UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2019
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)
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Delaware
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98-0204758
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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DropCar, Inc.
1412 Broadway, Suite 2105
New York, New York 10018
(646) 342-1595
(Registrant’s telephone number, including area
code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common stock par value $0.0001 per share
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DCAR
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The Nasdaq Stock Market
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted
electronically Interactive Data File required to be submitted
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):
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☑
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Smaller reporting company
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☑
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Emerging
growth company
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☐
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If an emerging growth company, indicate by a check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☑
As of August 12, 2019, there were 4,042,713 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 Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the “SEC”) on
April 3, 2019, as subsequently amended on April 12, 2019, and
other reports we file with the SEC. We advise you to carefully
review the reports and documents we file from time to time with the
SEC, particularly our quarterly reports on Form 10-Q and our
current reports on Form 8-K. Except for our ongoing obligations to
disclose material information under the Federal securities laws, we
undertake no obligation to publicly release any revisions to any
forward-looking statements, to report events or to report the
occurrence of unanticipated events.
OTHER INFORMATION
When used in this report, the terms, “we,” the
“Company,” “our,” and “us”
refer to DropCar, Inc., a Delaware corporation (previously named
WPCS International Incorporated), and its consolidated
subsidiaries.
TABLE OF CONTENTS
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PageNo.
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PART I – FINANCIAL INFORMATION
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Part II – OTHER INFORMATION
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Part I – Financial Information
Item 1 – Financial
Statements.
DropCar, Inc., and Subsidiaries
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Condensed
Consolidated Balance Sheets
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ASSETS
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CURRENT
ASSETS:
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Cash
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$3,448,501
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$4,303,480
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Accounts
receivable, net
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395,146
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295,626
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Prepaid expenses
and other current assets
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367,068
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328,612
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Total current
assets
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4,210,715
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4,927,718
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Property and
equipment, net
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30,787
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39,821
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Capitalized
software costs, net
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548,652
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659,092
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Operating lease
right-of-use asset
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6,619
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-
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Other
assets
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3,525
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3,525
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TOTAL
ASSETS
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$4,800,298
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$5,630,156
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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CURRENT
LIABILITIES:
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Accounts payable
and accrued expenses
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$2,028,818
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$2,338,560
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Deferred
revenue
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303,744
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253,200
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Lease
liability
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960
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-
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Total current
liabilities
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2,333,522
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2,591,760
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COMMITMENTS
AND CONTINGENCIES
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STOCKHOLDERS'
EQUITY:
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Preferred stock,
$0.0001 par value, 5,000,000 shares authorized
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Series seed
preferred stock, 842,405 shares authorized, zero issued and
outstanding
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-
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-
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Series A preferred
stock, 1,963,877 shares authorized, zero issued and
outstanding
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-
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-
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Convertible Series
H, 8,500 shares designated, 8 shares issued and
outstanding
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-
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-
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Convertible Series
H-1, 9,488 shares designated zero shares issued and
outstanding
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-
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-
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Convertible Series
H-2, 3,500 shares designated zero shares issued and
outstanding
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-
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-
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Convertible Series
H-3, 8,461 shares designated 2,189 shares issued and
outstanding
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-
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-
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Convertible Series
H-4, 30,000 shares designated 5,028 and 26,619 shares issued and
outstanding as of June 30, 2019 and December 31, 2018,
respectively
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1
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3
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Common stock,
$0.0001 par value; 100,000,000 shares authorized, 4,042,713 and
1,633,394 issued and outstanding as of June 30, 2019 and December
31, 2018, respectively
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404
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163
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Additional paid in
capital
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35,146,753
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32,791,951
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Accumulated
deficit
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(32,680,382)
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(29,753,721)
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TOTAL
STOCKHOLDERS' EQUITY
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2,466,776
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3,038,396
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
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$4,800,298
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$5,630,156
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
DropCar,
Inc., and Subsidiaries
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Condensed Consolidated Statements of
Operations
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For the Three
Months
Ended June
30,
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For the Six
Months
Ended June
30,
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SERVICE
REVENUES
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$1,246,544
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$1,873,997
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$2,345,987
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$3,566,072
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COST
OF REVENUE
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1,115,787
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2,528,781
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2,242,832
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4,824,562
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GROSS
PROFIT (LOSS)
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130,757
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(654,784)
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103,155
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(1,258,490)
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OPERATING
EXPENSES
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Research and
development
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48,330
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63,971
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117,312
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178,132
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Selling, general
and administrative expenses
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945,388
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3,341,601
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2,718,485
