UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended June 30, 2018
or
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from __________________ to
__________________
Commission File Number: 001-34643
DropCar, Inc.
(Exact name of registrant as specified in its charter)
Delaware
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98-0204758
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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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 every Interactive Data File required to be
submitted
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
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☒
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Smaller reporting company
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☒
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Emerging growth company
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☐
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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 ☒
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common stock par value $0.0001 per share
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DCAR
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The Nasdaq Stock Market
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As of August 9, 2018, there were 1,358,625 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
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Page
No.
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Explanatory Note
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4
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Consolidated
Financial Statements (Unaudited)
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Consolidated
Balance Sheets as of June 30, 2018 (Restated) and December 31,
2017
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5
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Consolidated
Statements of Operations for the three and six months ended June
30, 2018 (Restated) and 2017
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6
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Consolidated
Statement of Changes in Shareholders’ Equity for the six
months ended June 30, 2018 (Restated) and 2017
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7
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Consolidated
Statements of Cash Flows for the six months ended June 30, 2018
(Restated) and 2017
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9
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Notes
to Consolidated Financial Statements
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10
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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27
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Quantitative
and Qualitative Disclosures About Market Risk.
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35
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Controls
and Procedures.
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35
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PART
II - OTHER INFORMATION
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Legal
Proceedings.
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36
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Risk
Factors.
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36
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Unregistered
Sales of Equity Securities and Use of Proceeds.
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37
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Defaults
Upon Senior Securities.
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37
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Mine
Safety Disclosures.
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38
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Other
Information.
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38
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Exhibits.
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38
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Signatures.
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39
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EXPLANATORY NOTE
We
are filing this Amendment No. 1 to the Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2018 (“Form
10-Q/A”), which was filed with the United States Securities
and Exchange Commission (“SEC”) on August 14, 2018 (the
“Original Filing”), to reflect restatements of the
Consolidated Balance Sheet at June 30, 2018, the Consolidated
Statement of Operations for the six months ended June 30, 2018,
Consolidated Statement of Changes in Shareholders’ Equity
(Deficit), and Consolidated Statement of Cash Flows for the six
months ended June 30, 2018, and the related notes thereto.
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
Company, while undergoing the audit of its consolidated financial
statements for the year ended December 31, 2018, commenced an
evaluation of its accounting in connection with the Reverse Merger
for (1) lock-up agreements entered into with the holders of the
Notes (see Note 5), and (2) shares of common stock issued to Alpha
Capital Anstalt and Palladium Capital Advisors (see Note 7, Service
Based Common Stock). These agreements, which management originally
deemed to be primarily equity in nature and would not be recognized
as compensatory, were recorded as a debit and credit to additional
paid in capital. On March 29, 2019, under the authority of the
board of directors, the Company determined that these agreements
should have been recorded as compensatory in nature, which gives
rise to an adjustment in the amount of $1,119,294 for the periods
ended March 31, 2018, June 30, 2018, and September 30,
2018.
On December 24, 2018, the Company completed the sale of WPCS
International – Suisun City, Inc., a California corporation
(the “Suisun City Operations”), its wholly-owned
subsidiary, pursuant to the terms of a stock purchase agreement,
dated December 10, 2018 (the “Purchase Agreement”) by
and between the Company and World Professional Cabling Systems,
LLC, a California limited liability company (the
“Purchaser”). Upon the closing of the sale, the
Purchaser acquired all of the issued and outstanding shares of
common stock, no par value per share, of Suisun City Operations,
for an aggregate purchase price of $3,500,000. The sale of Suisun
City Operations represented a strategic shift that has had a major
effect on the Company’s operations, and therefore, is
presented as discontinued operations in the 2018 consolidated
statement of operations. The 2017 statement of operations is not
recast as the business was not owned by DropCar at that
time.
The
following sections in the Original Filing are revised in this Form
10-Q/A, solely as a result of, and to reflect, the
restatement:
Part I
- Item 1 - Financial Statements
Part I
- Item 2 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Part II
- Item 6 - Exhibits
Additionally, on March 8, 2019, the Company filed a certificate of
amendment to its amended and restated certificate of incorporation
with the Secretary of State of the State of Delaware to effect a
one-for-six reverse stock split of its outstanding shares of common
stock. Proportional adjustments for the reverse stock split were
made retroactively to the Company's shares of common stock,
outstanding stock options, warrants and equity incentive plans for
all periods presented.
Pursuant
to the rules of the SEC, Part II, Item 6 of the Original Filing has
been amended to include the currently-dated certifications from our
principal executive officer and principal financial officer, as
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
The certifications of the principal executive officer and principal
financial officer are included in this Form 10-Q/A as Exhibits
31.1, 31.2 and 32.1.
For the
convenience of the reader, this Form 10-Q/A sets forth the
information in the Original Filing in its entirety, as such
information is modified and superseded where necessary to reflect
the restatement. This Form 10-Q/A should be read in conjunction
with our filings with the SEC subsequent to the date of the
Original Filing, in each case as those filings may have been, or
with respect to the Initial Filings will be, superseded or
amended.
FINANCIAL INFORMATION
Item 1. Financial Statements.
