PART 1
Recent Developments
Merger and Asset Sale
On December 19, 2019, we entered into an Agreement and Plan of
Merger and Reorganization with ABC Merger Sub, Inc., a
Delaware corporation and a wholly owned subsidiary of ours
(“Merger Sub”), and AYRO, Inc., a Delaware
corporation (“AYRO”) (the “AYRO Merger
Agreement”), pursuant to which, among other matters, and
subject to the satisfaction or waiver of the conditions set forth
in the AYRO Merger Agreement, Merger Sub will merge with and into
AYRO, with AYRO continuing as our wholly owned subsidiary and the
surviving corporation of the merger (the “AYRO
Merger”). We will issue shares of our common stock to
the AYRO equity holders in connection with the AYRO Merger as
merger consideration.
Also on December 19, 2019, we entered into an asset purchase
agreement (the “Asset Purchase Agreement”) by and among
us, DropCar Operating Company, Inc., a Delaware corporation and
wholly owned subsidiary of DropCar (“DropCar
Operating”), DC Partners Acquisition, LLC (“DC
Partners”), Spencer Richardson and David Newman, pursuant to
which DropCar Operating agreed to sell substantially all of the
assets associated with its business of providing vehicle support,
fleet logistics and concierge services for both consumers and the
automotive industry to an entity controlled by Messrs. Richardson
and Newman, our current Chief Executive Officer and Chief Business
Development Officer, respectively (the “Asset Sale
Transaction”). The aggregate purchase price for the purchased
assets consists of the cancellation of certain liabilities pursuant
to those certain employment agreements by and between DropCar
Operating and each of Messrs. Richardson and Newman, plus the
assumption of certain liabilities relating to, or arising out of,
workers’ compensation claims that occurred prior to the
closing date of the Asset Purchase Agreement.
Following the AYRO Merger and the Asset Sale Transaction, it is
anticipated that the combined company will focus its resources on
executing AYRO’s current business plan.
Nasdaq Hearing
On September 6, 2019, we received notification from The Nasdaq
Stock Market (“Nasdaq”) stating that we did not comply
with the minimum $1.00 bid price requirement for continued listing
set forth in Listing Rule 5550(a)(2) (the “Listing
Rule”). In accordance with Nasdaq listing rules, we were
afforded 180 calendar days (until March 4, 2020) to regain
compliance with the Listing Rule. On March 5, 2020, we received
notification from the Listing Qualification Department of Nasdaq
that we had not regained compliance with the Listing Rule. The
notification indicated that our common stock would be delisted from
the Nasdaq Capital Market unless we request an appeal of this
determination. On March 12, 2020, we requested a hearing to appeal
the determination with the Nasdaq Hearings Panel (the
“Panel”), which will stay the delisting of our
securities pending the Panel’s decision. The hearing is
scheduled for April 16, 2020. Our appeal to the Panel included a
plan that sets forth a commitment to consider all available options
to regain compliance with the Listing Rule, including the option to
effectuate a reverse stock split upon receipt of stockholder
approval, which we intend to seek in connection with the joint
proxy statement and consent solicitation statement/prospectus filed
with the Securities and Exchange Commission on February 14, 2020 in
connection with the AYRO Merger, in order to bring our stock price
over the $1.00 bid price requirement and to meet the $4.00 bid
price initial listing requirement. However, there can be no
assurance that we will be successful in regaining compliance with
the Listing Rule.
Exchange Agreements
On February 5, 2020, we entered into separate exchange agreements
(the “Exchange Agreements”) with the holders of
existing Series H-5 Convertible Preferred Stock (the
“Series H-5 Shares”), par value $0.0001 per
share, to exchange an equivalent number of shares of our
Series H-6 Convertible Preferred Stock (the “Series H-6
Shares”), par value $0.0001 per share (the
“Exchange”). The Exchange closed on February 5, 2020.
The purpose of the exchange was to grant voting rights to the
holders of the Series H-6 Shares.
On February 5, 2020, we filed the Certificate of Designations,
Preferences and Rights of the Series H-6 Shares (the “Series
H-6 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-6 Shares. We designated up
to 50,000 shares of Series H-6 Shares and each share has a stated
value of $72.00 (the “H-6 Stated Value”). Each Series
H-6 Share is convertible at any time at the option of the holder
thereof, into a number of shares of our common stock determined by
dividing the H-6 Stated Value by the initial conversion price of
$0.72 per share, subject to a 9.99% blocker provision. The Series
H-6 Shares have the same dividend rights as the common stock,
except as provided for in the Series H-6 Certificate of Designation
or as otherwise required by law. The Series H-6 Shares also have
the same voting rights as the common stock, except that in no event
shall a holder of Series H-6 Shares be permitted to exercise a
greater number of votes than such holder would have been entitled
to cast if the Series H-6 Shares had immediately been converted
into shares of common stock at a conversion price equal to $0.78
(subject to adjustment for stock splits, stock dividends,
recapitalizations, reorganizations, reclassifications,
combinations, reverse stock splits or other similar events). In
addition, a holder (together with its affiliates) may not be
permitted to vote Series H-6 Shares held by such holder to the
extent that such holder would beneficially own more than 9.99% of
our common stock. In the event of any liquidation or dissolution,
the Series H-6 Shares rank senior to the common stock in the
distribution of assets, to the extent legally available for
distribution.
Business
Overview
We are a provider of automotive vehicle support, fleet logistics
and concierge services for both consumers and the automotive
industry. In 2015, we launched our cloud-based Enterprise Vehicle
Assistance and Logistics (“VAL”) platform and mobile
application (“App”) to assist consumers and
automotive-related companies to reduce the costs, hassles and
inefficiencies of owning a car, or fleet of cars, in urban centers.
Our VAL platform is a web-based interface to our core service that
coordinates the movements and schedules of trained valets who
pickup and drop off cars at dealerships and customer locations. The
App tracks progress and provides email and text notifications on
status to both dealers and customers, increasing the quality of
communication and subsequent satisfaction with the service. To
date, we operate primarily in the New York metropolitan
area.
Despite expanding city populations and the growing dependence on
cars for urban mobility, the shrinking supply of vehicle services
(i.e., garages, service centers, etc.) is bottlenecking the next
wave of transportation innovation. To solve for this systemic urban
problem, our technology captures and analyzes real time data to
dynamically optimize a rapidly growing network of professional
valets across a suite of vehicle transport and high-touch support
services.
We believe that consumers love the freedom and comfort of having a
personal vehicle but are held hostage by their dependence on the
physical location of garages and service centers for parking and
maintenance. The continued population shift into cities and
resulting increase in real estate prices are only compounding this
burden. We seek to solve this problem by freeing clients from the
reliance on the physical location of garages and service
centers.
We achieve this balance of increased consumer flexibility and lower
consumer cost by aggregating demand for parking and other
automotive services and redistributing their fulfillment to
partners in the city and on city outskirt areas that have not
traditionally had access to lucrative city business. Beyond the
immediate unit economic benefits of securing bulk discounts from
vendor partners, we believe there is significant opportunity to
further vertically integrate such businesses along the supply chain
into our platform.
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, face a similar urban
mobility challenge: getting cars to and from service bays,
rebalancing vehicle availability to meet demand and getting
vehicles from dealer lots to fleet locations.
In response to this growing urban mobility challenge, we work
directly with enterprises in the automotive space providing them
with the ability to have our valets transport vehicles to and from
customers, while also driving new revenue from new and existing
customers and their vehicles from within our consumer subscription
base.
We are able to offer our enterprise services at a fraction of the
cost of alternatives, including other third parties or expensive
in-house resources, given our pricing model that reduces and/or
eliminates any downtime expense while also giving clients access to
a network of trained valets on demand that can be scaled up or down
based on the real time needs of the enterprise client. We support
this model by maximizing the utilization of our employee-valet
workforce across a curated pipeline for both the consumer and
business network.
How DropCar Works
Business-to-Consumer (“B2C”)
Our customers use DropCar to reduce the cost and hassles of owning
a car through the following service:
●
Self-Park Storage
— When a B2C customer living within Manhattan or Brooklyn
needs to find a monthly parking spot near their residence or other
desired location, the B2C customer uses the DropCar App to locate a
nearby garage with available space and can sign up for garage
access on a monthly basis. This monthly self-park storage
subscription ranges in price from $249 to $600 per month based on
garage location, a discount to what we believe to be the typical
cost of garage parking in New York City.