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6,252,398
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Depreciation and
amortization
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98,967
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84,177
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206,716
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163,409
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TOTAL
OPERATING EXPENSES
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1,092,685
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3,489,749
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3,042,513
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6,593,939
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OPERATING
LOSS
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(961,928)
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(4,144,533)
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(2,939,358)
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(7,852,429)
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Other income
(expense), net
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10,973
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718
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12,697
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(1,081,499)
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LOSS
FROM CONTINUING OPERATIONS
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(950,955)
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(4,143,815)
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(2,926,661)
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(8,933,928)
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DISCONTINUED
OPERATIONS
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Income from
operations of discontinued component
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-
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151,565
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-
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460,943
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INCOME
FROM DISCONTINUED OPERATIONS
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-
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151,565
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-
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460,943
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Income
taxes
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-
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-
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-
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-
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NET
LOSS
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$(950,955)
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$(3,992,250)
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$(2,926,661)
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$(8,472,985)
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Deemed dividend on
exchange of warrants
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-
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(316,861)
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-
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(316,861)
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NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
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$(950,955)
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$(4,309,111)
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$(2,926,661)
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$(8,789,846)
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LOSS
PER SHARE FROM CONTINUING OPERATIONS:
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Basic
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$(0.24)
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$(3.12)
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$(0.96)
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$(7.65)
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Diluted
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$(0.24)
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$(3.12)
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$(0.96)
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$(7.65)
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EARNINGS
PER SHARE FROM DISCONTINUED OPERATIONS:
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Basic
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$-
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$0.11
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$-
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$0.39
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Diluted
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$-
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$0.11
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$-
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$0.39
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NET
LOSS PER SHARE:
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Basic
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$(0.24)
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$(3.24)
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$(0.96)
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$(7.53)
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Diluted
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$(0.24)
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$(3.24)
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$(0.96)
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$(7.53)
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WEIGHTED
AVERAGE SHARES OUTSTANDING
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Basic
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3,954,152
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1,328,654
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3,040,993
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1,167,432
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Diluted
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3,954,152
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1,328,654
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3,040,993
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1,167,432
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
DropCar Inc., and
Subsidiaries
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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
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(Unaudited)
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Balances,
January 1, 2019
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-
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-
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-
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-
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8
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-
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2,189
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-
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26,619
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3
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1,633,394
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163
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32,791,951
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(29,753,721)
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3,038,396
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Issuance of
common stock for cash net of costs of $15,000
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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478,469
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48
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1,984,953
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-
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1,985,001
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Exercise of
warrants
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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277,778
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28
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16,639
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-
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16,667
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Conversion of
Series H-4 preferred stock into common stock
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-
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-
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-
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-
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-
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-
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-
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-
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(21,591)
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(2)
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1,412,420
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141
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(139)
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-
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-
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Stock based
compensation for options issued to employees
|
-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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(19,361)
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-
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(19,361)
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Stock based
compensation for restricted stock units issued to
employees
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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289,842
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-
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289,842
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Stock based
compensation for common stock issued to service
providers
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-
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-
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-
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-
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-
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-
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-
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-
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-