DropCar, Inc. and Subsidiaries
Consolidated Balance Sheets
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ASSETS
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CURRENT
ASSETS:
|
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Cash
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$2,212,109
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$372,011
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Accounts
receivable, net
|
290,448
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187,659
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Prepaid expenses
and other current assets
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558,222
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51,532
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Current assets of
discontinued opeerations
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5,671,021
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-
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Total current
assets
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8,731,801
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611,202
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Property and
equipment, net
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45,256
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5,981
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Capitalized
software costs, net
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638,151
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589,584
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Other
assets
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-
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3,000
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Noncurrent assets
of discontinued operations
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5,460,320
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-
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TOTAL
ASSETS
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$14,875,528
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$1,209,767
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
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CURRENT
LIABILITIES:
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|
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Accounts payable
and accrued expenses
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$1,740,883
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$1,820,731
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Deferred
income
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222,525
|
236,433
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Accrued
interest
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-
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135,715
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Current liabilities
of discontinued operations
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3,640,507
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-
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Total current
liabilities
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5,603,915
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2,192,879
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|
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Noncurrent
liabilities of discontinued operations
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81,618
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-
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Convertible note
payable, net of debt discount
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-
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3,506,502
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TOTAL
LIABILITIES
|
5,685,533
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5,699,381
|
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COMMITMENTS
AND CONTINGENCIES
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STOCKHOLDERS'
EQUITY (DEFICIT):
|
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Preferred stock,
$0.0001 par value, 5,000,000 shares authorized
|
|
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Series seed
preferred stock, 275,691 shares authorized, zero and 275,691 issued
and outstanding as of June 30, 2018 and December 31, 2017,
respectively
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-
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27
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Series A preferred
stock, 642,728 shares authorized, zero and 611,944 issued and
outstanding as of June 30, 2018 and December 31, 2017,
respectively
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-
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61
|
Convertible Series
H, 8,500 shares designated, 8 and zero shares issued and
outstanding as of June 30, 2018 and December 31, 2017,
respectively
|
-
|
-
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Convertible Series
H-1, 9,488 shares designated zero shares issued and outstanding as
of June 30, 2018 and December 31, 2017, respectively
|
-
|
-
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Convertible Series
H-2, 3,500 shares designated zero shares issued and outstanding as
of June 30, 2018 and December 31, 2017, respectively
|
-
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-
|
Convertible Series
H-3, 8,461 shares designated 2,189 and zero shares issued and
outstanding as of June 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 June 30, 2018 and December 31, 2017,
respectively
|
3
|
-
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Common stock,
$0.0001 par value; 100,000,000 shares authorized, 1,358,625 and
374,285 issued and outstanding as of June 30, 2018 and December 31,
2017, respectively
|
136
|
37
|
Additional paid in
capital
|
27,584,599
|
5,115,158
|
Accumulated
deficit
|
(18,394,743)
|
(9,604,897)
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
9,189,995
|
(4,489,614)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$14,875,528
|
$1,209,767
|
The
accompanying notes are an integral part of these consolidated
financial statements.
DropCar, Inc. and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
|
For the Three
Months Ended June 30,
|
For the Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
SERVICE
REVENUES
|
$1,873,997
|
$889,295
|
$3,566,072
|
$1,527,853
|
|
|
|
|
|
COST
OF REVENUE
|
2,528,781
|
953,907
|
4,824,562
|
1,443,121
|
|
|
|
|
|
GROSS
PROFIT (LOSS)
|
(654,784)
|
(64,612)
|
(1,258,490)
|
84,732
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
Research and
develoment expenses
|
63,971
|
-
|
178,132
|
-
|
Selling, general
and administrative expenses
|
3,341,601
|
1,354,906
|
6,252,398
|
1,851,017
|
Depreciation and
amortization
|
84,177
|
45,487
|
163,409
|
90,827
|
TOTAL
OPERATING EXPENSES
|
3,489,749
|
1,400,393
|
6,593,939
|
1,941,844
|
|
|
|
|
|
OPERATING
LOSS
|
(4,144,533)
|
(1,465,005)
|
(7,852,429)
|
(1,857,112)
|
|
|
|
|
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Interest income
(expense), net
|
718
|
(328,393)
|
(1,081,499)
|
(328,393)
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
(4,143,815)
|
(1,793,398)
|
(8,933,928)
|
(2,185,505)
|
|
|
|
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DISCONTINUED
OPERATIONS
|
|
|
|
|
Income from
operations of discontinued component
|
151,565
|
-
|
460,943
|
-
|
INCOME
FROM DISCONTINUED OPERATIONS
|
151,565
|
-
|
460,943
|
-
|
|
|
|
|
|
NET
LOSS
|
(3,992,250)
|
(1,793,398)
|
(8,472,985)
|
(2,185,505)
|
Deemed dividend on
exchange of warrants
|
(316,861)
|
-
|
(316,861)
|
-
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$(4,309,111)
|
$(1,793,398)
|
$(8,789,846)
|
$(2,185,505)
|
|
|
|
|
|
LOSS
PER SHARE FROM CONTINUING OPERATIONS:
|
|
|
|
|
Basic
|
(3.12)
|
(6.08)
|
(7.65)
|
(7.70)
|
Diluted
|
(3.12)
|
(6.08)
|
(7.65)
|
(7.70)
|
EARNINGS
PER SHARE FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
Basic
|
0.11
|
-
|
0.39
|
-
|
Diluted
|
0.11
|
-
|
0.39
|
-
|
NET
LOSS PER SHARE:
|
|
|
|
|
Basic
|
(3.24)
|
(6.08)
|
(7.53)
|
(7.70)
|
Diluted
|
(3.24)
|
(6.08)
|
(7.53)
|
(7.70)
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
|
Basic
|
1,328,654
|
294,973
|
1,167,432
|
283,909
|
Diluted
|
1,328,654
|
294,973
|
1,167,432
|
283,909
|
The accompanying notes are an integral part of these consolidated
financial statements.