Business-to-Business (“B2B”)
Our B2B customers rely on us to facilitate selling, leasing,
renting and sharing their vehicles at scale in urban centers. While
the types of businesses we work with are continuing to expand, our
current primary B2B customers include:
●
OEMs, Dealers, and
Leasing Agents — Using our technology platform and large
network of readily available valets, we enable branded automobile
dealerships, leasing companies, peer to peer platforms and OEMs to
offer a unique level of convenience for their service center
operations and customers by providing efficient pick-up and
drop-off service. We also enable automotive-related companies to
track and digitize the lifecycle of their vehicle movements; many
of these companies have never had the technology or resources to
track such data prior to our engagement. The combination of easy to
access high-touch service fulfillment plus data maturation allows
our B2B customers the ability to more quickly launch new service
offerings without the need to incur the heavy up-front investments
or long-term commitments historically associated with building and
managing a dedicated in-house workforce. Dealers, peer to peer
market places and manufacturers can leverage our fully hosted
middleware and mobile App or can integrate our service into their
own consumer mobile apps (or directly into the vehicle’s
native software (e.g., OnStar®)) for seamless scheduling,
maintenance and delivery services. In addition, our B2B customers
can integrate our cost saving and convenient consumer support
services and subscriptions (i.e., parking, fueling and washing,
etc.) directly into their showroom sales and leasing offerings to
increase the likelihood of a sale.
●
Fleets and Car
Sharing — Strong growth in “e-hailing” and shared
mobility/car sharing services, along with the burgeoning response
from the traditional rental car industry, has increased consumer
expectations for more flexibility and reliability from their
automotive and transportation service providers. At the same time,
consumers continue to increase their sensitivity to price. As a
result, businesses in these industries are moving quickly to
identify opportunities to protect their operating margin while
building competitive differentiation through the integration of
services attractive to consumer needs.
This
trend has created highly fertile ground for us to establish
ourselves as a backbone partner with companies and platforms
seeking to compete in this highly competitive sector by providing
the same set of logistical support services and consumer facing
add-on services that our service provides to OEMs, peer to peer
platforms, dealers and leasing agents. In 2018, we entered into
several service agreements to provide transport, prep, vehicle
registration, cleaning and maintenance services for a
customer’s fleet of vehicles in a metropolitan area to
support its on-demand car sharing service. These services will be
provided and coordinated through access to our VAL platform, which
enables the fleet managers to schedule and track movements and
services via a dedicated, secure portal.
●
Real Estate —
We understand that parking spots in on-site garages often decrease
the overall value of property. Developers are often able to add
value by using the space that would otherwise be used for parking
spots for other alternatively valuable purposes. At the same time,
certain cities across the United States are placing caps on the
total number of parking spaces per unit for new developments. While
this may benefit developers, it may be negative for prospective
tenants who own cars.
We
believe that our vehicle storage and delivery service position us
well within the new ecosystem — where our “virtual
garage” provides consumers greater flexibility with
transportation related solutions while helping reduce stress and
costs associated with existing garages and crowded street
parking.
DropCar Informatics
We also enable automotive-related businesses to capture, analyze
and catalog critical data that is compiled into searchable
databases about their customers and operations, including real time
vehicle tracking, vehicle photos, vehicle inspection summaries, as
well as consumer profiles and preferences.
We are actively integrating new tools into our platform to help
businesses launch new products and services to deepen their
customer relationships beyond the point of sale, including
consumer-facing scheduling websites and tools for marketing into
their own consumer subscriber base.
Vertical Integration and Future of Automotive Space
●
Vertical
Integration — Today, we leverage our ability to aggregate
demand around our core services alongside our logistics and
fulfillment infrastructure to form margin attributive relationships
with third-party vendors looking to grow their businesses. However,
as our databases expand and we increase the predictability of our
clients’ needs across these respective services, we may seek
to acquire assets and service businesses to further try and
increase margins and synergies while generating incremental
investment returns derived from these assets.
●
Future of
Automotive Industry — Many automotive companies, rental car
companies and car sharing programs are developing subscription
models, peer to peer models and service portfolios to cater to
increasingly personalized customer preferences. These trends are
symptomatic of the broader market shift towards a car share and
subscription-based economy to accommodate the greater value
consumers are placing on the flexibility and option of paying for
products and services on demand as opposed to traditional
automobile ownership. We continue to offer our “micro
logistics support services” for the vehicle lifecycle which
may eventually go beyond our current mobile App, and into vehicles
directly.
Sales and Marketing
We currently use select digital marketing efforts to drive
awareness of our B2C and B2B businesses. B2C business development
has been driven by these marketing efforts and word-of-mouth
referrals. The B2B business development has been achieved through
the traditional direct sales efforts by our executives to companies
in the automotive supply chain, rental car, fleet, shared and peer
to peer mobility industries.
Employees
As of March 25, 2020, we had 5 full time employees and 1 part time
employee. We believe that our relations with our employees are
good.
Properties
For our self-park business, we have month to month agreements with
a number of garage companies strategically located throughout
Manhattan and Brooklyn which, among other items, permit our
customers parking access. Through our large inventory of monthly
subscriptions, we are able to favorably negotiate underutilized
parking spaces throughout our coverage areas and cost effectively
store vehicles for our B2C customers. We also have certain
arrangements from time to time with garage facilities for specific
event days and other parking needs where an event is seeking our
valet services.
Intellectual Property
Our primary source of revenue is generated by our service offerings
through our proprietary mobile App, available for download on the
Apple iTunes App Store and the Google Play Store. We developed our
App using a dedicated third-party code development team. We own the
software code associated with our mobile App. The App centralizes
and automates the management of our reservations, vehicle
locations, customer service and payment to optimize customer
experience, minimize costs and leverage efficiencies.
Our reservation system is built on a mix of open source web
applications and in-house technology developed by our technology
team to enable existing users to reserve our services using mobile
applications on the iPhone or Android platforms. Through our
reservation system, customers have around-the-clock access to the
complete, real-time availability of our services and can manage all
necessary transactions electronically.
We use third-party software for our credit card payment processing
which has been integrated directly into our application platform.
This third-party payment processing software allows us to provide
for accurate billing and timely payment and gives us the
flexibility to scale the business.
We designed and built our technology with the goal of providing the
most convenient, efficient and reliable service possible. Our
iPhone and Android applications are examples of how we continue to
seek ways to improve and simplify the customer experience. We
continue to invest in improving our technology platform to meet the
needs of our growing business.
In addition, the DropCar name and design mark are federally
registered U.S. trademarks, with registrations effective until
November 30, 2022 and May 1, 2023, respectively, subject to
renewal.
Competition
With respect to our B2C services, our competitors include
traditional parking garages and service centers, emerging
maintenance and repair mobile application providers and
alternatives to traditional car ownership and leasing for personal
mobility (i.e., e-hailing, car sharing, renting,
etc.).
While these alternatives to traditional car ownership and leasing
are competitors to our B2C business, they are target clients for
our B2B business services and as such are not seen as true
competitors. There are, however, separate B2B focused automotive
logistics and support platforms that compete with our B2B
business.
●
Traditional Parking
Garages and Service Centers — Our B2C offering competes
directly with on-site parking garages. Our service offering
presumes that parking a car in an urban setting remains challenging
and expensive. We compete with traditional valet parking facilities
as well as on-site parking garages which may offer more convenient
options to consumers than our services. The same competitive risks
exist for local repair shops and service centers.
We
believe, however, that consumers and businesses alike are
increasingly looking for vehicle support services to help clients
avoid sacrificing valuable time and convenience.
Historically,
companies such as Luxe, which closed operations in July 2017 and
subsequently sold their technology to Volvo in September 2017, and
Valet Anywhere, which closed operations in July 2016, have
unsuccessfully tried to build similar on-demand service models. We
believe these companies failed due to multiple factors, including
the use of expensive in-city garages, a parking-only focus and low
valet utilization rates directed only to servicing consumers (B2C).
Unlike these historical competitors, we attempt to solve for these
issues by offering a self-service option priced at a positive gross
margin and billed in advance of the month’s usage, and by
seeking to more effectively optimize valet utilization across both
B2C and B2B clients. We believe that this diversification of
services and revenue streams is critical for building a more
compelling and scalable vehicle support platform that is positioned
to benefit from larger urban mobility trends.
●
Emerging
Maintenance and Repair Mobile Apps — Our B2C offering
competes directly with new mobile applications that seek to connect
local repair shops and mechanics with customers for on-site car
service fulfillment, including companies such as YourMechanic,
Wrench, SQKY, Filld and RepairPal. Our 360 Repair Services has been
de-emphasized for the consumer since the middle of 2018 and we are
assessing the future direction of this offering. We continue to
offer simple maintenance services.
Many of
these competitors do not include transportation of the vehicle for
servicing but bring the service to the vehicle. We believe this
limits the scope of services that can be provided and also poses
significant logistical challenges in busy urban environments that
are likely to limit the ability to grow such operations. Moreover,
our approach to consolidating such support services in parallel
with our short-term and long-term parking solutions creates a
simpler “one stop shop” experience which we believe is
attractive to time-pressed consumers and businesses.
