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 September 30, 2018

 

or

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to __________________

 

Commission File Number:   001-34643

 

DropCar, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware	98-0204758
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

DropCar, Inc.

1412 Broadway, Suite 2105

New York, New York 10018

(646) 342-1595

(Registrant’s telephone number, including area code)

 

Not Applicable 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically 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 November 8, 2018, there were  1,618,741 shares of the registrant’s common stock, $0.0001 par value per share, issued and outstanding.

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

Certain statements in this report contain or may contain forward-looking statements. These statements, identified by words such as “plan,” “anticipate,” “believe,” “estimate,” “should,” “expect” and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our inability to obtain adequate financing, our inability to expand our business, existing or increased competition, stock volatility and illiquidity, and the failure to implement our business plans or strategies. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Readers should carefully review this report in its entirety, including but not limited to our financial statements and the notes thereto and the risks described in our Current Report on Form 8-K/A filed with the Securities and Exchange Commission (the “SEC”) on April 2, 2018 and other reports we file with the SEC. We advise you to carefully review the reports and documents we file from time to time with the SEC, particularly our quarterly reports on Form 10-Q and our current reports on Form 8-K. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to publicly release any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

 

OTHER INFORMATION

 

When used in this report, the terms, “we,” the “Company,” “our,” and “us” refer to DropCar, Inc., a Delaware corporation (previously named WPCS International Incorporated), and its consolidated subsidiaries.

 

 

TABLE OF CONTENTS

 

		Page No.
PART I – FINANCIAL INFORMATION
	Explanatory Note	4
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2018 (Restated) and December 31, 2017 (Audited)	5
	Consolidated Statements of Operations for the three and nine months ended September 30, 2018 (Restated) and 2017	6
	Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the nine months ended September 30, 2018 (Restated) and 2017	7
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 (Restated) and 2017	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	39
Item 4.	Controls and Procedures.	39
Part II – OTHER INFORMATION
Item 1.	Legal Proceedings.	39
Item 1A.	Risk Factors.	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	41
Item 3.	Defaults Upon Senior Securities.	41
Item 4.	Mine Safety Disclosures.	41
Item 5.	Other Information.	41
Item 6.	Exhibits.	42
	Signatures.	43

 

 

EXPLANATORY NOTE

 

We are filing this Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 (“Form 10-Q/A”), which was filed with the United States Securities and Exchange Commission (“SEC”) on November 14, 2018 (the “Original Filing”), to reflect restatements of the Consolidated Balance Sheet at September 30, 2018, the Consolidated Statements of Operations, Changes in Shareholders’ Equity (Deficit), and Cash Flows for the nine months ended September 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.

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DropCar, Inc. and Subsidiaries

Consolidated Balance Sheets

	September 30,	December 31,
	2018	2017
	(Restated)
ASSETS	(Unaudited)
CURRENT ASSETS:
Cash	$ 895,658	$372,011
Accounts receivable, net	192,058	187,659
Prepaid expenses and other current assets	387,046	51,532
Current assets of discontinued operations	5,440,684	-
Total current assets	6,915,446	611,202
Property and equipment, net	42,538	5,981
Capitalized software costs, net	679,304	589,584
Other assets	3,000	3,000
Noncurrent assets of discontinued operations	5,382,408	-
TOTAL ASSETS	$ 13,022,696	$ 1,209,767
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$ 1,916,486	$1,820,731
Deferred income	23,215	236,433
Accrued interest	-	135,715
Current liabilities of discontinued operations	3,428,241	-
Total current liabilities	5,367,942	2,192,879
Noncurrent liabilities of discontinued operations	69,373	-
Convertible note payable, net of debt discount	-	3,506,502
TOTAL LIABILITIES	5,437,315	5,699,381
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.0001 par value, 5,000,000 shares authorized
Series seed preferred stock, 275,691 shares authorized, zero and 275,691 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	-	27
Series A preferred stock, 642,728 shares authorized, zero and 611,944 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	-	61
Convertible Series H, 8,500 shares designated, 8 and zero shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	-	-
Convertible Series H-1, 9,488 shares designated zero shares issued and outstanding as of September 30, 2018 and December 31, 2017	-	-
Convertible Series H-2, 3,500 shares designated zero shares issued and outstanding as of September 30, 2018 and December 31, 2017	-	-
Convertible Series H-3, 8,461 shares designated 2,189 and zero shares issued and outstanding as of September 30, 2018 and December 31, 2017	-	-
Convertible Series H-4, 30,000 shares designated 26,843 and zero shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	3	-
Common stock, $0.0001 par value; 100,000,000 shares authorized, 1,618,741 and 374,285 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	162	37
Additional paid in capital	30,327,772	5,115,158
Accumulated deficit	(22,742,556)	(9,604,897)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)	7,585,381	(4,489,614)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$ 13,022,696	$ 1,209,767