DropCar, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity
(Deficit)
(Unaudited)
(Restated)
|
Series
Seed Preferred Stock
|
|
|
Series
H-3 Preferred Stock
|
Series
H-4 Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2018
|
275,691
|
$27
|
611,944
|
$61
|
-
|
$-
|
-
|
$-
|
-
|
$-
|
374,285
|
$37
|
$5,115,158
|
$(9,604,897)
|
Issuance
of common stock for cash
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
10,057
|
1
|
299,999
|
-
|
Conversion
of debt into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
136,785
|
14
|
3,682,488
|
-
|
Conversion
of accrued interest into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4,518
|
-
|
159,584
|
-
|
Interest
on lock-up shares in relation to convertible debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
85,571
|
9
|
672,135
|
-
|
Exchange
of shares in connection with Merger
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
490,422
|
49
|
9,792,174
|
-
|
Conversion
of outstanding Preferred Stock in connection with
Merger
|
(275,691)
|
(27)
|
(611,944)
|
(61)
|
-
|
-
|
-
|
-
|
-
|
-
|
147,939
|
15
|
73
|
-
|
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
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
25,472
|
3
|
-
|
-
|
5,898,336
|
-
|
Stock
based compesation for options issued to employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
84,516
|
-
|
Stock
based compesation for restricted stock units issued to
employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,084,336
|
-
|
Stock
based compensation for common stock issued to service
providers
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
60,262
|
6
|
478,944
|
-
|
Series
H-4 preferred stock and warrants issued to service
provider
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,371
|
-
|
-
|
-
|
-
|
-
|
Deemed
dividend on exchange of merger warrants to Series I warrants and
common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
48,786
|
5
|
316,856
|
(316,861)
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(8,472,985)
|
Balance,
June 30, 2018 (Restated)
|
-
|
$-
|
-
|
$-
|
8
|
$-
|
2,189
|
$-
|
26,843
|
$3
|
1,358,625
|
$136
|
$27,584,599
|
$(18,394,743)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2017
|
275,691
|
$27
|
530,065
|
$53
|
272,720
|
$27
|
$(69,960)
|
$2,117,237
|
$(1,964,091)
|
$83,293
|
Issuance
of Series A Preferred Stock
|
-
|
-
|
73,845
|
7
|
-
|
-
|
69,960
|
150,001
|
-
|
219,968
|
Issuance
of Series A Preferred stock for services
|
-
|
-
|
8,034
|
1
|
-
|
-
|
-
|
24,999
|
-
|
25,000
|
Fair
value of warrants issued with convertible notes
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
987,158
|
-
|
987,158
|
Issuance
of common stock to officers
|
|
|
|
|
101,565
|
10
|
-
|
255,782
|
-
|
255,792
|
Stock
based compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
137,900
|
-
|
137,900
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,185,505)
|
(2,185,505)
|
Balance,
June 30, 2017
|
275,691
|
$27
|
611,944
|
$61
|
374,285
|
$37
|
$-
|
$3,673,077
|
(4,149,596)
|
$(476,394)
|
●
See
note 1 for share exchange and reverse split
The accompanying notes are an integral part of these consolidated
financial statements.
DropCar, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(8,472,985)
|
$(2,185,505)
|
Income from
discontinued operations
|
(460,943)
|
-
|
Loss from
continuing operations
|
(8,933,928)
|
(2,185,505)
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
-
|
Depreciation and
amortization
|
163,409
|
90,827
|
Amortization of
debt discount
|
176,000
|
296,860
|
Stock based
compensation
|
1,647,802
|
418,692
|
Non-cash interest
expense
|
696,013
|
-
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
(102,789)
|
(123,330)
|
Prepaid expenses
and other assets
|
(503,690)
|
2,270
|
Accounts payable
and accrued expenses
|
(79,850)
|
(27,798)
|
Accrued
interest
|
-
|
31,667
|
Deferred
revenue
|
(13,908)
|
122,689
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES - CONTINUING
OPERATIONS
|
(6,950,941)
|
(1,373,628)
|
NET
CASH USED IN OPERATING ACTIVITIES - DISCONTINUED
OPERATIONS
|
(1,131,108)
|
-
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(8,082,049)
|
(1,373,628)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Purchase of
property and equipment
|
(43,108)
|
(6,600)
|
Capitalization of
software costs
|
(208,143)
|
(111,184)
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES - CONTINUING
OPERATIONS
|
(251,251)
|
(117,784)
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES - DISCONTINUED
OPERATIONS
|
3,997,483
|
-
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
3,746,232
|
(117,784)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
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 Series A Preferred Stock and subscription
receivable
|
-
|
219,968
|
Proceeds from
issuance of convertible notes and warrants
|
-
|
2,240,000
|
Offering costs -
Convertible Notes
|
-
|
(208,200)
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING
OPERATIONS
|
6,198,339
|
2,251,768
|
NET
CASH USED IN FINANCING ACTIVITIES - DISCONTINUED
OPERATIONS
|
(22,424)
|
-
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
6,175,915
|
2,251,768
|
|
|
|
Net increase in
cash
|
1,840,098
|
760,356
|
|
|
|
Cash,
beginning of period
|
372,011
|
51,366
|
|
|
|
Cash,
end of period
|
$2,212,109
|
$811,722
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
NON-CASH
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Fair value of stock
warrants issued with convertible notes
|
$-
|
$978,158
|
Fair value of
common stock sold to founders
|
$-
|
$137,900
|
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
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
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.