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-
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116,666
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12
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222,188
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-
|
222,200
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Net
Loss
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-
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-
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-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
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-
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(1,975,706)
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(1,975,706)
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|
Balance, March
31, 2019
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-
|
-
|
-
|
-
|
8
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-
|
2,189
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-
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5,028
|
1
|
3,918,727
|
392
|
35,286,073
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(31,729,427)
|
3,557,039
|
|
Issuance of
common stock upon vesting of restricted stock
units
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
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244,644
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24
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(24)
|
-
|
-
|
|
Common stock
reserved and retired for excess tax benefits from stock based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(120,658)
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(12)
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(183,321)
|
-
|
(183,333)
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|
Stock based
compensation for options issued to employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
44,025
|
-
|
44,025
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
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(950,955)
|
(950,955)
|
|
Balance, June
30, 2019
|
-
|
$-
|
-
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$-
|
8
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$-
|
2,189
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$-
|
5,028
|
$1
|
4,042,713
|
$404
|
$35,146,753
|
$(32,680,382)
|
$2,466,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Balances,
January 1, 2018
|
275,691
|
$27
|
611,944
|
$61
|
-
|
$-
|
-
|
$-
|
-
|
$-
|
374,285
|
$37
|
$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
|
|
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
|
|
Stock based
compensation for options issued to employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
17,210
|
-
|
17,210
|
|
Stock based
compensation for restricted stock units issued to
employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
275,528
|
-
|
275,528
|
|
Stock based
compensation for common stock issued to service
providers
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
56,929
|
6
|
447,144
|
-
|
447,150
|
|
Series H-4
preferred stock and warrants issued to service
provider
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,371
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,480,735)
|
(4,480,735)
|
|
Balance, March
31, 2018 (Restated)
|
-
|
-
|
-
|
-
|
8
|
-
|
2,189
|
-
|
26,843
|
3
|
1,301,988
|
131
|
26,200,245
|
(14,085,632)
|
12,114,747
|
|
Conversion of
accrued interest into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4,518
|
|
159,584
|
|
159,584
|
|
Stock based
compensation for options issued to employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
67,306
|
-
|
67,306
|
|
Stock based
compensation for restricted stock units issued to
employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
808,808
|
-
|
808,808
|
|
Stock based
compensation for common stock issued to service
providers
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,333
|
-
|
31,800
|
-
|
31,800
|
|
Deemed
dividend on exchange of merger warrants to Series I warrants and
common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
48,786
|
5
|
316,856
|
(316,861)
|
-
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,992,250)
|
(3,992,250)
|
|
Balance, June
30, 2018 (Restated)
|
-
|
$-
|
-
|
$-
|
8
|
$-
|
2,189
|
$-
|
26,843
|
$3
|
1,358,625
|
$136
|
$27,584,599
|
$(18,394,743)
|
$9,189,995
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
DropCar,
Inc., and Subsidiaries
Condensed Consolidated Statements of Cash
Flows
(Unaudited)
|
|
For the Six Months
Ended June 30,
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$(2,926,661)
|
$(8,472,985)
|
|
Income from
discontinued operations
|
-
|
(460,943)
|
|
Loss from
continuing operations
|
(2,926,661)
|
(8,933,928)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
210,048
|
163,409
|
|
Amortization of
debt discount
|
-
|
176,000
|
|
Loss of disposition
of asset
|
3,641
|
-
|
|
Stock based
compensation
|
638,119
|
1,647,802
|
|
Non-cash interest
expense
|
-
|
696,013
|
|
Amortization of
operating lease right-of-use asset
|
16,421
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(99,520)
|
(102,789)
|
|
Prepaid expenses
and other assets
|
(47,886)
|
(503,690)
|
|
Accounts payable
and accrued expenses
|
(411,156)
|
(79,850)
|
|
Lease
liabilities
|
(12,650)
|
-
|
|
Deferred
revenue
|
50,544
|
(13,908)
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES - CONTINUING
OPERATIONS
|
(2,579,100)
|
(6,950,941)
|
|
NET
CASH USED IN OPERATING ACTIVITIES - DISCONTINUED
OPERATIONS
|
-
|
(1,131,108)
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(2,579,100)
|
(8,082,049)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchase of
property and equipment
|
-
|
(43,108)
|
|
Capitalization of
software costs
|
(94,489)
|
(208,143)
|
|
Proceeds from sale
of fixed asset
|
275
|
-
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES - CONTINUING
OPERATIONS
|
(94,214)
|
(251,251)
|
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES - DISCONTINUED
OPERATIONS
|
-
|
3,997,483
|
|
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(94,214)
|
3,746,232
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds from the
sale of common stock, net
|
1,985,001
|
300,000
|
|
Common stock
reserved and retired in connection with excess tax benefits
paid
|
(183,333)
|
-
|
|
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 K
warrants
|
16,667
|
-
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING
OPERATIONS
|
1,818,335
|
6,198,339
|
|
NET
CASH USED IN FINANCING ACTIVITIES - DISCONTINUED
OPERATIONS
|
-
|
(22,424)
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
1,818,335
|
6,175,915
|
|
|
|
|
|
Net increase
(decrease) in cash
|
(854,979)
|
1,840,098
|
|
|
|
|
|
Cash,
beginning of period
|
4,303,480
|
372,011
|
|
|
|
|
|
Cash,
end of period
|
$3,448,501
|
$2,212,109
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
Stock based
compensation included in accounts payable and accrued
expenses
|
$106,137
|
$-
|
Issuance
of common stock for accrued stock based compensation
|
$4,724
|
$-
|
Assets
acquired under operating leases
|
$23,040
|
$-
|
|
|
|
|
|
NON-CASH
FINANCING ACTIVITIES:
|
|
|
|
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
|
$-
|
$568,648
|
|
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 unaudited
condensed consolidated financial statements.
7
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company 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, the Company 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. The
Company’s Mobility Cloud also provides access to private
application programming interfaces (“APIs”) which
automotive-businesses can use to integrate the Company’s
logistics and field support directly into their own applications
and processes natively, to create more seamless client experiences.
The Company earned de minimis revenues from Mobility Cloud in 2019.
The Company did not earn any revenues from Mobility Cloud in
2018.
On the enterprise side, original equipment manufacturers
(“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.
In July 2018, the Company began assessing demand for a Self-Park
Spaces monthly parking plan whereby consumers could designate
specific garages for their vehicles to be stored at a base monthly
rate, with personal 24/7 access for picking up and returning their
vehicle directly, and the option to pay a la carte on a per hour
basis for a driver to perform functions such as picking up and
returning their vehicle to their front door. This model aligns more
directly with how the Company has structured the enterprise
Business-to-Business (“B2B”) side of its business,
where an interaction with a vehicle on behalf of its drivers
typically generates new revenue. The Company consumer Self-Park
Spaces plan combined with its on-demand hourly valet service are
the only consumer plans offered from September 1, 2018 onwards.
Subscriber plans prior to this date continued to receive service on
a prorated basis through the end of August 2018. Additionally, the
Company is scaling back its DropCar 360 Services on Demand Service
(“360 Services”) for the Consumer portion of the
market. As a result of this shift, in August 2018, the Company
began to significantly streamline its field teams, operations and
back office support tied to its pre-September 1, 2018 consumer
subscription plans. The scaling back of these services and the
discontinuation of the Company’s monthly parking with front
door valet (“Steve”) service resulted in a decrease in
revenue.
To date, the Company operates primarily in the New York
metropolitan area. In May, June, and August 2018, the Company
expanded operations with its B2B business in San Francisco, Washing
DC, and Los Angeles, respectively. These three new market
expansions are with an OEM customer.
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 “Merger.” The 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 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”).
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Following the closing of the Merger, holders of WPCS’s common
stock immediately prior to the Merger owned approximately 22.9% on
a fully diluted basis, and holders of Private DropCar common stock
immediately prior to the Merger owned approximately 77.1% on a
fully diluted basis, of WPCS’s common stock.
The 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 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 Merger, the combined company changed its
name from WPCS International Incorporation to DropCar, Inc. The
combined company following the Merger may be referred to herein as
“the combined company,” “DropCar,” or the
“Company.”
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 condensed
consolidated statement of operations.