●
B2B Automotive
Logistics and Transport — Our B2B offering competes directly
with other automotive logistics and transport companies such as
RedCap, MyKarma and Stratim (formerly Zirx). These companies, like
us, seek to work with OEMs, dealers, car sharing programs, and
other automotive companies to assist in the management of fleet
transportation and servicing.
Many of
these B2B competitors, including Stratim and RedCap, rely on
third-party firms to provide independent contractors to ultimately
fulfill their vehicle transportation services. Unlike these
competitors, we are investing in our own employee-based workforce
which not only increases the speed at which we can respond to the
needs of our B2B clients, but we also believe that it is critically
important for attracting the best talent and ensuring the highest
levels of reliability. Moreover, our B2B clients enjoy the security
of a clear vendor relationship, which avoids the uncertainties
associated with independent contractor relationships. We believe
our unique B2C value proposition and services supports confidence
in our value as a logistics partner as well as provides additional
opportunities to partner with us as a lead generation partner for
new business.
Government Regulation
Other than to maintain our corporate good standing in the
jurisdictions in which we operate and laws and regulations
affecting employers generally, we do not believe we are currently
subject to any direct material government regulations or oversight.
We do not own the vehicles that are used in our business service
(other than the vehicles we own to deploy valets), nor do we
currently own any of the facilities used to store or service such
vehicles. Although various jurisdictions and government agencies
are considering implementing legislation in response to the rise of
other ride- and car-sharing enterprises, such as Uber Technologies
Inc., currently no such legislation exists that we believe has
jurisdiction over, or applicability to, our
operations.
Investing in our securities involves a high degree of risk. You
should carefully consider the risk factors set forth in our most
recent annual and quarterly filings with the SEC before purchasing
our securities. The risks and uncertainties we have described are
not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also
affect our operations. The occurrence of any of these risks might
cause you to lose all or part of your investment in the offered
securities.
Risks Related to the AYRO Merger
There is no assurance when or if the AYRO Merger will be completed.
Any delay in completing the AYRO Merger may substantially reduce
the intended benefits that we and AYRO expect to obtain from the
AYRO Merger.
Completion
of the AYRO Merger is subject to the satisfaction or waiver of a
number of conditions, as set forth in the AYRO Merger Agreement,
including the approval by our stockholders, approval by Nasdaq of
our application for initial listing of our common stock in
connection with the AYRO Merger, and other customary closing
conditions. There can be no assurance that we and AYRO will be able
to satisfy the closing conditions or that closing conditions beyond
our control will be satisfied or waived. If the conditions are not
satisfied or waived, the AYRO Merger may not occur or will be
delayed, and we and AYRO each may lose some or all of the intended
benefits of the AYRO Merger. In addition, if the AYRO Merger
Agreement is terminated under certain circumstances, we or AYRO may
be required to pay a termination fee of $1,000,000. Moreover, we
and AYRO have incurred and expect to continue to incur significant
expenses related to the AYRO Merger, such as legal and accounting
fees, some of which must be paid even if the AYRO Merger is not
completed.
In
addition, if the AYRO Merger Agreement is terminated and our or
AYRO’s board of directors determines to seek another business
combination, we may not be able to find a third party willing to
provide equivalent or more attractive consideration than the
consideration to be provided by us and AYRO in the AYRO Merger. In
such circumstances, DropCar’s board of directors ( the
“Board of Directors”) may elect to, among other things,
divest all or a portion of our business, or take the steps
necessary to liquidate all of our business and assets, and in
either such case, the consideration that we receive may be less
attractive than the consideration we receive pursuant to the AYRO
Merger Agreement.
The issuance of shares of our common stock to AYRO stockholders in
the AYRO Merger will substantially dilute the voting power of our
current stockholders. Having a minority share position may reduce
the influence that current stockholders have on our
management.
Pursuant
to the terms of the AYRO Merger Agreement, at the effective time of
the AYRO Merger, we will issue approximately 41,927,211 pre-reverse
stock split shares of our common stock to AYRO equity holders as
merger consideration, including shares to be issued in respect of
the sale by AYRO prior to the AYRO
Merger of shares of AYRO common stock (or common stock equivalents)
representing an aggregate of 16.55% of the outstanding common stock
of the combined company after giving effect to the AYRO Merger and
warrants to purchase an equivalent number of shares of AYRO common
stock for an aggregate purchase price of $2.0 million (the
“AYRO Private Placement”) shares and upon
conversion of the bridge loans immediately prior to the closing of
the AYRO Merger. As a result, assuming the conversion of all shares
of our preferred stock into common stock and the exercise of the
pre-funded warrants to purchase
an aggregate of 1,750,000 shares of AYRO common stock at an
exercise price of $0.0001 per whole share (the
“Pre-funded Warrants”), upon completion of the
AYRO Merger, our current stockholders will hold 9,902,276
pre-reverse stock split shares, or approximately 18.0% of the
issued and outstanding equity; former AYRO stockholders will own
43,458,376 pre-reverse stock split shares, or approximately 79.0%
of the issued and outstanding equity in our common stock, in each
case, excluding certain warrants, options and restricted stock
units (“RSUs”); and the financial advisor to us and
AYRO will own approximately 1,650,329 pre-reverse stock split
shares, or approximately 3% of our outstanding equity. Accordingly,
the issuance of the shares of our common stock to AYRO equity
holders in the AYRO Merger will significantly reduce the ownership
stake and relative voting power of each share of our common stock
held by our current stockholders. Consequently, following the AYRO
Merger, the ability of our current stockholders to influence the
management of the company will be substantially
reduced.
Because the lack of a public market for AYRO common stock makes it
difficult to evaluate the fairness of the AYRO Merger, AYRO
stockholders may receive consideration in the AYRO Merger that is
greater than or less than the fair market value of AYRO common
stock.
The
outstanding capital stock of AYRO is privately held and is not
traded in any public market. The lack of a public market makes it
extremely difficult to determine the fair market value of AYRO
shares. Since the percentage of our common stock to be issued to
AYRO equity holders was determined based on negotiations between us
and AYRO, it is possible that the value of our common stock to be
issued in connection with the AYRO Merger will be greater than the
fair market value of AYRO shares. Alternatively, it is possible
that the value of the shares of our common stock to be issued in
connection with the AYRO Merger will be less than the fair market
value of AYRO shares.
Our directors and officers and AYRO’s directors and officers
may have interests in the AYRO Merger that are different from, or
in addition to, those of our stockholders and AYRO stockholders
generally that may influence them to support or approve the AYRO
Merger.
Our
officers and directors and AYRO’s officers and directors may
have interests in the AYRO Merger that are different from, or are
in addition to, those of our stockholders and AYRO stockholders
generally. Effective upon the closing of the AYRO Merger, Mr.
Keller and Mr. Smith will be employed by the combined company and
receive compensation and other consideration. Three of our current
directors, which shall include Joshua Silverman and two other
current directors, and all of the current directors of AYRO will be
appointed as directors of the combined company after the completion
of the AYRO Merger and will receive cash and equity compensation in
consideration for such service. All of AYRO’s executive
officers are expected to continue to serve as our executive
officers after the completion of the AYRO Merger. Each outstanding
stock option to acquire shares of AYRO common stock held by
executive officers and directors of AYRO will be converted into an
option to acquire shares of our common stock. In addition, our
directors and executive officers and AYRO’s directors and
executive officers also have certain rights to indemnification or
to directors’ and officers’ liability insurance that
will survive the completion of the AYRO Merger. These interests may
have influenced our directors and executive officers and
AYRO’s directors and executive officers to support or
recommend the proposals presented to our stockholders and AYRO
stockholders.
The announcement and pendency of the AYRO Merger could have an
adverse effect on our or AYRO’s business, financial
condition, results of operations or business
prospects.
The
announcement and pendency of the AYRO Merger could disrupt our
and/or AYRO’s businesses in the following ways, among
others:
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our or
AYRO’s current and prospective employees could experience
uncertainty about their future roles within the combined company,
and this uncertainty might adversely affect our or AYRO’s
ability to retain, recruit and motivate key personnel;
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the
attention of our or AYRO’s management may be directed towards
the completion of the AYRO Merger and other transaction-related
considerations and may be diverted from our or AYRO’s
day-to-day business operations, as applicable, and matters related
to the AYRO Merger may require commitments of time and resources
that could otherwise have been devoted to other opportunities that
might have been beneficial to us or AYRO, as
applicable;
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customers,
prospective customers, suppliers, collaborators and other third
parties with business relationships with us or AYRO may decide not
to renew or may decide to seek to terminate, change or renegotiate
their relationships with us or AYRO as a result of the AYRO Merger,
whether pursuant to the terms of their existing agreements with us
or AYRO; and
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the
market price of our common stock may decline to the extent that the
current market price reflects a market assumption that the AYRO
Merger will be completed.