Discontinued Operations
On December 24, 2018, the Company completed the sale of WPCS
International – Suisun City, Inc., a California corporation
(the “Suisun City Operations”), its wholly-owned
subsidiary, pursuant to the terms of a stock purchase agreement,
dated December 10, 2018 (the “Purchase Agreement”) by
and between the Company and World Professional Cabling Systems,
LLC, a California limited liability company (the
“Purchaser”). Upon the closing of the sale, the
Purchaser acquired all of the issued and outstanding shares of
common stock, no par value per share, of Suisun City Operations,
for an aggregate purchase price of $3,500,000. The sale of Suisun
City Operations represented a strategic shift that has had a major
effect on the Company’s operations, and therefore, is
presented as discontinued operations in the 2018 consolidated
statement of operations. The 2017 statement of operations is
not recast as the business was not owned by DropCar at that
time.
Reverse Stock Split
On March 8, 2019, the Company filed a certificate of amendment to
its amended and restated certificate of incorporation with the
Secretary of State of the State of Delaware to affect a one-for-six
reverse stock split of its outstanding shares of common stock.
Proportional adjustments for the reverse stock split were made
retroactively to the Company's shares of common stock, outstanding
stock options, warrants and equity incentive plans for all periods
presented.
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.
The purchase price allocation of $9.8 million was as
follows:
Fair
value of equity consideration 506,423 WPCS 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
$317,000; and accounts payable and accrued liabilities of
$2,534,000.
|
|
(2)
|
The useful lives related to the acquired customer
relationships and trade name are expected to be approximately
10 years.
|
Unaudited Interim Consolidated Financial Information
The accompanying consolidated balance sheets as of June 30, 2018,
the consolidated statements of operations for the three and six
months ended June 30, 2018 and 2017, the consolidated statements of
cash flows for the six months ended June 30, 2018 and 2017, and the
consolidated statement of stockholders’ equity (deficit) for
the six months ended June 30, 2018 and 2017 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 June 30, 2018 and
December 31, 2017 and the results of its operations for the three
and six months ended June 30, 2018 and 2017, and its cash flows for
the six months ended June 30, 2018 and 2017. The financial data and
other information disclosed in the notes to the consolidated
financial statements related to the six months ended June 30, 2018
and 2017 are unaudited.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
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. As further discussed in
Note 10 “Subsequent Events”, 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, face a similar urban
mobility challenge: getting cars to and from service bays,
rebalancing vehicle availability to meet demand and getting
vehicles from dealer lots to fleet 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 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, we expanded operations with our B2B
business in San Francisco and in June 2018 we expanded operations
with our B2B business in Washington DC, both new market expansions
are with a major original equipment manufacturer
(“OEM”) customer.
|
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
June 30, 2018, the Company has an accumulated deficit of $18.4
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 not
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, as further discussed in Note 10 “Subsequent
Events”, through the potential sale of the assets 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.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
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.
Restatement
The Company, while undergoing the audit of its consolidated
financial statements for the year ended December 31, 2018,
commenced an evaluation of its accounting in connection with the
Reverse Merger for (1) lock-up agreements entered into with the
holders of the Notes (see Note 5), and (2) shares of common stock
issued to Alpha Capital Anstalt and Palladium Capital Advisors (see
Note 7, Service Based Common Stock). These agreements, which
management originally deemed to be primarily equity in nature and
would not be recognized as compensatory, were recorded as a debit
and credit to additional paid in capital. On March 29, 2019, under
the authority of the board of directors, the Company determined
that these agreements should have been recorded as compensatory in
nature which gives rise to an adjustment in the amount of
$1,119,294 for the period ended June 30, 2018.