 

 

DropCar, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2018	2017	2018	2017
			(Restated)
SERVICE REVENUES	$ 1,389,134	$ 1,269,556	$ 4,955,206	$ 2,797,409
COST OF REVENUE	1,789,021	1,426,874	6,613,583	2,869,995
GROSS LOSS	(399,887)	(157,318)	(1,658,377)	(72,586)
OPERATING EXPENSES
Research and development expenses	60,299	-	238,431	-
Selling, general and administrative expenses	2,690,991	2,319,433	8,943,389	4,170,450
Depreciation and amortization	94,031	45,576	257,440	136,403
TOTAL OPERATING EXPENSES	2,845,321	2,365,009	9,439,260	4,306,853
OPERATING LOSS	(3,245,208)	(2,522,327)	(11,097,637)	(4,379,439)
Interest income (expense), net	171	(380,598)	(1,081,328)	(708,991)
LOSS FROM CONTINUING OPERATIONS	(3,245,038)	(2,902,925)	(12,178,965)	(5,088,430)
DISCONTINUED OPERATIONS
Income (loss) from operations of discontinued component	(83,736)	-	377,207	-
INCOME FROM DISCONTINUED OPERATIONS	(83,736)	-	377,207	-
NET LOSS	(3,328,773)	(2,902,925)	(11,801,758)	(5,088,430)
Deemed dividend on exchange of warrants	(1,019,040)	-	(1,335,901)	-
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$ (4,347,813)	$ (2,902,925)	$ (13,137,659)	$ (5,088,430)
LOSS PER SHARE FROM CONTINUING OPERATIONS:
Basic	$(2.26)	$(8.27)	$(9.65)	$(16.60)
Diluted	$(2.26)	$(8.27)	$(9.65)	$(16.60)
EARNINGS PER SHARE FROM DISCONTINUED OPERATIONS:
Basic	$(0.06)	$-	$0.30	$-
Diluted	$(0.06)	$-	$0.30	$-
NET LOSS PER SHARE:
Basic	$(3.03)	$(8.27)	$(10.41)	$(16.60)
Diluted	$(3.03)	$(8.27)	$(10.41)	$(16.60)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	1,434,963	351,133	1,262,409	306,563
Diluted	1,434,963	351,133	1,262,409	306,563

 

 

 