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Should
they occur, any of these matters could adversely affect the
businesses of, or harm the financial condition, results of
operations or business prospects of, the company or
AYRO.
During the pendency of the AYRO Merger, the company or AYRO may not
be able to enter into a business combination with another party and
will be subject to contractual limitations on certain actions
because of restrictions in the AYRO Merger Agreement.
Covenants
in the AYRO Merger Agreement impede our or AYRO’s ability to
make acquisitions or complete other transactions that are not in
the ordinary course of business pending completion of the AYRO
Merger, other than the sale of substantially all of our assets
pursuant to the Asset Purchase Agreement, the AYRO Private
Placement and the issuance of the
Pre-funded Warrants to be issued in a nominal stock subscription
(the “Nominal Stock Subscription”). As a result,
if the AYRO Merger is not completed, we and AYRO may be at a
disadvantage to our competitors, respectively. In addition, while
the AYRO Merger Agreement is in effect and subject to limited
exceptions, both us and AYRO are prohibited from soliciting,
initiating, encouraging or taking actions designed to facilitate
any inquiries or the making of any proposal or offer that could
lead to the entering into certain extraordinary transactions with
any third party, such as a sale of assets, an acquisition, a tender
offer, a merger or other business combination outside the ordinary
course of business. These restrictions may prevent us and AYRO from
pursuing otherwise attractive business opportunities or other
capital structure alternatives and making other changes to our
business or executing certain of our business strategies prior to
the completion of the AYRO Merger, which could be favorable to our
stockholders or AYRO stockholders.
Certain provisions of the AYRO Merger Agreement may discourage
third parties from submitting competing proposals, including
proposals that may be superior to the arrangements contemplated by
the AYRO Merger Agreement.
The
terms of the AYRO Merger Agreement prohibit each of us and AYRO
from soliciting competing proposals or cooperating with persons
making unsolicited takeover proposals, except in limited
circumstances if our Board of Directors determines in good faith,
after consultation with our independent financial advisor, if any,
and outside counsel, that an unsolicited competing proposal
constitutes, or would reasonably be expected to result in, a
superior competing proposal and that failure to take such action
would be reasonably likely to result in a breach of the fiduciary
duties of our Board of Directors. In addition, if we or AYRO
terminate the AYRO Merger Agreement under specified circumstances,
including, in our case, terminating because of a decision of our
Board of Directors to recommend a superior competing proposal, we
or AYRO would be required to pay a termination fee of $1,000,000.
This termination fee may discourage third parties from submitting
competing proposals to us or our stockholders and may cause our
Board of Directors to be less inclined to recommend a competing
proposal.
The rights of AYRO stockholders who become our stockholders in the
AYRO Merger and our stockholders following the AYRO Merger will be
governed by an amended and restated charter and amended and
restated bylaws.
Upon
consummation of the AYRO Merger, outstanding shares of AYRO common
stock will be converted into the right to receive shares of our
common stock. AYRO stockholders who receive shares of our common
stock in the AYRO Merger will become our stockholders. As a result,
AYRO stockholders who become our stockholders will be governed by
our organizational documents and bylaws, rather than being governed
by AYRO’s organizational documents and bylaws. Pursuant to
the AYRO Merger Agreement, our charter will be amended and
restated, subject to our stockholders’ approval, and our
bylaws will be amended and restated, immediately prior to the
effective time of the AYRO Merger.
The Exchange Ratio is not adjustable based on the market price of
our common stock, so the merger consideration at the closing may
have a greater or lesser value than at the time the AYRO Merger
Agreement was signed.
If the AYRO Merger is completed, holders of outstanding shares of
AYRO common stock and preferred stock will be entitled to receive
1.1893 shares of our common stock per share of AYRO common stock
they hold or into which their shares of preferred stock convert
(the “Exchange Ratio”). The AYRO Merger
Agreement has set the Exchange Ratio formula for the AYRO common
stock, and the Exchange Ratio is only adjustable upward or downward
to reflect our and AYRO’s equity capitalization as of
immediately prior to the effective time of the AYRO Merger. Any
changes in the market price of common stock before the completion
of the AYRO Merger will not affect the number of shares AYRO
securityholders will be entitled to receive pursuant to the AYRO
Merger Agreement. Therefore, if before the completion of the AYRO
Merger, the market price of our common stock declines from the
market price on the date of the AYRO Merger Agreement, then AYRO
securityholders could receive merger consideration with
substantially lower value. Similarly, if before the completion of
the AYRO Merger, the market price of our common stock increases
from the market price on the date of the AYRO Merger Agreement,
then AYRO securityholders could receive merger consideration with
substantially more value for their shares of AYRO capital stock
than had been negotiated for in the establishment of the Exchange
Ratio.
If the AYRO Merger does not qualify as a reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended, or
is otherwise taxable to U.S. AYRO equity holders, then such holders
may be required to pay U.S. federal income taxes.
For
U.S. federal income tax purposes, the AYRO Merger is intended to
constitute a reorganization within the meaning of Section 368(a) of
the Code. If the Internal Revenue Services (the “IRS”)
or a court determines that the AYRO Merger should not be treated as
a reorganization, a holder of AYRO common stock and warrants would
recognize taxable gain or loss upon the exchange of AYRO common
stock and conversion of warrants for our common stock and warrants
pursuant to the AYRO Merger Agreement.
We have incurred, and expect to continue to incur, substantial
expenses related to the AYRO Merger.
We have
incurred, and expect to continue to incur substantial expenses in
connection with the AYRO Merger, as well as operating as a public
company. We will incur significant fees and expenses relating to
legal, accounting, financial advisory and other transaction fees
and costs associated with the AYRO Merger. Actual transaction costs
may substantially exceed estimates and may have an adverse effect
on the combined company’s financial condition and operating
results.
Failure to complete the AYRO Merger could negatively affect the
value of our common stock and the future business and financial
results of both us and AYRO.
If the
AYRO Merger is not completed, our ongoing businesses and
AYRO’s ongoing business, as the case may be, could be
adversely affected and we and AYRO will be subject to a variety of
risks associated with the failure to complete the AYRO Merger,
including without limitation the following:
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diversion
of management focus and resources from operational matters and
other strategic opportunities while working to implement the AYRO
Merger;
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reputational
harm due to the adverse perception of any failure to successfully
complete the AYRO Merger; and
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having
to pay certain costs relating to the AYRO Merger, such as legal,
accounting, financial advisory, filing and printing
fees.
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If the
AYRO Merger is not completed, these risks could materially affect
the market price of our common stock and the business and financial
results of both us and AYRO.
The AYRO Merger is expected to result in a limitation on the
combined company’s ability to utilize its net operating loss
carryforward.
Under
Section 382 of the Code, use of our net operating loss
carryforwards (“NOLs”) will be limited if we experience
a cumulative change in ownership of greater than 50% in a moving
three-year period. We will experience an ownership change as a
result of the AYRO Merger and therefore our ability to utilize our
NOLs and certain credit carryforwards remaining at the effective
time of the AYRO Merger will be limited. The limitation will be
determined by the fair market value of our common stock outstanding
prior to the ownership change, multiplied by the applicable federal
rate. It is expected that the AYRO Merger will impose a limitation
on our NOLs. Limitations imposed on our ability to utilize NOLs
could cause U.S. federal and state income taxes to be paid earlier
than would be paid if such limitations were not in effect and could
cause such NOLs to expire unused, in each case reducing or
eliminating the benefit of such NOLs.
The opinion received by our Board of Directors from Gemini has not
been, and is not expected to be, updated to reflect changes in
circumstances that may have occurred since the date of the
opinion.
At a
meeting held on December 18, 2019, our financial advisor, Gemini,
rendered its opinion as to the fairness of the merger consideration
from a financial point of view to the company as of the date of
such opinion, and such opinion was one of many factors considered
by our Board of Directors in approving the AYRO Merger. The opinion
does not speak as of the time the AYRO Merger will be completed or
any date other than the date of such opinion. Subsequent changes in
the operation and prospects of the company or AYRO, general market
and economic conditions and other factors that may be beyond the
control of the company or AYRO, may significantly alter the value
of the company or AYRO or the prices of the shares of our common
stock by the time the AYRO Merger is to be completed. The opinion
does not address the fairness of the merger consideration from our
financial point of view at the time the AYRO Merger is to be
completed, or as of any other date other than the date of such
opinion, and the AYRO Merger Agreement does not require that the
opinion be updated, revised or reaffirmed prior to the closing of
the AYRO Merger to reflect any changes in circumstances between the
date of the signing of the AYRO Merger Agreement and the completion
of the AYRO Merger as a condition to closing the AYRO
Merger.