The following tables sets forth the effects of the adjustments on
affected items within the Company’s previously reported
Consolidated Interim Balance Sheet at June 30, 2018, and includes a
reclassification adjustment for the stock split of
$679:
|
|
|
|
|
|
Additional
paid in capital
|
$26,464,626
|
$1,119,973
|
$27,584,599
|
Accumulated
deficit
|
$(17,275,449)
|
$(1,119,294)
|
$(18,394,743)
|
The following table sets forth the effects of the adjustments on
affected items within the Company’s previously reported
Consolidated Interim Statement of Operations for the six months
ended June 30, 2018:
|
Six
Months Ended June 30, 2018
|
|
|
|
|
Effect
of Discontinued Operations
|
|
Selling,
general and administrative expenses
|
$6,923,599
|
$447,150
|
$7,370,749
|
$(1,116,686)
|
$6,254,063
|
Depreciation
and amortization
|
304,687
|
-
|
304,687
|
$(142,943)
|
$161,744
|
Total
operating expenses
|
$7,406,418
|
$447,150
|
$7,853,568
|
$(1,259,629)
|
$(6,593,939)
|
Operating
loss
|
$(6,943,738)
|
$(447,150)
|
$(7,390,888)
|
$(461,541)
|
$(7,852,429)
|
Interest
income (expense), net
|
$(409,953)
|
$(672,144)
|
$(1,082,097)
|
$598
|
$(1,081,499)
|
Loss
from continuing operations
|
$(7,353,691)
|
$(1,119,294)
|
$(8,472,985)
|
$(460,943)
|
$(8,933,928)
|
Income
from discontinued operations
|
$-
|
$-
|
$-
|
$460,943
|
$460,943
|
Net
loss
|
$(7,353,691)
|
$(1,119,294)
|
$(8,472,985)
|
$460,943
|
$(8,472,985)
|
Net
loss attributable to common shareholders
|
$(7,670,552)
|
$(1,119,294)
|
$(8,789,846)
|
$-
|
$(8,789,846)
|
Net
loss per common shares, basic and diluted
|
$(6.57)
|
|
$(7.53)
|
|
$(7.53)
|
The following table sets forth the effects of the adjustments on
affected items within the Company’s previously reported
Consolidated Interim Statement of Cash Flows for the six months
ended June 30, 2018:
|
Six Months Ended June 30, 2018
|
|
As previously reported
|
Adjustment
|
As restated
|
Net loss
|
$(7,353,691)
|
$(1,119,294)
|
$(8,472,985)
|
Stock based compensation
|
$1,200,652
|
$447,150
|
$1,647,802
|
Non-cash interest expense
|
$23,869
|
$672,144
|
$696,013
|
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.
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.
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 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 ending June 30, 2018.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
DropCar Operating
We are a provider of 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. As further discussed in
Note 10 “Subsequent Events”, we launched our Mobility
Cloud platform which provides automotive-related businesses with a
100% self-serve SaaS version of its VAL platform to manage our 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, face a similar urban
mobility challenge: getting cars to and from service bays,
rebalancing vehicle availability to meet demand and getting
vehicles from dealer lots to fleet 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 where 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 started operations in its B2B business in
San Francisco and in May 2018 in June 2018 in Washington DC with a
major original equipment manufacturer (“OEM”)
customer.
Monthly Subscriptions
During the second quarter DropCar Operating offered 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.
On Demand Valet and Parking Services
During the second quarter, DropCar Operating offered its customers
on demand services through its mobile application. The customer was
billed at an hourly rate upon completion of the services. Revenue
was recognized when the Company had satisfied all performance
obligations which is upon completion of the service.
DropCar 360 Services
During the second quarter, DropCar Operating offered an additional
service to its customers by offering to take the vehicle for
inspection, maintenance, car washes or to fill up with gas. The
customers were charged a fee in addition to the cost of the
third-party services provided. Revenue was 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 and
others in the automotive industry in moving their fleet of cars.
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.
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 June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
DropCar
Operating Subscription Services
|
$1,282,962
|
$671,202
|
$2,639,555
|
$1,171,888
|
DropCar
Operating Services On-Demand
|
591,035
|
218,093
|
926,517
|
355,965
|
DropCar Operating Revenue (1)(2)
|
1,873,997
|
889,295
|
3,566,072
|
1,527,853
|
|
(1)
|
Represents revenues recognized by type of services.
|
|
(2)
|
All revenues are generated in the United States.
|
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
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 over the requisite service period based on the number
of options or shares expected to ultimately vest. Forfeitures are
estimated at the date of grant and revised when actual or expected
forfeiture activity differs materially from original
estimates.
The Company has one equity incentive plan, the 2014 Equity
Incentive Plan (the “Plan”). As of June 30, 2018, there
were 5,127 shares reserved for future issuance under the
Plan.
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.
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 June
30, 2018 and 2017.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
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 June 30, 2018,
and December 31, 2017, the Company had a full valuation allowance
against its 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
June 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 June 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:
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, and accrued interest, due to their
short-term nature.
Earnings/Loss Per Share
Basic earnings 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 earnings 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.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
|
|
|
|
|
Common
stock equivalents:
|
|
|
Common
stock options
|
202,058
|
-
|
Series
A, H-1, H-3, H-4, I and Merger common stock purchase
warrants
|
585,307
|
-
|
Series
H, H-3, and H-4 Convertible Preferred Stock
|
2,739,225
|
-
|
Restricted
shares (unvested)
|
244,643
|
-
|
Convertible
notes
|
-
|
63,307
|
Series
seed preferred stock
|
-
|
275,691
|
Series
A preferred stock
|
-
|
611,944
|
Totals
|
3,771,233
|
950,942
|
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.