	Series Seed Preferred Stock		Series A Preferred Stock		Series H Preferred Stock		Series H-3 Preferred Stock		Series H-4 Preferred Stock		Common Stock		Subscription	Paid-in	Accumulated
	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Receivable	Capital	Deficit	Total
Balance, January 1, 2018	275,691	$ 27	611,944	$ 61	-	$ -	-	$ -	-	$ -	374,285	$ 37	0	$ 5,115,158	$ (9,604,897)	$ (4,489,614)
Issuance of common stock for cash	-	-	-	-	-	-	-	-	-	-	10,057	1	-	299,999	-	300,000
Conversion of debt into common stock	-	-	-	-	-	-	-	-	-	-	136,785	14	-	3,682,488	-	3,682,502
Conversion of accrued interest into common stock	-	-	-	-	-	-	-	-	-	-	4,518	-	-	159,584	-	159,584
Interest on lock-up shares in relation to convertible debt	-	-	-	-	-	-	-	-	-	-	85,571	9	-	672,135	-	672,144
Exchange of shares in connection with Merger	-	-	-	-	-	-	-	-	-	-	490,422	49	-	9,792,174	-	9,792,223
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	-	5,898,339
Issuance of common shares in connection with exercise of H-4 warrants	-	-	-	-	-	-	-	-	-	-	260,116	26	-	936,397	-	936,423
Stock based compensation for options issued to employees	-	-	-	-	-	-	-	-	-	-	-	-	-	54,556	-	54,556
Stock based compensation for restricted stock units issued to employees	-	-	-	-	-	-	-	-	-	-	-	-	-	1,902,032	-	1,902,032
Stock based compensation for common stock issued to service provider	-	-	-	-	-	-	-	-	-	-	60,262	-	-	478,950	-	478,950
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)	-
Deemed dividend on modification of H-4 Warrants and issuance of Series J warrants	-	-	-	-	-	-	-	-	-	-	-	6	-	1,019,034	(1,019,040)	-
Net loss	-	-	-	-	-	-	-	-	-	-	-	-	-	-	(11,801,758)	(11,801,758)
Balance September 30, 2018 (Restated)	-	$ -	-	$ -	8	$ -	2,189	$ -	26,843	$ 3	1,618,741	$ 162	$ 0	$ 30,327,772	$ (22,742,556)	$ 7,585,381

 

	Series Seed		Series A
	Preferred Stock		Preferred Stock		Common Stock		Subscription	AdditionalPaid-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	-	-	-	-	-	-	-	1,426,789	-	1,426,789
Issuance of common stock to officers					101,565	10	-	546,090	-	546,100
Stock based compensation	-	-	-	-	-	-	-	137,900	-	137,900
Net Loss	-	-	-	-	-	-	-	-	(5,088,430)	(5,088,430)
Balance, September 30, 2017	275,691	$ 27	611,944	$ 61	374,285	$ 37	$ -	$ 4,403,016	(7,052,521)	$ (2,649,380)

 

 

 

DropCar, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	For the Nine Months Ended September 30,
	2018	2017
	(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (11,801,758)	$ (5,088,430)
Income from discontinued operations	(377,207)	-
Loss from continuing operations	(12,178,965)	(5,088,430)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	257,440	136,403
Bad debt provision	-	42,057
Amortization of debt discount	176,000	638,370
Stock based compensation	2,435,538	709,000
Non-cash interest expense	696,013	-
Changes in operating assets and liabilities:
Accounts receivable	(4,399)	(138,582)
Prepaid expenses and other assets	(335,514)	(39,844)
Accounts payable and accrued expenses	95,756	565,286
Accrued interest	-	70,803
Deferred revenue	(213,218)	125,174
NET CASH USED IN OPERATING ACTIVITIES - CONTINUING OPERATIONS	(9,071,349)	(2,979,763)
NET CASH USED IN OPERATING ACTIVITIES - DISCONTINUED OPERATIONS	(995,250)	-
NET CASH USED IN OPERATING ACTIVITIES	(10,066,599)	(2,979,763)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(43,108)	(6,600)
Capitalization of software costs	(340,608)	(317,019)
NET CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS	(383,716)	(323,619)
NET CASH PROVIDED BY INVESTING ACTIVITIES - DISCONTINUED OPERATIONS	3,875,529	-
NET CASH PROVIDED BY INVESTING ACTIVITIES	3,491,813	(323,619)
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 common stock in connection with exercise of H-4 warrants	936,423	-
Proceeds from issuance of Series A Preferred Stock and subscription receivable	-	219,969
Proceeds from issuance of convertible notes and warrants	-	3,340,000
Offering costs - Convertible Notes	-	(263,200)
NET CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING OPERATIONS	7,134,762	3,296,769
NET CASH USED IN FINANCING ACTIVITIES - DISCONTINUED OPERATIONS	(36,329)	-
NET CASH PROVIDED BY FINANCING ACTIVITIES	7,098,433	3,296,769
Net increase (decrease) in cash	523,647	(6,613)
Cash, beginning of period	372,011	51,366
Cash, end of period	$ 895,658	$ 44,753
SUPPLEMENTAL CASH FLOW INFORMATION:
NON-CASH FINANCING ACTIVITIES:
Fair value of stock warrants issued with convertible notes	$ -	$ 1,395,707
Fair value of common stock sold to founders	$ -	$ 684,000
Stock issued to WPCS Shareholder in the merger net of cash received of $4,947,023	$ 4,845,200	$ -
Series H-4 offering cost paid in H-4 shares and warrants	$ 568,468	$ -
Stock issued for convertible note payable	$ 3,682,502	$ -
Stock issued for accrued interest on convertible note payable	$ 159,584	$ -
Deemed dividends on warrant issuances	$ 1,335,872	$ -