The AYRO Merger may be completed even though material adverse
changes may result from the announcement of the AYRO Merger,
industry-wide changes or other causes.
In
general, the company or AYRO can refuse to complete the AYRO Merger
if there is a material adverse change (as defined in the AYRO
Merger Agreement) affecting the other party between December 19,
2019, the date of the AYRO Merger Agreement, and the closing of the
AYRO Merger. However, some types of changes do not permit either us
or AYRO to refuse to complete the AYRO Merger, even if such changes
would materially and adversely affect us or AYRO, as the case may
be:
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changes
in general economic, business, financial or market
conditions;
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changes
or events affecting the industries or industry sectors in which we
or AYRO operate generally;
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changes
in generally accepted accounting principles;
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changes
in laws, rules, regulations, decrees, rulings, ordinances, codes or
requirements issued, enacted, adopted or otherwise put into effect
by or under the authority of any governmental body;
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changes
caused by the announcement or pendency of the AYRO
Merger;
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changes
caused by any action taken by either us or AYRO with the prior
written consent of the other party;
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changes
caused by any decision, action, or inaction by governmental or
regulatory bodies, with respect to any of our products or
AYRO’s products;
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changes
caused by any act of war, terrorism, national or international
calamity or any other similar event;
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with
respect to us, a decline in our stock price; or
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with
respect to us, a change in the listing status of our common stock
on Nasdaq.
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If
adverse changes occur but we and AYRO must still complete the AYRO
Merger, the market price of our common stock may
suffer.
We and AYRO may become involved in securities litigation or
stockholder derivative litigation in connection with the AYRO
Merger, and this could divert the attention of our management and
AYRO’s management and harm the combined company’s
business, and insurance coverage may not be sufficient to cover all
related costs and damages.
Securities
litigation or stockholder derivative litigation frequently follows
the announcement of certain significant business transactions, such
as the sale of a business division or announcement of a business
combination transaction. We and AYRO may become involved in this
type of litigation in connection with the AYRO Merger, and the
combined company may become involved in this type of litigation in
the future. Litigation is often expensive and diverts
management’s attention and resources, which could adversely
affect our business, the AYRO business and the combined
company.
Risks Related to the Asset Sale Transaction
While the Asset Sale Transaction is pending, it creates unknown
impacts on our future which could materially and adversely affect
our business, financial condition and results of
operations.
While
the Asset Sale Transaction is pending, it creates unknown impacts
on our future. Therefore, our current or potential business
partners may decide to delay, defer or cancel entering into new
business arrangements with us pending consummation of the Asset
Sale Transaction. The occurrence of these events individually or in
combination could materially and adversely affect our business,
financial condition and results of operations.
The failure to consummate the Asset Sale Transaction may materially
and adversely affect our business, financial condition and results
of operations.
The
Asset Sale Transaction is subject to various closing conditions
including, among others: (i) the affirmative vote of the holders of
a majority of the outstanding shares of our capital stock entitled
to vote on the approval of the asset sale proposal and (ii) the
consummation of a change in control transaction of our company,
which will occur as a result of the AYRO Merger. We cannot control
these conditions and cannot assure you that they will be satisfied.
If the Asset Sale Transaction is not consummated, we may be subject
to a number of risks, including the following:
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we may
not be able to consummate the AYRO Merger, the closing of which is
conditioned upon the consummation of the Asset Sale
Transaction;
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we may
not be able to identify an alternate transaction, or if an
alternate transaction is identified, such alternate transaction may
not result in equivalent terms as compared to what is proposed in
the Asset Sale Transaction;
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the
trading price of our common stock may decline to the extent that
the current market price reflects a market assumption that the
Asset Sale Transaction will be consummated;
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the
failure to complete the Asset Sale Transaction may create doubt as
to our ability to effectively implement our current business
strategies;
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our
costs related to the Asset Sale Transaction, such as legal,
accounting and financial advisory fees, must be paid even if the
Asset Sale Transaction is not completed; and
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our
relationships with our customers, suppliers and employees may be
damaged and our business may be harmed.
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The
occurrence of any of these events individually or in combination
could materially and adversely affect our business, financial
condition and results of operations, which could cause the market
value of our common stock to decline.
Some of our executive officers have interests in the Asset Sale
Transaction that may be in addition to, or different from, the
interests of our stockholders.
Stockholders
should be aware that our executive officers have financial
interests in the Asset Sale Transaction that may be in addition to,
or different from, the interests of our stockholders generally.
Each of Mr. Richardson and Mr. Newman is a party to the Asset
Purchase Agreement. Our Board of Directors was aware of and
considered these potential interests, among other matters, in
evaluating and negotiating the Asset Sale Transaction and Asset
Purchase Agreement and in recommending to our stockholders that
they approve the asset sale proposal.
Risks Related to Our Business Prior to the Consummation of the AYRO
Merger
We have a history of losses and may be unable to achieve or sustain
profitability.
We have
incurred net losses in each year since our inception and as of
December 31, 2019, we have an accumulated deficit of $34.7 million.
Such losses are continuing to date. We do not know if our business
operations will become profitable or if we will continue to incur
net losses in the future. Our management expects to incur
significant expenses in the future in connection with the
development and expansion of our business, which will make it
difficult for us to achieve and maintain future profitability. We
may incur significant losses in the future for a number of reasons,
including the other risks described herein, and we may encounter
unforeseen expenses, difficulties, complications, delays and other
unknown events. Accordingly, there can be no certainty regarding if
or when we will achieve profitability, or if such profitability
will be sustained.
Historical losses and negative cash flows from operations raise
doubt about our ability to continue as a going
concern.
Historically,
we have suffered losses and have not generated positive cash flows
from operations. This raises substantial doubt about our ability to
continue as a going concern. The audit report of Friedman LLP for
the year ended December 31, 2019 on our financial statements
contained an explanatory paragraph expressing substantial doubt
about our ability to continue as a going concern.
We have a limited operating history which makes it difficult to
predict future growth and operating results.
We have
a relatively short operating history which makes it difficult to
reliably predict future growth and operating results. We face all
the risks commonly encountered by other businesses that lack an
established operating history, including, without limitation, the
need for additional capital and personnel and intense competition.
There is no relevant history upon which to base any assumption as
to the likelihood that our business will be
successful.
We will require substantial additional funding, which may not be
available on acceptable terms, or at all.
We have
historically used substantial funds to develop our VAL platform and
will require substantial additional funds to continue to develop
our VAL platform and expand into new markets. Our future capital
requirements and the period for which we expect our existing
resources to support our operations may vary significantly from
what we expect. Our monthly spending levels vary based on new and
ongoing technology developments and corporate activities. To date,
we have primarily financed our operations through sales of our
securities. We may intend to seek additional funding in the future
through equity or debt financings, credit or loan facilities or a
combination of one or more of these financing sources. Our ability
to raise additional funds will depend on financial, economic and
other factors, many of which are beyond our control. Additional
funds may not be available to us on acceptable terms or at
all.
If we
raise additional funds by issuing equity or convertible debt
securities, our stockholders will suffer dilution and the terms of
any financing may adversely affect the rights of these
stockholders. In addition, as a condition to providing us with
additional funds, future investors may demand, and may be granted,
rights superior to those of existing stockholders. Debt financing,
if available, may involve restrictive covenants limiting our
flexibility in conducting future business activities, and, in the
event of insolvency, debt holders would be repaid before holders of
equity securities received any distribution of corporate
assets.
Because our VAL platform operates in a relatively new market, we
must actively seek market acceptance of our services, which we
expect will occur gradually, if at all.
We
derive, and expect to continue to derive, a substantial portion of
our revenue from our VAL platform, which is part of a relatively
new and evolving market. Our services are substantially different
from existing valet, parking, maintenance and car storage services
and many potential clients may be reluctant to utilize our services
until they have been tested in more established commercial
operations over a significant period. As a result, we may have
difficulty achieving market acceptance for our platform. If the
market for our services fails to grow or grows more slowly than we
currently anticipate, our business would be negatively
affected.
Future growth may place significant demands on our management and
infrastructure.
Our
business is logistically and technologically complex. This
complexity has placed and may continue to place significant demands
on our management and our operational and financial infrastructure,
and it may be challenging to sustain in future growth periods. Many
of our systems and operational practices were implemented when the
company was at a smaller scale of operations. In addition, as we
grow, we must implement new systems and software to help run our
operations and must hire additional personnel. As our operations
grow in size, scope and complexity, we will need to continue to
improve and upgrade our systems and infrastructure to offer an
increasing number of clients enhanced services, solutions and
features. We may choose to commit significant financial,
operational and technical resources in advance of an expected
increase in the volume of our business, with no assurance that the
volume of business will increase. Growth could also strain our
ability to maintain reliable service levels for existing and new
clients, which could adversely affect our reputation and business
in the future. For example, in the past, we have experienced, and
may in the future experience, situations where the demand for our
services exceeded our estimates and our employee base was, and may
in the future be, insufficient to support this higher demand. Our
client experience and overall reputation could be harmed if we are
unable to grow our employee base to support higher
demand.