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 issued ASU No. 2016-02, amended and
codified as Topic 842, Leases. The new standard establishes a
right-of-use ("ROU") model that requires a lessee to record a ROU
asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as
either finance or operating, with classification affecting the
pattern of expense recognition in the income statement. The new
standard is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. Either a
prospective approved or a modified retrospective transition
approach is required for lessees for capital and operating leases
existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with
certain practical expedients available. The Company is in the
process of evaluating the impact of this guidance on its
consolidated financial statements and related disclosures; however,
based on the Company's current operating leases, it is expected to
have a material impact on the Company's consolidated balance sheet
by increasing assets and liabilities.
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.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies the accounting for nonemployee
share-based payment transactions. The amendments specify that Topic
718 applies to all share-based payment transactions in which a
grantor acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment
awards. The standard will be effective in the first quarter of
2020, although early adoption is permitted. The Company is
currently evaluating the effect the adoption of this ASU will have
on its consolidated financial statements.
|
3.
|
Discontinued Operations and Disposition of Operating
Segment
|
On December 24, 2018, the Company completed the sale of WPCS
International – Suisun City, Inc., a California corporation,
its wholly-owned subsidiary, pursuant to the terms of a stock
purchase agreement, dated December 10, 2018 by and between the
Company and World Professional Cabling Systems, LLC, a California
limited liability company. Upon the closing of the sale, the
Purchaser acquired all of the issued and outstanding shares of
common stock, no par value per share, of Suisun City Operations,
for an aggregate purchase price of $3,500,000.
The operations and cash flows of the Suisun City Operations are
presented as discontinued operations. The operating results of the
Suisun City Operations for the three and six months ended June 30,
2018 were as follows:
|
For the Three
Months
Ended June 30,
2018
|
For the Six
Months
Ended June 30,
2018
|
|
|
|
Revenues
|
$4,466,370
|
$7,648,849
|
Cost
of revenues
|
3,601,403
|
5,927,679
|
Gross
profit
|
864,967
|
1,721,170
|
|
|
|
Selling,
general and administrative expenses
|
626,886
|
1,116,686
|
Depreciation
and amortization
|
86,098
|
142,943
|
Total
Operating Expenses
|
712,984
|
1,259,629
|
|
|
|
Operating
income
|
151,983
|
461,541
|
|
|
|
Interest
expense, net
|
(418)
|
(598)
|
|
|
|
Net
income from discontinued operations
|
$151,565
|
$460,943
|
|
|
|
Capitalized software consists of the following as of June 30, 2018
and December 31, 2017:
|
|
|
Software
|
$1,112,526
|
$904,383
|
Accumulated
amortization
|
(474,375)
|
(314,799)
|
Total
|
$638,151
|
$589,584
|
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Amortization expense for the three months ended June 30, 2018 and
2017, was $81,392 and $45,487, respectively. Amortization expense
for the six months ended June 30, 2018 and 2017 was $159,576 and
$90,827, 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
146,358 shares of common stock at an exercise price of $59.04 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 $35.40
per share and, including accrued interest, were converted into
136,785 shares of common stock in connection with the Reverse
Merger. At June 30, 2018 and December 31, 2017, the aggregate
carrying value of the Notes was $0 and $3,506,502,
respectively.
In connection with the Reverse Merger, the holders of the Notes
entered into lock-up agreements pursuant to which they have agreed
not to sell the 85,573 shares of common stock received in the
Reverse Merger. The length of the lock-up period was up to 120
days. For the six months ended June 30, 2018, the Company recorded
$672,144 as interest expense in relation to the lock-up agreements
in the accompanying consolidated statement of
operations.
Lease Agreements
The Company has short term leases for office space in New York City
that expire on August 31, 2018.
For the three months ended June 30, 2018 and 2017, rent expense for
the Company’s facilities was $45,000 and $9,000,
respectively. For the six months ended June 30, 2018 and 2017, rent
expense for the Company’s facilities was $74,000 and $18,000,
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 six months ended June 30, 2018, approximately
$44,000 of this amount was settled upon payment. An additional
$30,000 was expensed and accrued for potential settlements during
the three months ended June 30, 2018. As of June 30, 2018,
approximately $82,000 remains accrued for the potential settlement
of employment disputes.
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.
Common Stock
On January 18, 2018, the Company sold 10,057 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 136,785 shares of common stock just prior to
the Reverse Merger.
During the period ended June 30, 2018, the Company converted
$159,584 of accrued interest related to the convertible notes into
4,518 shares of common stock.
During the period ended June 30, 2018, the Company granted 3,333
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.
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.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Series H-1 and H-2 Convertible
The Company has designated 9,458 Series H-1 Preferred Stock and
designated 3,500 Series H-2 Preferred Stock, none of which are
outstanding.
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 424,533
shares of common stock of the Company, and warrants to purchase
424,533 shares of common stock of the Company, with an exercise
price of $15.60 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 $14.15 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
Stock Based Compensation
Service Based Restricted Stock Units
On February 28, 2018, the Company issued 244,643 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 June 30, 2018, unamortized stock compensation for the RSUs was
$2,159,630, which will be recognized over the next 8
months.