Trading of Company’s stock
The Company’s shares of common stock listed on The Nasdaq
Capital Market, previously trading through the close of business on
January 30, 2018 under the ticker symbol “WPCS,”
commenced trading on The Nasdaq Capital Market, on a post-Reverse
Stock Split adjusted basis, under the ticker symbol
“DCAR” on January 31, 2018.
On September 25, 2018, the Company received a notification letter
from The Nasdaq Stock Market ("Nasdaq") informing the Company that
for the last 30 consecutive business days, the bid price of the
Company’s securities had closed below $1.00 per share, which
is the minimum required closing bid price for continued listing on
The Nasdaq Capital Market pursuant to Listing Rule 5550(a)(2). In
order to regain compliance, 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. On March 26, 2019, the Company received a
notification letter from The Nasdaq Stock Market informing it that
it had regained compliance with Listing Rule 5550(a)(2). As a
result of the reverse stock split, every six shares of the
Company’s outstanding pre-reverse split common stock were
combined and reclassified into one share of common stock. Unless
otherwise noted, all share and per share data included in these
financial statements retroactively reflect the 1-for-6 reverse
stock split.
2.
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, 2019, the Company has an accumulated deficit of $32.7
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 not
sufficient to fund its operations for a 12 month period from the
date of these financial statements. These factors raise substantial
doubt about the Company’s ability to continue as a going
concern.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Management’s plan includes raising funds from outside
investors. 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.
3.
Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial
statements were prepared using generally accepted accounting
principles for interim financial information and the instructions
to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these
unaudited condensed consolidated financial statements do not
include all information or notes required by generally accepted
accounting principles for annual financial statements and should be
read in conjunction with the Company’s annual consolidated
financial statements included within the Company’s Form 10-K
for the fiscal year ended December 31, 2018, as filed with the SEC
on April 3, 2019 and subsequently amended on April 12,
2019.
The preparation of the unaudited condensed consolidated financial
statements in conformity with these accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements; and the reported amounts of expenses during the
reported period. Ultimate results could differ from the estimates
of management. The unaudited condensed consolidated financial
statements include the accounts of DropCar, Inc. and subsidiaries,
all of which are wholly owned. All significant intercompany
transactions and balances have been eliminated in
consolidation.
In the opinion of management, the unaudited condensed consolidated
financial statements included herein contain all adjustments
necessary to present fairly the Company's financial position and
the results of its operations and cash flows for the interim
periods presented. Such adjustments are of a normal recurring
nature. The results of operations for the three and
six months ended June 30, 2019 may not be indicative
of results for the full year.
Significant Accounting Policies
In February 2016, the FASB issued Accounting Standards Codification
(ASC) 842, Leases, which requires lessees to recognize most leases
on their balance sheets as a right-of-use asset with a
corresponding lease liability. Lessor accounting under the standard
is substantially unchanged. Additional qualitative and quantitative
disclosures are also required. The Company adopted the standard
effective January 1, 2019 using the cumulative-effect adjustment
transition method, which applies the provisions of the standard at
the effective date without adjusting the comparative periods
presented. The Company adopted all practical expedients and elected
the following accounting policies related to this
standard:
●
Short-term
lease accounting policy election allowing lessees to not recognize
right-of-use assets and liabilities for leases with a term of 12
months or less; and
●
The
option to not separate lease and non-lease components for equipment
leases.
●
The
package of practical expedients applied to all of its leases,
including (i) not reassessing whether any expired or existing
contracts are or contain leases, (ii) not reassessing the lease
classification for any expired or existing leases, and (iii) not
reassessing initial direct costs for any existing
leases.
Right-of-use assets and lease liabilities are recognized based on
the present value of the future minimum lease payments over the
lease term at the commencement date for leases exceeding 12 months.
Minimum lease payments include only the fixed lease component of
the agreement.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company’s operating leases do not provide an implicit
rate that can readily be determined. Therefore, the Company uses a
discount rate based on its incremental borrowing rate.
Operating lease expense is recognized on a straight-line basis over
the lease term and is included in cost of sales and general and
administrative expenses. Amortization expense for finance (capital)
leases is recognized on a straight-line basis over the lease term
and is included in cost of sales or general and administrative
expenses, while interest expense for finance leases is recognized
using the effective interest method.
Adoption of this standard resulted in the recognition of operating
lease right-of-use assets of approximately $23,000 (including
a reclassification from Prepaid expenses of a prepaid lease
approximating $9,500) and corresponding lease liabilities of
approximately $13,500 on the consolidated balance sheet as of
January 1, 2019. The standard did not materially impact operating
results or liquidity. Disclosures related to the amount, timing and
uncertainty of cash flows arising from leases are included in Note
8, Leases.
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 guidance was adopted effective January 1, 2019, and the
adoption of this ASU did not have a material effect on its
consolidated financial statements.
Aside from the adoption of ASU 2016-02, as described above, there have been no other
material changes to the significant accounting policies or recent
accounting pronouncements previously disclosed in DropCar, Inc.'s
2018 annual consolidated financial statements included in the
Company's Form 10-K for the fiscal year ended December 31,
2018.
Use of Estimates
The preparation of consolidated financial statements in conformity
with U.S. generally accepted accounting principles (“US
GAAP”) requires management to make estimates and
assumptions that affect amounts reported therein. Generally,
matters subject to estimation and judgement include amounts related
to accounts receivable realization, asset impairments, useful lives
of property and equipment and capitalized software costs, deferred
tax asset valuation allowances, and operating expense accruals.