Competition for staffing, shortages of qualified drivers and union
activity may increase our labor costs and reduce
profitability.
If our
labor costs increase, we may not be able to raise rates to offset
these increased costs. Union activity is another factor that may
contribute to increased labor costs. We currently do not have any
union employees, and any increase in labor union activity could
have a significant impact on our labor costs. Our failure to
recruit and retain qualified drivers, or to control our labor
costs, could have a material adverse effect on our business,
financial position, results of operations, and cash
flows.
Deterioration in economic conditions in general could reduce the
demand for our services and damage our business and results of
operations.
Adverse
changes in global, national and local economic conditions could
negatively impact our business. Our business operations are
concentrated and will likely continue to be concentrated in large
urban areas, and business could be materially adversely affected to
the extent that weak economic conditions result in the elimination
of jobs and high unemployment in these large urban areas. If
deteriorating economic conditions reduce discretionary spending,
business travel or other economic activity that fuels demand for
our services, our earnings could be reduced. Adverse changes in
local and national economic conditions could also depress prices
for our services or cause individual and/or corporate clients to
cancel their agreements to purchase our services. Moreover,
mandated changes in local and/or national compensation as it
relates to minimum wage, overtime, and other compensation
regulations may have an adverse impact on our
profitability.
Our business, results of operations and financial condition may be
materially adversely impacted by public health epidemics, including
the recent coronavirus outbreak
Our business, results of operations and financial condition may be
materially adversely impacted if a public health epidemic,
including the recent coronavirus outbreak, interferes
with our ability, or the ability of our employees, workers,
contractors, suppliers and other business partners to perform our
and their respective responsibilities and obligations relative to
the conduct of our business. A public health epidemic, including
the coronavirus, poses the risk of disruptions from the
temporary closure of third-party suppliers and manufacturers,
restrictions on our employees' and other service providers' ability
to travel, the decreased willingness or ability of our customers to
travel or to utilize our services and shutdowns that may be
requested or mandated by governmental authorities. The extent to
which the coronavirus may impact our results will depend
on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning
the severity of the coronavirus and the actions to
contain the coronavirus or treat its impact, among
others.
We expect to face intense competition in the market for innovative
logistics, valet and car storage services, and our business will
suffer if we fail to compete effectively.
While
we believe that our platform offers a number of advantages over
existing service providers, we expect that the competitive
environment for our logistics, valet and storage services will
become more intense as companies enter the market. In addition,
there are relatively low barriers to entry into our business.
Currently, our primary competitors are public transportation,
logistics, traditional valet and car storage providers, car sharing
services and traditional rental car companies that have recently
begun offering more innovative services. Many of our competitors
have greater name recognition among our target clients and greater
financial, technical and/or marketing resources than we have. Our
competitors have resources that may enable them to respond more
quickly to new or emerging technologies and changes in client
preferences. These competitors could introduce new solutions with
competitive prices or undertake more aggressive marketing campaigns
than us. Failure to compete effectively could have a material
adverse impact on our results of operations.
Our long-term sustainability relies on our ability to anticipate or
keep pace with changes in the marketplace and the direction of
technological innovation and customer demands.
The
automotive industry, especially the vehicle support segment of the
automotive industry in which we operate, is subject to intense and
increasing competition and rapidly evolving technologies. We
believe that the automotive industry will experience significant
and continued change in the coming years. In addition to
traditional competitors, we must also be responsive to the entrance
of non-traditional participants in the automotive industry. These
non-traditional participants, such as ride-sharing companies and
autonomous vehicles, may seek to disrupt the historic business
model of the industry through the introduction of new technologies,
new products or services, new business models or new methods of
travel. To compete successfully, we will need to demonstrate the
advantages of our services over alternative solutions and services,
as well as newer technologies. Failure to adapt to innovations in
technology and service offerings in the automotive space could have
a material adverse impact on our ability to sustain our business
and remain competitive.
Our growth depends on our ability to gain sustained access to a
sufficient number of parking locations on commercially reasonable
terms that offer convenient access in reaching our
clients.
We
currently operate Self-park in New York City. We must therefore
compete for limited parking locations. Many cities are densely
populated, and parking locations may not be available at locations
that provide convenient access to our clients or on terms that are
commercially reasonable. If we are unable to gain sustained access
to a sufficient number of parking locations that are convenient to
our clients, our ability to attract and retain clients will suffer.
This challenge of finding adequate parking will grow if we are able
to successfully grow our subscriber base. If we are unable to gain
sustained access to a sufficient number of parking locations, or we
are unable to gain such access on commercially reasonable terms,
this could have a material adverse impact on our business,
financial condition and results of operations.
If we fail to successfully execute our growth strategy, our
business and prospects may be materially and adversely
affected.
To
date, we primarily operate in the New York metropolitan area. Our
growth strategy includes expanding our services to new geographic
locations, which may not succeed due to various factors, including
one or more of the following: competition, our inability to build
brand name recognition in these new markets, our inability to
effectively market our services in these new markets or our
inability to deliver high-quality services on a cost-effective,
continuous and consistent basis. In addition, we may be unable to
identify new cities with sufficient growth potential to expand our
network, and we may fail to attract quality drivers and other
employees and/or establish the necessary commercial relationships
with local vendors that are required in order to deliver our
services in these areas. If we fail to successfully execute our
growth strategy, we may be unable to maintain and grow our business
operation, and our business and prospects may be materially and
adversely affected.
We may experience difficulties demonstrating the value to customers
of newer, higher priced and higher margin services if they believe
existing services are adequate to meet end customer
expectations.
As we
develop and introduces new services, we faces the risk that
customers may not value or be willing to purchase these higher
priced and higher margin services due to pricing constraints. Owing
to the extensive time and resources that we invest in developing
new services, if we are unable to sell customers new services, our
revenue could decline and our business, financial condition,
operating results and cash flows could be negatively
affected.
If efforts to build and maintain strong brand identity are not
successful, we may not be able to attract or retain clients, and
our business and operating results may be adversely
affected.
We
believe that building and maintaining our brand is critical to the
success of our business. Consumer client and automotive awareness
of the brand and its perceived value will depend largely on the
success of marketing efforts and the ability to provide a
consistent, high-quality client and business experience.
Conversely, any failure to maximize marketing opportunities or to
provide clients with high-quality valet, logistics, maintenance and
storage experiences for any reason could substantially harm our
reputation and adversely affect our efforts to develop as a trusted
brand. To promote our brand, we have made, and will continue to
make, substantial investments relating to advertising, marketing
and other efforts, but cannot be sure that such investment will be
successful.
Furthermore,
as the primary point of contact with clients, we rely on our
drivers to provide clients and business partners with a
high-quality client experience. The failure of our drivers to
provide clients and business partners with this trusted experience
could cause customers and business partners to turn to alternative
providers, including our competitors. Any incident that erodes
consumer affinity for our brand, including a negative experience
with one of our valets or damage to a customer’s car could
result in negative publicity, negative online reviews and damage
our business.
We rely on third-party service providers to provide parking garages
for our clients’ cars. If these service providers experience
operational difficulties or disruptions, our business could be
adversely affected.
We
depend on third-party service providers to provide parking garages
for our clients’ cars. In particular, we rely on local
parking garage vendors to provide adequate convenient parking
locations. We do not control the operation of these providers. If
these third-party service providers terminate their relationship
with us, decide to sell their facilities or do not provide
convenient access to our clients’ vehicles, it would be
disruptive to our business, as we are dependent on suitable parking
locations within relative proximity of our clients’
residences and business locations. This disruption could harm our
reputation and brand and may cause us to lose clients.
If we are unsuccessful in establishing or maintaining our
business-to-business (B2B) model, our revenue growth could be
adversely affected.
We
currently depend on corporate clients and the B2B market for a
significant portion of our revenue. The success of this strategy
will depend on our ability to maintain existing B2B partners,
obtain new B2B partners, and generate a community of participating
corporate clients sufficiently large to support such a model. We
may not be successful in establishing such partnerships on terms
that are commercially favorable, if at all, and may encounter
financial and logistical difficulties associated with sustaining
such partnerships. If we are unsuccessful in establishing or
maintaining our B2B model, our revenue growth could be adversely
affected.
We face risks related to liabilities resulting from the use of
client vehicles by our employees.