 

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.

 

Notification Letter

On September 25, 2018, the Company received a notification letter from The Nasdaq Stock Market ("Nasdaq") informing the Company that for the last 30 consecutive business days, the bid price of the Company’s securities had closed below $1.00 per share, which is the minimum required closing bid price for continued listing on The Nasdaq Capital Market pursuant to Listing Rule 5550(a)(2).

 

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 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.

 

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, 4,685,164 common shares	$9,792,000
Liability assumed: notes payable	158,000
Total purchase price consideration	$9,950,000
Tangible assets
Net working capital (1)	$6,664,000
Deferred revenue	(2,300,000)
Fixed assets & equipment	376,000
Intangible assets (2)
Customer contracts	1,200,000
Trade name	600,000
Goodwill	3,410,000
Total allocation of purchase price consideration	$9,950,000

 

  

 

Unaudited Interim Consolidated Financial Information

 

The accompanying consolidated balance sheets as of September 30, 2018, the consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, the consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017, and the consolidated statement of stockholders’ equity (deficit) for the nine months ended September 30, 2018 are unaudited. These financial statements should be read in conjunction with the DropCar, Inc’s. 2017 financial statements included in the Company’s Form 8-K/A filed on April 2, 2018. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2018 and December 31, 2017, and the results of its operations for the three and nine months ended September 30, 2018 and 2017, and its cash flows for the nine months ended September 30, 2018 and 2017. The financial data and other information disclosed in the notes to the consolidated financial statements related to the nine months ended September 30, 2018 and 2017 are unaudited.

  

DropCar Operating

 

DropCar Operating is a provider of automotive vehicle support, fleet logistics, and concierge services for both consumers and the automotive industry. Its cloud-based Enterprise Vehicle Assistance and Logistics (“VAL”) platform and mobile application (“app”) assists consumers and automotive-related companies to reduce the costs, hassles and inefficiencies of owning a car, or fleet of cars, in urban centers. In July 2018, DropCar Operating launched its Mobility Cloud platform which provides automotive-related businesses with a 100% self-serve SaaS version of its VAL platform to manage their own operations and drivers, as well as customer relationship management (“CRM”) tools that enable their clients to schedule and track their vehicles for service pickup and delivery. DropCar Operating’s Mobility Cloud also provides access to private APIs (application programming interface) which automotive-businesses can use to integrate DropCar Operating’s logistics and field support directly into their own applications and processes natively, to create more seamless client experiences.

 

On the enterprise side, OEMs, dealers, and other service providers in the automotive space are increasingly being challenged with consumers who have limited time to bring in their vehicles for maintenance and service, making it difficult to retain valuable post-sale service contracts or scheduled consumer maintenance and service appointments. Additionally, many of the vehicle support centers for automotive providers (i.e., dealerships, including body work and diagnostic shops) have moved out of urban areas thus making it more challenging for OEMs and dealers in urban areas to provide convenient and efficient service for their consumer and business clientele. Similarly, shared mobility providers and other fleet managers, such as rental car companies and car share programs, face a similar urban mobility challenge: getting cars to and from service bays, rebalancing vehicle availability to meet demand in fleeting and de-fleeting vehicles to and from dealer lots, auction sites and to other locations.