Actual results could differ from those estimates.
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.
Revenue from contracts with customers is recognized when, or as,
the Company satisfies its performance obligations by transferring
the promised goods or services to the customers. A good or service
is transferred to a customer when, or as, the customer obtains
control of that good or service. A performance obligation may be
satisfied over time or at a point in time. Revenue from a
performance obligation satisfied over time is recognized by
measuring the Company’s progress in satisfying the
performance obligation in a manner that depicts the transfer of the
goods or services to the customer. Revenue from a performance
obligation satisfied at a point in time is recognized at the point
in time that the Company determines the customer obtains control
over the promised good or service. The amount of revenue recognized
reflects the consideration the Company expects to be entitled to in
exchange for those promised goods or services (i.e., the
“transaction price”). In determining the transaction
price, the Company considers multiple factors, including the
effects of variable consideration. Variable consideration is
included in the transaction price only to the extent it is probable
that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainties with respect to
the amount are resolved. In determining when to include variable
consideration in the transaction price, the Company considers the
range of possible outcomes, the predictive value of its past
experiences, the time period of when uncertainties expect to be
resolved and the amount of consideration that is susceptible to
factors outside of the Company’s influence, such as the
judgment and actions of third parties.
The Company’s contracts are generally designed to provide
cash fees to the Company 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.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Monthly Subscriptions
The Company offers a selection of subscriptions and on-demand
services which include parking, valet, and access to other
services. The contract terms are on a month-to-month subscription
contract with fixed monthly or contract term fees. These
subscription services include a fixed number of round-trip
deliveries of the customer’s vehicle to a designated
location. The Company allocates the purchase price among the
performance obligations which results in deferring revenue until
the service is utilized or the service period has
expired.
On Demand Valet and Parking Services
The Company offers to consumers certain on demand services through
its mobile application. The customer is billed at an hourly rate
upon completion of the services. Revenue is recognized when the
Company had satisfied all performance obligations which is upon
completion of the service.
DropCar 360 Services on Demand Service
The Company offers to consumers certain services upon request
including vehicle inspection, maintenance, car washes or to fill up
with gas. The customers are charged a fee in addition to the cost
of the third-party services provided. Revenue is recognized on a
gross basis when the Company had satisfied all performance
obligations which is upon completion of the service.
On Demand Business-To-Business
The Company also has contracts with car dealerships, car share
programs and others in the automotive industry transporting
vehicles. Revenue is recognized at the point in time all
performance obligations are satisfied which is when the Company
provides the delivery service of the vehicles.
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,
|
|
|
|
|
|
|
|
Subscription
services
|
$796,917
|
$1,282,961
|
$1,458,381
|
$2,639,556
|
|
Services
on-demand
|
449,627
|
591,036
|
887,606
|
926,516
|
|
Total revenues
(1)(2)
|
$1,246,544
|
$1,873,997
|
$2,345,987
|
$3,566,072
|
(1)
Represents revenues
recognized by type of services.
(2)
All revenues are
generated in the United States.
The following presents our revenues from B2C and B2B
customers.
|
|
Three Months
Ended June 30,
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
$889,707
|
$1,622,065
|
$1,653,684
|
$3,080,589
|
|
B2B
|
356,837
|
251,932
|
692,303
|
485,483
|
|
|
$1,246,544
|
$1,873,997
|
$2,345,987
|
$3,566,072
|
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Employee Stock-Based Compensation
The Company recognizes all employee share-based compensation as an
expense in the financial statements. Equity-classified awards
principally related to stock options, restricted stock units
(“RSUs”) and equity-based compensation, are measured at
the grant date fair value of the award. The Company determines
grant date fair value of stock option awards using the
Black-Scholes option-pricing model. The fair value of RSUs are
determined using the closing price of the Company’s common
stock on the grant date. For service-based vesting grants, expense
is recognized ratably over the requisite service period based on
the number of options or shares. Stock-based compensation is
reversed for forfeitures in the period of forfeiture.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net loss
attributable to common shareholders (the numerator) by the
weighted-average number of common shares outstanding (the
denominator) for the period. In periods when the Company has
income, the Company calculates basic earnings per share using
the two-class method, if required, pursuant to ASC
260 Earnings Per Share. The two-class method
was required effective with the issuance of convertible preferred
stock in the past because this class of stock qualified as a
participating security, giving the holder the right to receive
dividends should dividends be declared on common stock. Under
the two-class method, earnings for a period are allocated
on a pro rata basis to the common stockholders and to the holders
of convertible preferred stock based on the weighted average number
of common shares outstanding and number of shares that could be
issued upon conversion. In periods of losses, diluted loss per
share is computed on the same basis as basic loss per share as the
inclusion of any other potential shares outstanding would be
anti-dilutive.