Service Based Warrants
On March 8, 2018, in connection with the financing discussed above,
the Company issued 1,371 Series H-4 Shares and 22,850 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 $15.60; fair market value of underlying
stock of $13.20; expected term of 5 years; risk free rate of 2.63%;
volatility of 120.63%; and dividend yield of 0%. For the six months
ended June 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.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
Employee and Non-employee Stock Options
The following table summarizes stock option activity during the six
months ended June 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
|
133,711
|
36.42
|
4.40
|
-
|
Granted
|
68,347
|
12.24
|
9.76
|
-
|
Outstanding
at June 30, 2018
|
202,058
|
$25.74
|
8.49
|
-
|
At June 30, 2018, unamortized stock compensation for stock options
was $618,137, with a weighted-average recognition period of 2
years.
Share Based Compensation
Stock based compensation for RSUs and options issued to employees
and non-employees was recorded as part of selling, general, and
administrative expense for the three months ended June 30, 2018 and
2017 in the amount of $876,114 and $0, respectively. Stock based
compensation for RSUs and options issued to employees and
non-employees was recorded as part of selling, general, and
administrative expense for the six months ended June 30, 2018 and
2017 in the amount of $1,200,652 and $418,692,
respectively.
On May 14, 2018, the Company approved of annual option grants to
the Chairman of the Board and to each non-executive member of the
Board. The Chairman shall receive an annual option grant to
purchase shares of common stock equal to the intrinsic value of
$30,000 and each non-executive member of the Board (other than the
Chairman) shall receive an annual option grant to purchase shares
of common stock equal to an intrinsic value of $20,000, each such
grant to vest in equal quarterly installments over a one-year
period. The option grants are subject to stockholder approval of an
amendment to the Plan increasing the number of shares available for
grant thereunder and will not be granted if the Company’s
stockholders do not approve such an increase. The Company will fair
value and record these board grants upon stockholder approval of an
amendment to the Plan.
Service Based Common Stock
On January 30, 2018 the Company issued 213,707 and 35,558 shares of
common stock to Alpha Capital Anstalt and Palladium Capital
Advisors, respectively, in connection with the Reverse Merger. For
the Alpha Capital Anstalt issuance, the Company recorded 90% of the
issuance, or 192,336 common shares, as cost of capital raise and
10% of the issuance, or 21,371 common shares, as advisory services.
The Reverse Merger costs in the amount of $1,510,722 was recorded
as a reduction to additional paid in capital and the advisory
service costs in the amount of $167,858 were recorded as general
and administrative expense in the consolidated statement of
operations. For the Palladium Capital Advisors issuance, the
Company recorded $279,292 as general and administrative expense in
the consolidated statement of operations.
Stock option pricing model
The fair value of the stock options granted during the three months
ended June 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
|
|
$10.92-$13.26
|
Expected volatility
|
|
118.10% - 118.83%
|
Dividend yield
|
|
$0
|
Risk-free interest
|
|
2.87% - 3.00%
|
Expected life (years)
|
|
5.33
|
Warrants
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 1/18 of a share of Common Stock and
1/12 of a warrant to purchase a share of Common Stock
(collectively, the “Series I Warrants”). The Series I
Warrants have an exercise price of $13.80 per share. In connection
with the Exchange Agreements, the Company issued an aggregate of
(i) 48,786 new shares of common stock and (ii) Series I Warrants to
purchase an aggregate of 73,178 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 $10.32, (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.
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
|
146,358
|
$59.04
|
Acquired,
H-1 warrants
|
50,744
|
29.04
|
Acquired,
H-3 warrants
|
14,001
|
33.12
|
Granted, H-4 warrants(1)
|
447,383
|
3.60
|
Granted,
I warrants
|
73,178
|
13.80
|
Retired,
Merger Warrants
|
(146,357)
|
59.04
|
Outstanding,
June 30, 2018
|
585,307
|
$16.98
|
(1) Excludes 1,342,150 H-4
warrants representing 150% coverage of H-4 warrants
granted.
The warrants expire through the years 2020-2024.
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
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 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 the client’s front door. This model
aligns more directly with how the Company has structured the
enterprise B2B side of its business, where every interaction with a
vehicle on behalf of its drivers generates net new revenue. DropCar
Operating has decided that the Self-Park Spaces plan combined with
its on-demand valet service will be the only plans that it will
offer consumers from September 1, 2018 onwards. Subscriber plans
prior to this date will continue to receive service on a prorated
basis. 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 has begun to significantly streamline
its field teams, operations and back office support tied to its
pre-September 1, 2018 consumer subscription plans.
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 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. 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.
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
Sale of Suisun City Operations
On December 24, 2018, the Company completed the sale of WPCS
International – Suisun City, Inc., a California corporation,
its wholly-owned subsidiary, pursuant to the terms of a stock
purchase agreement, dated December 10, 2018 by and between the
Company and World Professional Cabling Systems, LLC, a California
limited liability company. Upon the closing of the sale, the
Purchaser acquired all of the issued and outstanding shares of
common stock, no par value per share, of Suisun City Operations,
for an aggregate purchase price of $3,500,000.
