,
equipping and growing our workforce to meet market demand, securing
infrastructure for operating activities such as garage parking
spaces, technology investment to grow our platform, as well as to
support other operational expenses while we aggressively
expand.
Net cash used in operating activities for the nine months ended
September 30, 2018 was approximately $10.1 million, which includes
a net loss of approximately $10.7 million, offset by non-cash
expenses of approximately $2.7 million principally related
stock-based compensation expense of $2.0 million, and depreciation
and amortization of approximately $0.5 million, and approximately
$2.1 million of cash used from a change in net working capital
items principally related to the decrease in contract liabilities,
and accounts payable and accrued expenses, and to the increase of
contract assets, deferred income, and prepaid
expenses.
Net cash used in operating activities for the nine months ended
September 30, 2017 was approximately $3.0 million, which includes a
net loss of approximately $5.1 million, offset by non-cash expenses
of approximately $1.5 million principally related to stock based
compensation and amortization of debt discount, approximately $0.6
million of cash provided from a change in net working capital items
principally related to the increase in accounts payable, accrued
interest and deferred income of $0.8 million, offset by an increase
of accounts receivable and prepaid expenses of approximately $0.2
million.
Investing Activities
Cash provided by investing activities for the nine months ended
September 30, 2018 of approximately $4.6 million primarily resulted
from $4.9 million received upon the acquisition of WPCS net of $0.4
million used for the purchase of fixed assets and capitalization of
software costs.
Cash used in investing activities during the nine months ended
September 30, 2017 of approximately $0.3 million primarily resulted
from capitalization of software costs.
Financing Activities
Cash provided by financing activities for the nine months ended
September 30, 2018 of approximately $7.1 million primarily resulted
from proceeds of $6.0
million for the sale
of the Series H-4 Shares
and warrants, $0.9 million from the issuance of common stock in
connection with exercise of Series H-4 warrants, and $0.3 million for the sale of common
stock, offset by financing costs related to the
Series H-4 Shares and warrants of approximately $0.1
million.
Cash provided by financing activities for the nine months ended
September 30, 2017 totaled approximately $3.3 million primarily
resulted from proceeds of $3.3 million from the issuance of
convertible notes and warrants and $0.2 million from the issuance
of preferred stock and subscription receivable, offset by offering
costs of $0.3 million.
Off-Balance Sheet Arrangements
We did not engage in any “off-balance sheet
arrangements” (as that term is defined in Item 303(a)(4)(ii)
of Regulation S-K) as of September 30, 2018.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
Not applicable to a smaller reporting company.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the
participation of our Chief Executive Officer and our Chief
Financial Officer, our principal executive officer and principal
financial officer, respectively, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by this report. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are not
effective due to the material weaknesses resulting from a limited
segregation of duties among our employees with respect to our
control activities and this deficiency is the result of our limited
number of employees and our financial closing process. These
deficiencies may affect management’s ability to determine if
errors or inappropriate actions have taken place. Management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible changes in our disclosure controls and
procedures.
Management continues to evaluate potential areas for improvement in
the Company’s disclosure controls and procedures and has
implemented certain measures including additional cash controls,
dual-signature procedures, and other review and approval processes
by the Company’s management team. The Company intends to hire
additional personnel to allow for improved financial reporting
controls and segregation of duties when the Company’s
operations and revenues have grown to the point of warranting such
controls.
Changes in Internal Controls over Financial Reporting
On January 30, 2018, we completed a reverse merger with WPCS
International Incorporated and our management is in the process of
evaluating any related changes to our internal control over
financial reporting as a result of this integration. Except for any
changes relating to this integration, there has been no change in
our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the period covered by this
report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
Item 1. Legal Proceedings.
DropCar
Our DropCar business is subject to various legal proceedings and
claims, either asserted or unasserted, which arise in the ordinary
course of business that we believe are incidental to the operation
of our business. While the outcome of these claims cannot be
predicted with certainty, our management does not believe that the
outcome of any of these legal matters will have a material adverse
effect on our consolidated results of operations, financial
positions or cash flows.
In February 2018, we were served an Amended Summons and Complaint
in the Supreme Court of the City of New York, Bronx county
originally served solely on an individual, a former customer, for
injuries sustained by plaintiffs alleging such injuries were caused
by either the customer, a DropCar valet operating the
customer’s vehicle, or an unknown driver operating
customer’s vehicle. DropCar to date has cooperated with the
NYC Police Department and no charges have been brought against any
employee of DropCar. DropCar has referred the matter to its
insurance carrier.