The following securities were excluded from weighted average
diluted common shares outstanding because their inclusion would
have been antidilutive.
|
|
|
|
|
|
|
|
Common stock
equivalents:
|
|
|
|
Common stock
options
|
380,396
|
202,058
|
|
Series A, H-1, H-3,
H-4, I, J and Merger common stock purchase warrants
|
585,306
|
585,307
|
|
Series H, H-3, and
H-4 Convertible Preferred Stock
|
338,069
|
2,739,225
|
|
Restricted shares
(unvested)
|
-
|
244,643
|
|
Totals
|
1,303,771
|
3,771,233
|
Research and development costs, net
Costs are incurred in connection with research and development
programs that are expected to contribute to future earnings. Such
costs include labor, stock-based compensation, training, software
subscriptions, and consulting. These amounts are charged to the
condensed consolidated statement of operations as incurred. Total
research and development expenses were $48,330 and $63,971 for the
three months ended June 30, 2019 and 2018, respectively. Total
research and development expenses were $117,312 and $178,132 for
the six months ended June 30, 2019 and 2018,
respectively.
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 August 2018, the FASB issued ASU 2018-13, Changes to Disclosure
Requirements for Fair Value Measurements, which will improve the
effectiveness of disclosure requirements for recurring and
nonrecurring fair value measurements. The standard removes,
modifies, and adds certain disclosure requirements, and is
effective for the Company beginning January 1, 2020. The Company is
currently evaluating the impact this standard will have on the
Company’s consolidated financial statements.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In June
2016, the FASB issued ASU 2016-13, “Financial Instruments
– Credit Losses” to improve information on credit
losses for financial assets and net investment in leases that are
not accounted for at fair value through net income. ASU 2016-13
replaces the current incurred loss impairment methodology with a
methodology that reflects expected credit losses. In April 2019 and
May 2019, the FASB issued ASU No. 2019-04, “Codification
Improvements to Topic 326, Financial Instruments-Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825,
Financial Instruments” and ASU No.
2019-05, “Financial Instruments-Credit Losses (Topic
326): Targeted Transition Relief” which provided
additional implementation guidance on the previously issued ASU.
Management has not yet completed its assessment of the impact of
the new standards on the Company’s financial statements. The
Company is currently evaluating the effect the adoption of these
ASUs will have on its condensed consolidated financial statements.
These ASUs are effective for the Company in the first quarter of
2020.
The Company is currently evaluating the impact of the pending
adoption of the new standard on its consolidated financial
statements and intends to adopt the standard on January 1,
2020.
Accounts Receivable
The Company’s concentration of accounts receivable are as
follows:
|
|
|
|
|
|
|
|
Customer
A
|
44%
|
58%
|
|
Customer
B
|
39%
|
23%
|
Revenue Recognition
The concentration of revenue recognition for the three
and six months ended June 30, 2019 and 2018, respectively are as
follows:
|
|
For the three months ended June 30,
|
For the six months ended June 30,
|
|
|
|
|
|
|
|
Customer
A
|
10%
|
-
|
12%
|
-
|
-
Represents
less than 10%
5.
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.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The operations and cash flows of the Suisun City Operations are
presented as discontinued operations. The operating results of the
Suisun City Operations for the three and six months ended June 30,
2018 were as follows:
|
|
For the Three
Months Ended June 30, 2018
|
For the Six
Months Ended June 30, 2018
|
|
|
|
|
|
Revenues
|
$4,466,370
|
$7,648,849
|
|
Cost
of revenues
|
3,601,403
|
5,927,679
|
|
Gross
profit
|
864,967
|
1,721,170
|
|
|
|
|
|
Selling,
general and administrative expenses
|
626,886
|
1,116,686
|
|
Depreciation
and amortization
|
86,098
|
142,943
|
|
Total
Operating Expenses
|
712,984
|
1,259,629
|
|
|
|
|
|
Operating
income
|
151,983
|
461,541
|
|
|
|
|
|
Interest
expense, net
|
(418)
|
(598)
|
|
|
|
|
|
Net
income from discontinued operations
|
$151,565
|
$460,943
|
Capitalized software consists of the following as of:
|
|
|
|
|
|
|
|
Software
|
$1,418,765
|
$1,324,275
|
|
Accumulated
amortization
|
(870,113)
|
(665,183)
|
|
Total
|
$548,652
|
$659,092
|
Minimum future amortization expense for capitalized software from
June 30, 2019 is as follows:
|
Year
|
|
|
2019
(remaining six months)
|
$183,219
|
|
2020
|
254,859
|
|
2021
|
104,969
|
|
2022
|
5,605
|
|
Total
amortization expense
|
$548,652
|
7.
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
141,303 shares of common stock in connection with the
Merger.
In connection with the 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 upon conversion of
the Notes in connection with the Merger. The length of the lock-up
period was up to 120 days. In accordance with ASC 815-40-15-6, the
Company considers the lock-up agreements contingent options
exchanged in a contemplated business combination. The lock-up
agreements are considered “lock-up options” that are
issued and accounted for upon the Merger. For the three and six
months ended June 30, 2018, the Company recorded $0 and $672,144 as
interest expense in relation to the lock-up agreements in the
accompanying 2018 consolidated statement of
operations.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company has various operating lease agreements with initial
terms up to three years, all of which relate to vehicles. The
Company’s office lease is on a month-to-month basis and so is
not recognized on the balance sheet. Some leases include options to
purchase, terminate or extend for one or more years. These options
are included in the lease term when it is reasonably certain that
the option will be exercised.
The Company determines if an arrangement is a lease at inception.
Operating leases are included in operating right-of-use lease
assets and lease liabilities on the consolidated balance sheets,
totaling $6,619 and $960 at June 30, 2019, respectively, including
$7,544 of operating right-of-use assets previously prepaid at lease
commencement.