 

While DropCar Operating’s business-to-business (“B2B”) and business-to-consumer (“B2C”) services generate revenue and help meet the unmet demand for vehicle support services, DropCar Operating is also building-out a platform and customer base that it believes positions it well for developments in the automotive space when vehicles become partially to fully autonomous and vehicle ownership becomes more subscription based with transportation services and concierge options well-suited to match a customer’s immediate needs.

 

To date, the Company operates primarily in the New York metropolitan area. In May 2018, the Company expanded operations with its B2B business in San Francisco. In June 2018 the Company expanded its B2B operations in Washington DC. In August 2018, the Company expanded B2B operations to Los Angeles. These three new market expansions are with a major original equipment manufacturer (“OEM”) customer.

  

 

2.	Summary of Significant Accounting Policies

 

Liquidity and Basis of Presentation

 

The Company has a limited operating history and the sales and income potential of its business and market are unproven. As of September 30, 2018, the Company has an accumulated deficit of $22.7 million and has experienced net losses each year since its inception. The Company anticipates that it will continue to incur net losses into the foreseeable future and will need to raise additional capital to continue. The Company’s cash is sufficient to fund its operations into the first quarter of 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the date of the filing of this Form 10-Q.

 

Management’s plan includes raising funds from outside investors, and through the potential sale of the Company’s subsidiary, WPCS International Suisan City, Inc. However, there is no assurance that outside funding will be available to the Company, outside funding will be obtained on favorable terms or will provide the Company with sufficient capital to meet its objectives. These financial statements do not include any adjustments relating to the recoverability and classification of assets, carrying amounts or the amount and classification of liabilities that may be required should the Company be unable to continue as a going concern.

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 8-K/A filed with the SEC on April 2, 2018. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any future periods. The December 31, 2017 balance sheet information was derived from the audited financial statements as of that date. 

 

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 September 30, 2018.

 

The following table sets forth the effects of the adjustments on affected items within the Company’s previously reported Consolidated Interim Balance Sheet at September 30, 2018, and includes a reclassification adjustment for the stock split of $809 which increased additional paid in capital: 

 

	September 30, 2018
	As previously reported	Adjustment	As restated
Additional paid in capital	$ 29,207,669	$ 1,120,103	$ 30,327,772
Accumulated deficit	$ (21,623,262)	$ (1,119,294)	$ (22,742,556)

 

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 nine months ended September 30, 2018:

 

	Nine Months Ended September 30, 2018
	As previously reported	Adjustment	As restated	Effect of discontinued operations	As currently reported
Selling, general and administrative expense	$ 10,188,172	$ 447,150	$ 10,635,322	$ (1,691,933)	$ 8,943,389
Depreciation and amortization	$ 479,337	-	$ 479,337	$ (221,897)	$ 257,440
Total operating expenses	$ 10,905,941	$ 447,150	$ 11,353,091	$ (2,152,263)	$ 9,439,260
Operating loss	$ (10,269,388)	$ (447,150)	$ (10,716,538)	$ (381,099)	$ (11,097,637)
Interest income (expense), net	$ (413,076)	$ (672,144)	$ (1,085,220)	$ 3,892	$ (1,081,328)
Loss from continuing operations	$ (10,682,464)	$ (1,119,294)	$ (11,801,758)	$ (377,207)	$ (12,178,965)
Income from discontinued operations	-	-	-	$ 377,207	$ 377,207
Net loss	$ (10,682,464)	$ (1,119,294)	$ (11,801,758)	-	$ (11,801,758)
Net loss per common shares, basic and diluted	$ (9.52)		$ (10.41)		$ (10.41)