The operations and cash flows of the Suisun City Operations are
presented as discontinued operations. The operating results of the
Suisun City Operations for the three and six months ended June 30,
2018 were as follows:
|
For the Three
Months
Ended June 30,
2018
|
For the Six
Months
Ended June 30,
2018
|
|
|
|
Revenues
|
$4,466,370
|
$7,648,849
|
Cost
of revenues
|
3,601,403
|
5,927,679
|
Gross
profit
|
864,967
|
1,721,170
|
|
|
|
Selling,
general and administrative expenses
|
626,886
|
1,116,686
|
Depreciation
and amortization
|
86,098
|
142,943
|
Total
Operating Expenses
|
712,984
|
1,259,629
|
|
|
|
Operating
income
|
151,983
|
461,541
|
|
|
|
Interest
expense, net
|
(418)
|
(598)
|
|
|
|
Net
income from discontinued operations
|
$151,565
|
$460,943
|
|
|
|
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 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 the client’s 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. DropCar Operating has decided that the Self-Park Spaces
plan combined with its on-demand valet service will be the only
plans that it will offer consumers from September 1, 2018 onwards.
Subscriber plans prior to this date will continue to receive
service on a prorated basis. 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 has begun to
significantly streamline its field teams, operations and back
office support tied to its pre-September 1, 2018 consumer
subscription plans.
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
447,383 shares of our Series H-4 Preferred Stock, with an exercise
price of $15.60 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 447,383 shares of Common
Stock.
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 1/18 of a
share of Common Stock and 1/12 of a warrant to purchase a share of
Common Stock (collectively, the “Series I Warrants”).
The Series I Warrants have an exercise price of $13.80 per share.
In connection with the Exchange Agreements, we issued an aggregate
of (i) 48,786 new shares of common stock and (ii) Series I Warrants
to purchase an aggregate of 73,178 shares of common
stock.
Overview
DropCar Operating
We are a provider of 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. As further discussed in
Note 10 “Subsequent Events” in our unaudited
consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q, 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 our 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, face a similar urban
mobility challenge: getting cars to and from service bays,
rebalancing vehicle availability to meet demand and getting
vehicles from dealer lots to fleet 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 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.
To date, we operate primarily in the New York metropolitan area. In
May 2018, we expanded operations with our B2B business in San
Francisco and in June 2018 we expanded operations with our B2B
business in Washington DC, both new market expansions are with a
major original equipment manufacturer (“OEM”)
customer.
Results of Operations
We have never been profitable and have incurred significant
operating losses in each year since inception. Net losses for six
months ended June 30, 2018 and 2017 were approximately $8.5 million
and $2.2 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. As
of June 30, 2018, we had net working capital of approximately $3.1
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
Service Revenues
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 Revenue
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 significantly
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 six months ended June 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. At
June 30, 2018 and 2017, the accounts receivable reserve was
approximately $267,000 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 contracts are generally designed to provide cash
fees to us on a monthly basis or an agreed upfront rate based upon
on-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 periods ending June 30, 2018.
Monthly Subscriptions
During the second quarter, DropCar Operating offered 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.
On Demand Valet and Parking Services
During the second quarter, DropCar Operating offered its customers
on demand services through its mobile application. The customer was
billed at an hourly rate upon completion of the services. Revenue
was recognized when the Company had satisfied all performance
obligations which is upon completion of the service.
DropCar 360 Services
During the second quarter, DropCar Operating offered an additional
service to its customers by offering to take the vehicle for
inspection, maintenance, car washes or to fill up with gas. The
customers were charged a fee in addition to the cost of the
third-party services provided. Revenue was 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 and
others in the automotive industry in moving their fleet of cars.
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.
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 June 30, 2018 and
2017
Service Revenues
Net services revenues during the three months ended June 30, 2018
totaled $1.9 million, an increase of $1.0 million, or 111%,
compared to $0.9 million recorded for the three months ended June
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 the in additional markets of San
Francisco and Washington D.C.
Cost of Revenue
Cost of services during the three months ended June 30, 2018
totaled $2.5 million, an increase of $1.5 million, or 150%,
compared to $1.0 million recorded for the three months ended June
30, 2017. The increase was primarily attributable to increases of
$1.1 million in wages and related costs, $0.2 million in parking
garage fees, $0.1 million in repairs and damages, and $0.1 million
in other costs.
Research and development costs, net
Research and development costs during the three months ended June
30, 2018 totaled $0.1 million, an increase of $0.1 million, or
100%, compared to zero recorded for the three months ended March
31, 2017. The increase was primarily attributable to increases in
consulting services and information technology
security.
Selling, General and Administrative
Selling, general and administrative expenses during the three
months ended June 30, 2018 totaled 3.3 million, an increase of $1.9
million, or 136%, compared to $1.4 million recorded for the three
months ended June 30, 2017. This was primarily attributable to an
increase of, $0.4 million in wages and related, $0.9 million in
employee stock compensation, $0.2 million in professional and
consulting fees, $0.1 million in insurance costs and $0.3 million
in other costs.
Depreciation and amortization
Depreciation and amortization during the three months ended June
30, 2018 totaled $0.08 million, an increase of $0.03 million, or
60%, compared to $0.05 million recorded for the three months ended
June 30, 2017. This increase was primarily attributable to our
increased capitalization of software costs related to our software
platform.