The Company’s weighted-average remaining lease term relating
to its operating leases is 0.68 years and weighted-average
remaining payments for operating lease liabilities is 0.50 years,
with a weighted-average discount rate of 6.00%.
Operating lease expense is recognized on a straight-line basis over
the lease term within selling, general and administrative expenses
on the Company’s condensed consolidated statement of
operations. The Company incurred lease expense of $8,258 and
$12,459 for the three months ended June 30, 2019 and 2018,
respectively. The Company incurred lease expense of $16,421
and $27,457 for the six months ended June 30, 2019 and 2018,
respectively. The Company made cash payments of $18,250 for
operating leases for the six months ended June 30,
2019.
9.
Commitments and Contingencies
Lease Agreements
The Company leases office space in New York City on a
month-to-month basis, with a condition of a 60 day notice to
terminate. For the three months ended June 30, 2019 and 2018, rent
expense for the Company’s New York City office was $10,800
and $40,341, respectively. For the six months ended June 30, 2019
and 2018, rent expense for the Company’s New York City office
was $33,700 and $69,341, respectively. The Company has taken the
short term lease exception and not recorded a lease liability or
right-of-use asset for this lease.
Litigation
The Company is subject to various legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course
of business that it believes are incidental to the operation of its
business. While the outcome of these claims cannot be predicted
with certainty, 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. In June 2019, the Company reached a
settlement covering all disputes in relation to the summons and
complaint which was covered and paid for by the Company’s
insurance carrier.
Other
As of December 31, 2018, the Company had accrued approximately
$232,000 for the settlement of multiple employment disputes. During
the six months ended June 30, 2019, approximately $88,000 of this
amount was settled upon payment. For the six months ended June 30,
2019 and 2018, $11,000 and $30,000, respectively, was expensed and
accrued for settlements. As of June 30, 2019, approximately
$155,000 remains accrued for the settlement of employment disputes.
As of June 30, 2019, the Company has entered into multiple
settlement agreements with former employees for which it has agreed
to make monthly settlement payments which will extend through
December 31, 2019.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On March 23, 2018, DropCar was made aware of an audit being
conducted by the New York State Department of Labor
(“DOL”) regarding a claim filed by an employee. The DOL
is investigating whether DropCar properly paid overtime for which
DropCar has raised several defenses. In addition, the DOL is
conducting its audit to determine whether the Company owes spread
of hours pay (an hour’s pay for each day an employee worked
or was scheduled for a period over ten hours in a day). If the DOL
determines that monies are owed, the DOL will seek a backpay order,
which management believes will not, either individually or in the
aggregate, have a material adverse effect on DropCar’s
business, consolidated financial position, results of operations or
cash flows. As of June 30, 2019, the Company has accrued
approximately $60,000 in relation to these matters.
10.
Stockholders’ Equity
Common Stock
On March 26, 2019, the Company entered into a Securities Purchase
Agreement with certain existing investors, pursuant to which the
Company sold, in a registered public offering by the Company
directly to the investors an aggregate of 478,469 shares of common
stock, par value $0.0001 per share, at an offering price of $4.18
per share for proceeds of $1,985,001 net of offering expenses of
$15,000.
During the six months ended June 30, 2019, the Company issued
1,412,420 shares of common stock from the conversion of 21,591
shares of Series H-4 Convertible Preferred stock.
During the six months ended June 30, 2019, the Company granted
116,666 shares of common stock to a service provider and recorded
$222,200 stock based compensation as a part of general and
administrative expense in the Company’s consolidated
statements of operations.
During the six months ended June 30, 2019, the Company issued
277,778 shares of common stock from the exercise of Series K
warrants and received cash proceeds of $16,667.
Preferred Stock
In accordance with the Certificate of Incorporation, there are
5,000,000 authorized preferred shares at a par value of
$0.0001.
Voting Privileges and Protective Features of Preferred
Stock
Each holder of outstanding shares of Preferred Stock are entitled
to cast the number of votes equal to the number of whole shares of
Common Stock into which the shares of such Preferred Stock held by
such holder are convertible as of the record date for determining
stockholders entitled to vote on such matter. The holders of record
of a majority of outstanding Preferred Stock shall be entitled to
elect the majority of the directors of the Company. In liquidation,
the Preferred Stockholders receive their original purchase price
plus any dividends if declared.
For so long as any shares of Preferred Stock remain outstanding,
the vote or written consent of the holders of the majority of the
outstanding shares of Preferred Stock is necessary for the Company
to conduct certain corporate actions, including but not limited to
liquidation, windup or dissolution of the Company; certain
amendments to the certificate of incorporation or bylaws of the
Company; authorization or issuance of shares of any additional
class or series of capital stock unless the same ranks junior to
the Preferred Stock with respect to liquidation preference, the
payment of dividends and rights of redemption or increase in the
authorized number of shares of any series of capital stock;
authorize the creation of, or issue, or authorize the issuance of
any debt security unless such indebtedness was approved by the
Board of Directors, and increase or decrease the authorized number
of directors constituting the Board of Directors.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Series Seed
On January 30, 2018, the Company converted 275,691 shares of Series
Seed Preferred Stock into 45,949 shares of common stock in
connection with the Merger.
Series A
On January 30, 2018, the Company converted 611,944 shares of Series
A Preferred Stock into 101,991 shares of common stock in connection
with the Merger.
