UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q/A
(Mark One)
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
or
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________________ to __________________
 
Commission File Number:   001-34643
 
DropCar, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
98-0204758
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
DropCar, Inc.
1412 Broadway, Suite 2105
New York, New York 10018
(646) 342-1595
(Registrant’s telephone number, including area code)
 
Not Applicable 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ☒   No   ☐
 
Indicate by check mark whether the registrant has submitted electronically 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
 
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  No 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock par value $0.0001 per share
DCAR
The Nasdaq Stock Market
 
 
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
 
 
 
Page
No.
 
Explanatory Note
4
 
 
 
Consolidated Financial Statements (Unaudited)
 
 
   Consolidated Balance Sheets as of June 30, 2018 (Restated) and December 31, 2017
5
 
   Consolidated Statements of Operations for the three and six months ended June 30, 2018 (Restated) and 2017
6
 
   Consolidated Statement of Changes in Shareholders’ Equity for the six months ended June 30, 2018 (Restated) and 2017
7
 
   Consolidated Statements of Cash Flows for the six months ended June 30, 2018 (Restated) and 2017
9
 
   Notes to Consolidated Financial Statements
10
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
27
 
 
 
Quantitative and Qualitative Disclosures About Market Risk.
35
 
 
 
Controls and Procedures.
35
 
 
 
      PART II - OTHER INFORMATION
 
 
 
 
Legal Proceedings.
36
 
 
 
Risk Factors.
36
 
 
 
Unregistered Sales of Equity Securities and Use of Proceeds.
37
 
 
 
Defaults Upon Senior Securities.
37
 
 
 
Mine Safety Disclosures.
38
 
 
 
Other Information.
38
 
 
 
Exhibits.
38
 
 
 
 
Signatures.
39
 
 
 
 
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.
 
 
4
 
 
PART I
FINANCIAL INFORMATION
 
Item 1. Financial Statements.
DropCar, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
 
June 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
 
 
(Restated)
 
 
 
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
Cash
 $2,212,109 
 $372,011 
Accounts receivable, net
  290,448 
  187,659 
Prepaid expenses and other current assets
  558,222 
  51,532 
Current assets of discontinued opeerations
  5,671,021 
  - 
Total current assets
  8,731,801 
  611,202 
 
    
    
Property and equipment, net
  45,256 
  5,981 
Capitalized software costs, net
  638,151 
  589,584 
Other assets
  - 
  3,000 
Noncurrent assets of discontinued operations
  5,460,320 
  - 
TOTAL ASSETS
 $14,875,528 
 $1,209,767 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
    
    
 
    
    
CURRENT LIABILITIES:
    
    
Accounts payable and accrued expenses
 $1,740,883 
 $1,820,731 
Deferred income
  222,525 
  236,433 
Accrued interest
  - 
  135,715 
Current liabilities of discontinued operations
  3,640,507 
  - 
Total current liabilities
  5,603,915 
  2,192,879 
 
    
    
Noncurrent liabilities of discontinued operations
  81,618 
  - 
Convertible note payable, net of debt discount
  - 
  3,506,502 
TOTAL LIABILITIES
  5,685,533 
  5,699,381 
 
    
    
COMMITMENTS AND CONTINGENCIES
    
    
 
    
    
STOCKHOLDERS' EQUITY (DEFICIT):
    
    
Preferred stock, $0.0001 par value, 5,000,000 shares authorized
    
    
Series seed preferred stock, 275,691 shares authorized, zero and 275,691 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
  - 
  27 
Series A preferred stock, 642,728 shares authorized, zero and 611,944 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
  - 
  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
  - 
  - 
Convertible Series H-1, 9,488 shares designated zero shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
  - 
  - 
Convertible Series H-2, 3,500 shares designated zero shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
  - 
  - 
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 
  - 
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.
 
 
5
 
 
DropCar, Inc. and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
 
 
 
For the Three Months Ended June 30,
 
 
For the Six Months Ended June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
(Restated)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
    
    
    
    
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)
 
    
    
    
    
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.
 
 
6
 
 
 
DropCar, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
(Unaudited)
(Restated)
  
 
 
 
Series Seed Preferred Stock
 
 
Series A Preferred Stock
 
 
Series H Preferred Stock
 
 
Series H-3 Preferred Stock
 
 
Series H-4 Preferred Stock
 
 
Common Stock
 
 
Paid-in
 
 
Accumulated
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
(Deficit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
 
7
 
 
 
 
Series Seed
 
 
Series A
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
Preferred Stock
 
 
Preferred Stock
 
 
Common Stock
 
 
 
 
 
Subscription
 
 
Paid-in
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Receivable
 
 
Capital
 
 
(Deficit)
 
 
Total
 
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.
 
 
8
 
 
DropCar, Inc., and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Six Months Ended June 30,
 
 
 
2018
 
 
2017
 
 
 
 (Restated)
 
 
 
 
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.
 
 
9
 
 
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
 
 
1.
The Company
 
Reverse Merger and Exchange Ratio
 
On January 30, 2018, DC Acquisition Corporation (“Merger Sub”), a wholly-owned subsidiary of WPCS International Incorporated (“WPCS”), completed its merger with and into DropCar, Inc. (“Private DropCar”), with Private DropCar surviving as a wholly owned subsidiary of WPCS. This transaction is referred to as the “Reverse Merger.” The Reverse Merger was effected pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated September 6, 2017, by and among WPCS, Private DropCar and Merger Sub.
 
As a result of the Reverse Merger, each outstanding share of Private DropCar share capital (including shares of Private DropCar share capital 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.
 
 
10
 
 
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.
 
 
11
 
 
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.
 
 
12
 
 
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:  
 
 
 
June 30, 2018
 
 
 
As previously reported
 
 
Adjustment
 
 
As restated
 
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
 
 
 
As previously reported
 
 
Adjustment
 
 
As restated
 
 
Effect of Discontinued Operations
 
 
As currently reported
 
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
 
 
13
 
 
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.
 
 
14
 
 
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.
 
 
15
 
 
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,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
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.
 
 
16
 
 
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.
 
 
17
 
 
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.
 
 
18
 
 
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
 
 
 
As of June 30,
 
 
 
2018
 
 
2017
 
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.
 
 
19
 
 
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 
 
    
    
 
 
4.
Capitalized Software
 
Capitalized software consists of the following as of June 30, 2018 and December 31, 2017:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Software
 $1,112,526 
 $904,383 
Accumulated amortization
  (474,375)
  (314,799)
Total
 $638,151 
 $589,584 
 
 
 
20
 
 
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.
 
 
6.
Commitments
 
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.
 
 
21
 
 
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.
 
 
7.
Stockholders’ Equity
 
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.
 
 
22
 
 
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.
 
 
23
 
 
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.
 
 
24
 
 
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:
 
 
 
Number of Warrants
 
 
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.

 
25
 
 
DropCar, Inc., and Subsidiaries
Note to Consolidated Financial Statements
(unaudited)
 
 
8.
Subsequent Events
 
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.
  
 
26
 
 
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 
 
    
    
 
 
 
27
 
 
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.
 
 
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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.
 
 
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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.

 
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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.
 
 
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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.