Our
business can expose us to claims for property damage, personal
injury and death resulting from the operation and storage of client
cars by our drivers. While operating client cars, drivers could
become involved in motor vehicle accidents due to mechanical or
manufacturing defects, or user error by our employed driver or by a
third-party driver that results in death or significant property
damage for which we may be liable.
In
addition, we depend on our drivers to inspect the vehicles prior to
driving in order to identify any potential damage or safety concern
with the vehicle. To the extent that we are found at fault or
otherwise responsible for an accident, our insurance coverage would
only cover losses up to a maximum of $5 million, in certain
instances, in the United States.
We may experience difficulty obtaining coverage for certain
insurable risks or obtaining such coverage at a reasonable
cost.
We
maintain insurance for workers’ compensation, general
liability, automobile liability, property damage and other
insurable risks. We are responsible for claims exceeding our
retained limits under our insurance policies, and while we endeavor
to purchase insurance coverage corresponding to our assessment of
risk, we cannot predict with certainty the frequency, nature or
magnitude of claims or direct or consequential damages and may
become exposed to liability at levels in excess of our historical
levels resulting from unusually high losses or otherwise.
Additionally, consolidation of entities in the insurance industry
could impact our ability to obtain or renew policies at competitive
rates, which could have a material adverse impact on our business,
as would the incurrence of uninsured claims or the inability or
refusal of our insurance carriers to pay otherwise insured claims.
Any material changes in our insurance costs due to changes in
frequency of claims, the severity of claims, the costs of premiums
or for any other reason could have a material adverse effect on our
financial position, results of operations, or cash
flows.
Our success depends on the continued reliability of the internet
infrastructure.
Our
services are designed primarily to work over the internet, and the
success of our platform is largely dependent on the development and
maintenance of the internet infrastructure, along with our
clients’ access to low-cost, high-speed internet. The future
delivery of our services will depend on third-party internet
service providers to expand high-speed internet access, to maintain
a reliable network with the necessary speed, data capacity and
security, and to develop complementary products and services for
providing reliable and timely internet access. Any outages or
delays resulting from damage to the internet infrastructure,
including problems caused by viruses, malware and similar programs,
could reduce clients’ access to the internet and our services
and could adversely impact our business.
System interruptions that impair access to our website or mobile
application could substantially harm our business and operating
results.
The
satisfactory performance, reliability and availability of our
website and mobile application, which enable clients to access our
services, are critical to our business. Any systems interruption
that prevents clients and visitors from accessing our website and
mobile App could result in negative publicity, damage to our
reputation and brand and could cause our business and operating
results to suffer. We may experience system interruptions for a
variety of reasons, including network failures, power outages,
cyber-attacks, problems caused by viruses and similar programs,
software errors or an overwhelming number of clients or visitors
trying to reach our website during periods of strong demand.
Because we are dependent in part on third parties for the
implementation and maintenance of certain aspects of our systems
and because some of the causes of system interruptions may be
outside of our control, we may not be able to remedy such
interruptions in a timely manner, or at all. Any significant
disruption to our website, mobile application or internal computer
systems could result in a loss of clients and adversely affect our
business and results of operations.
If we are unable to protect confidential client information, our
reputation may be harmed, and we may be exposed to liability and a
loss of clients.
Our
system stores, processes and transmits confidential client
information, including location information and other sensitive
data. We rely on encryption, authentication and other technologies
to keep this information secure. We may not have adequately
assessed the internal and external risks posed to the security of
our systems and may not have implemented adequate preventative
safeguards. In the event that the security of our system is
compromised in the future, we may not take adequate reactionary
measures. Any compromise of information security could expose our
confidential client information, damaging our reputation and
exposing the company to costly litigation and liability that could
harm our business and operating results.
Security breaches, loss of data and other disruptions could
compromise sensitive information related to our business, prevents
us from accessing critical information or exposes us to liability,
which could adversely affect our business and
reputation.
We
utilize information technology systems and networks to process,
transmit and store electronic information in connection with our
business activities. As the use of digital technologies has
increased, cyber incidents, including deliberate attacks and
attempts to gain unauthorized access to computer systems and
networks, have increased in frequency and sophistication. These
threats pose a risk to the security of our systems and networks and
the confidentiality, availability and integrity of our data, all of
which are vital to our operations and business strategy. There can
be no assurance that we will be successful in preventing
cyber-attacks or successfully mitigating their
effects.
Despite
the implementation of security measures, our internal computer
systems and those of our contract research organizations and other
contractors and consultants are vulnerable to damage or disruption
from hacking, computer viruses, software bugs, unauthorized access
or disclosure, natural disasters, terrorism, war, and
telecommunication, equipment and electrical failures. In addition,
there can be no assurance that we will promptly detect any such
disruption or security breach, if at all. Unauthorized access, loss
or dissemination could disrupt our operations, including our
ability to conduct research and development activities, process and
prepare company financial information, and manage various general
and administrative aspects of our business. To the extent that any
such disruption or security breach results in a loss of or damage
to our data or applications, or inappropriate disclosure or theft
of confidential, proprietary or personal information, we could
incur liability, suffer reputational damage or poor financial
performance or become the subject of regulatory actions by state,
federal or non-US authorities, any of which could adversely affect
our business.
Future legislation or regulations may adversely affect our business
and results of operations.
Although
various jurisdictions and government agencies are considering
implementing legislation in response to the rise of other ride- and
car-sharing enterprises, such as Uber Technologies Inc., currently
no such legislation exists that we believe has jurisdiction over,
or applicability to, our operations. We do not believe we are
subject to any material government regulations or oversight, but
regulations impacting parking and traffic patterns in the areas of
our operations could impact the services we provide. We are also
subject to various U.S. federal, state and local laws and
regulations, including those related to environmental, health and
safety, financial, tax, customs and other matters. We cannot
predict the substance or impact of pending or future legislation or
regulations, or the application thereof. The introduction of new
laws or regulations or changes in existing laws or regulations, or
the interpretations thereof, could increase the costs of doing
business for us or our clients or otherwise restrict our actions
and adversely affect our financial condition, results of operations
and cash flows.
Seasonality may cause fluctuations in our financial
results.
We
generally experience some effects of seasonality due to increases
in travel during the summer months and holidays such as
Thanksgiving and Christmas. Accordingly, the use of our services
and associated revenue have generally increased at a higher rate
during such periods. Our revenue also fluctuates due to inclement
weather conditions, such as snow or rain storms. This seasonality
may cause fluctuations in our financial results.
We depend on key personnel to operate our business, and the loss of
one or more members of our management team, or our failure to
attract, integrate and retain other highly qualified personnel in
the future, could harm our business.
We
believe our future success will depend in large part upon our
ability to attract and retain highly skilled managerial, technical,
finance and sales and marketing personnel. We currently depend on
the continued services and performance of the key members of our
management team, including Spencer Richardson, our Co-Founder and
Chief Executive Officer, and David Newman, our Co-Founder and Chief
Business Development Officer. The loss of any key personnel could
disrupt our operations and have an adverse effect on our ability to
grow the business.
Prior
to the second quarter in 2018, we relied on outside consultants and
other service providers for the majority of our accounting and
financial support. During 2018, we hired new members to our
management team. In February of 2019, we terminated our Chief
Financial Officer and, on the same day, engaged a consultant to
serve as our Chief Financial Officer going forward. We compete in
the market for personnel against numerous companies, including
larger, more established competitors who have significantly greater
financial resources and may be in a better financial position to
offer higher compensation packages to attract and retain human
capital. We cannot be certain that we will be successful in
attracting and retaining the skilled personnel necessary to operate
our business effectively in the future.
We may become engaged in legal proceedings that could result in
unforeseen expenses and could occupy a significant amount of
management’s time and attention.
From
time to time, we may become subject to litigation, claims or other
proceedings that could negatively affect our business operations
and financial position. Litigation disputes could cause us to incur
unforeseen expenses, could occupy a significant amount of
management’s time and attention and could negatively affect
our business operations and financial position.
Our business is subject to interruptions, delays and failures
resulting from natural or man-made disasters.
Our
services, systems and operations are vulnerable to damage or
interruption from earthquakes, volcanoes, fires, floods, power
losses, telecommunications failures, terrorist attacks, acts of
war, human errors, break-ins and similar events. A significant
natural disaster could have a material adverse impact on our
business, operating results and financial condition. We may not
have sufficient protection or recovery plans in certain
circumstances and our insurance coverage may be insufficient to
compensate for losses that may occur. As we rely heavily on our
servers, computer and communications systems and the internet to
conduct our business and provide a high-quality client experience,
such disruptions could negatively impact our ability to run the
business, which could have an adverse effect on our operating
results.