Series H Convertible Preferred Stock
On January 30, 2018, in accordance with the Merger the Company
issued 8 shares of Series H Convertible Preferred
Stock.
Under the terms of the Series H Certificate of Designation, each
share of Series H Preferred Stock has a stated value of $154 and is
convertible into shares of the Company’s Common Stock, equal
to the stated value divided by the conversion price of $36.96 per
share (subject to adjustment in the event of stock splits or
dividends). The Company is prohibited from effecting the conversion
of the Series H Preferred Stock to the extent that, as a result of
such conversion, the holder would beneficially own more than 9.99%,
in the aggregate, of the issued and outstanding shares of the
Company’s common stock calculated immediately after giving
effect to the issuance of shares of common stock upon such
conversion.
Series H-1 and H-2 Convertible Preferred Stock
The Company has designated 9,488 Series H-1 Preferred Stock and
designated 3,500 Series H-2 Preferred Stock, none of which are
outstanding.
Series H-3 Convertible Preferred Stock
On January 30, 2018, in accordance with the Merger the Company
issued 2,189 shares of Series H-3 Convertible Preferred
Stock.
Pursuant to the Series H-3 Certificate of Designation (as defined
below), the holders of the Series H-3 Shares are entitled to elect
up to two members of a seven member Board, subject to certain step
downs; pursuant to the Series H-3 Securities Purchase Agreement,
the Company agreed to effectuate the appointment of the designees
specified by the Series H-3 Investors as directors of the
Company.
On March 30, 2017, the Company filed with the Secretary of State of
the State of Delaware a Certificate of Designations, Preferences
and Rights with respect to the Series H-3 Shares (the “Series
H-3 Certificate of Designation”).
Under the terms of the Series H-3 Certificate of Designation, each
share of the Series H-3 Shares has a stated value of $138 and is
convertible into shares of common stock, equal to the stated value
divided by the conversion price of $33.12 per share (subject to
adjustment in the event of stock splits and dividends). The Company
is prohibited from effecting the conversion of the Series H-3
Shares to the extent that, as a result of such conversion, the
holder or any of its affiliates would beneficially own more than
9.99%, in the aggregate, of the issued and outstanding shares of
common stock calculated immediately after giving effect to the
issuance of shares of common stock upon the conversion of the
Series H-3 Shares.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Series H-4 Convertible Preferred Stock
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
conversion price of $3.60 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.
The holders of Series H-4 Stock are entitled to certain
anti-dilution adjustments if the Company issues shares of its
common stock at a lower price per share than the applicable
conversion price of the Series H-4 Stock. If any such dilutive
issuance occurs prior to the conversion of the Series H-4 Stock,
the conversion price will be adjusted downward to a price equal to
the issuance (subject to a floor of $2.82 per share). On August 31,
2018, the Company entered into an agreement with certain investors
to exercise Series H-4 warrants and issue Series J warrants which
resulted in a reduced conversion price of $3.60 per share for the
Series H-4 Stock. See “Exercise of Series H-4 Warrants and
Issuance of Series J Warrants” below.
If at any time (i) the volume weighted average price
(“VWAP”) of the Common Stock exceeds $35.10 for not
less than ten (10) consecutive Trading Days (the “Mandatory
Exercise Measuring Period”); (ii) the daily average number of
shares of Common Stock traded during the Mandatory Exercise
Measuring Period equals or exceeds 25,000; and (iii) no equity
conditions failure has occurred as of such date, then the Company
shall have the right to require the holder to exercise all or any
portion of the Series H-4 Warrants still unexercised for a cash
exercise.
During the period ended June 30, 2019, investors converted 21,591
shares of Series H-4 Stock into 1,412,420 shares of Common
Stock.
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. On March
26, 2019, the Board of Directors, with the consent of the grantees,
agreed to amend the vesting period for the RSUs issued on February
28, 2018 to vest in full on May 17, 2019. 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 was amortized
over the original vesting period. On June 6, 2019, the Company
issued 244,643 shares of common stock upon vesting of the RSUs.
Upon vesting, the Company paid $183,333 of personal withholding
taxes for the grantees and reserved 120,658 shares of common stock
as consideration for the cash paid which was immediately
retired.
Employee and Non-employee Stock Options
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes stock option activity during the six
months ended June 30, 2019:
|
|
Shares Underlying Options
|
Weighted Average Exercise Price
|
Weighted
average
Remaining
Contractual
Life(years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2018
|
302,772
|
$18.30
|
7.20
|
$-
|
|
Granted
|
99,072
|
2.32
|
|
-
|
|
Forfeited
|
(21,448)
|
13.09
|
|
|
|
Outstanding
at June 30, 2019
|
380,396
|
$14.43
|
7.35
|
$-
|
At June 30, 2019, unamortized stock compensation for stock options
was approximately $193,839, with a weighted-average recognition
period of 1.61 years.
Share Based Compensation
The following table sets forth total non-cash stock-based
compensation for common stock, RSUs and options issued to employees
and non-employees by operating statement classification for the
three and six months ended June 30, 2019 and 2018:
|
|
Three Months
ended June 30,
|
Six Months ended
June 30,
|
|
|
|
|
|
|
|
Research and
development
|
$3,758
|
$5,005
|
$7,475
|
$6,710
|
|
Selling, general
and administrative
|
146,404
|
902,909
|
630,644
|
1,641,092
|
|
Total
|
|