We have incurred significant increased costs as a result of
operating as a public company, and our management is required to
devote substantial time to public company compliance
requirements.
As a
public company, we face increased legal, accounting, administrative
and other costs and expenses that we did not incur as a private
company. The Sarbanes-Oxley Act of 2002, including the requirements
of Section 404, and rules and regulations subsequently implemented
by the SEC, the Public Company Accounting Oversight Board, and The
Nasdaq Capital Market require public companies to meet certain
corporate governance standards. A number of those requirements
necessitate our management to carry out activities we have not done
previously. For example, we have adopted new internal controls and
disclosure controls and procedures. Our management and other
personnel will need to devote a substantial amount of time to these
requirements. Moreover, these rules and regulations have increased
our legal and financial compliance costs and will make some
activities more time-consuming and costlier. These increased costs
will require us to divert a significant amount of money that we
could otherwise use to expand our business and achieve our
strategic objectives.
Failure to establish and maintain effective internal controls in
accordance with Sections 302 and 404 of the Sarbanes-Oxley Act
could have an adverse effect on our business and stock
price.
We are
required to comply with the SEC’s rules implementing Sections
302 and 404 of the Sarbanes-Oxley Act, which require management to
certify financial and other information in our quarterly and annual
reports and provide an annual management report on the
effectiveness of controls over financial reporting. We are required
to disclose changes made in our internal controls and procedures on
a quarterly basis. We are required to make our annual assessment of
our internal controls over financial reporting pursuant to Section
404 as of December 31, 2019.
To
comply with the requirements of Sections 302 and 404, we have
undertaken or may in the future undertake various actions, such as
implementing new internal controls and procedures and hiring
additional accounting or internal audit staff. Testing and
maintaining internal controls can divert our management’s
attention from other matters that are important to the operation of
our business. In addition, when evaluating our internal controls
over financial reporting, we may identify material weaknesses that
we may not be able to remediate in time to meet the applicable
deadline imposed upon us for compliance with the requirements of
Sections 302 and 404. If we identify material weaknesses in our
internal controls over financial reporting or are unable to comply
with the requirements of Sections 302 and 404 in a timely manner or
assert that our internal controls over financial reporting are
effective, or if it becomes necessary for our independent
registered public accounting firm to express an opinion as to the
effectiveness of our internal controls over financial reporting and
is unable to do so, investors may lose confidence in the accuracy
and completeness of our financial reports and the market price of
our common stock could be negatively affected. In addition, we
could become subject to investigations by The Nasdaq Capital
Market, SEC or other regulatory authorities, which could require
additional financial and management resources.
A material weakness in our internal controls could have a material
adverse effect on us.
Effective
internal controls are necessary for us to provide reasonable
assurance with respect to our financial reports and to adequately
mitigate risk of fraud. If we cannot provide reasonable assurance
with respect to our financial reports and adequately mitigate risk
of fraud, our reputation and operating results could be harmed.
Internal control over financial reporting may not prevent or detect
misstatements because of its inherent limitations, including the
possibility of human error, the circumvention or overriding of
controls, or fraud. Therefore, even effective internal controls can
provide only reasonable assurance with respect to the preparation
and fair presentation of financial statements. In addition,
projections of any evaluation of effectiveness of internal control
over financial reporting to future periods are subject to the risk
that the control may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A
material weakness is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected
on a timely basis. A material weakness in our internal control over
financial reporting could adversely impact our ability to provide
timely and accurate financial information. If we are unable to
report financial information timely and accurately or to maintain
effective disclosure controls and procedures, we could be subject
to, among other things, regulatory or enforcement actions by the
SEC, any one of which could adversely affect our business
prospects.
Our
Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are not effective due
to the material weaknesses resulting from a limited segregation of
duties among our employees with respect to our control activities
and this deficiency is the result of our limited number of
employees. We also identified material weaknesses surrounding the
financial closing process and the recording of debt and equity
transactions that occurred in the year ended December 31, 2019.
These deficiencies may affect our management’s ability to
determine if errors or inappropriate actions have taken
place.
Provisions of our charter documents or Delaware law could delay or
prevent an acquisition of the company, even if the acquisition
would be beneficial to our stockholders, and could make it more
difficult for you to change management.
Provisions
in our amended and restated certificate of incorporation and
amended and restated bylaws may discourage, delay or prevent a
merger, acquisition or other change in control that our
stockholders may consider favorable, including transactions in
which our stockholders might otherwise receive a premium for their
shares. In addition, these provisions may frustrate or prevent any
attempt by our stockholders to replace or remove our current
management by making it more difficult to replace or remove our
Board of Directors. These provisions include:
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the
exclusive right of our Board of Directors to elect a director to
fill a vacancy created by the expansion of our Board of Directors
or the resignation, death or removal of a director;
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a
requirement that special meetings of our stockholders be called
only by the chairman of our Board of Directors, our Board of
Directors or a committee of our Board of Directors to whom such
authority has been delegated;
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an
advance notice requirement for stockholder proposals and
nominations;
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the
authority of our Board of Directors to issue preferred stock with
such terms as our Board of Directors may determine;
and
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a
requirement of approval of not less than 66 2/3% of all outstanding
shares of our capital stock entitled to vote to amend any bylaws by
stockholder action.
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In
addition, our amended and restated bylaws, to the fullest extent
permitted by law, provides that the Court of Chancery of the State
of Delaware will be the exclusive forum for: any derivative action
or proceeding brought on Our behalf; any action asserting a breach
of fiduciary duty; any action asserting a claim against us arising
pursuant to the Delaware General Corporation Law, our amended and
restated certificate of incorporation, or our amended and restated
bylaws; or any action asserting a claim against us that is governed
by the internal affairs doctrine. This exclusive forum provision
does not apply to suits brought to enforce a duty or liability
created by the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). It could apply, however, to a suit
that falls within one or more of the categories enumerated in the
exclusive forum provision and asserts claims under the Securities
Act, inasmuch as Section 22 of the Securities Act of 1933, as
amended (the “Securities Act”) creates concurrent
jurisdiction for federal and state courts over all suits brought to
enforce any duty or liability created by the Securities Act or the
rule and regulations thereunder. There is uncertainty as to whether
a court would enforce such provision with respect to claims under
the Securities Act, and our stockholders will not be deemed to have
waived our compliance with the federal securities laws and the
rules and regulations thereunder.
This
choice of forum provision may limit a stockholder’s ability
to bring a claim in a judicial forum that it finds favorable for
disputes with us or any of our directors, officers, or other
employees, which may discourage lawsuits with respect to such
claims. Alternatively, if a court were to find the choice of forum
provisions contained in our bylaws to be inapplicable or
unenforceable in an action, we may incur additional costs
associated with resolving such action in other jurisdictions, which
could harm our business, results of operations and financial
condition.
Provisions
in our charter and other provisions of Delaware law could limit the
price that investors are willing to pay in the future for shares of
our common stock.
Risks Relating to Our Financial Position and Need for Additional
Capital
Our ability to use NOLs may be limited.
At
December 31, 2019, we had approximately $17.0 million of operating
loss carryforwards for federal and approximately $17.0 million for
New York state tax purposes that may be applied against future
taxable income. The NOLs will begin to expire in the year 2037 if
not utilized prior to that date. To the extent available, we intend
to use these NOLs to reduce the corporate income tax liability
associated with our operations. The ability to utilize these NOLs
may be limited under Section 382 of the Code, which apply if an
ownership change occurs. It is expected that the AYRO Merger will
impose a limitation on the utilization of our NOLs under Section
382 of the Code. To the extent our use of NOLs is significantly
limited, our income could be subject to corporate income tax
earlier than it would if we were able to use NOLs, which could have
a negative effect on our financial results.
The Tax Cut and Jobs Act could adversely affect our business and
financial condition.
On
December 22, 2017, President Trump signed into law the “Tax
Cuts and Jobs Act,” or TCJA, which significantly reforms the
Internal Revenue Code of 1986, as amended, or the Code. The TCJA,
among other things, includes changes to U.S. federal tax rates,
imposes significant additional limitations on the deductibility of
interest and NOLs, allows for the expensing of capital
expenditures, and puts into effect the migration from a
“worldwide” system of taxation to a territorial system.
Our net deferred tax assets and liabilities were revalued at the
newly enacted U.S. corporate rate, and the estimated impact was
recognized in our tax expense in 2017. We continue to examine the
impact this tax reform legislation may have on our business.
However, the effect of the TCJA on our business, whether adverse or
favorable, is uncertain, and may not become evident for some period
of time. We urge investors to consult with their legal and tax
advisers regarding the implications of the TCJA on an investment in
our common stock.
Our principal stockholders and management own a significant
percentage of our common stock and are able to exert significant
control over matters subject to stockholder approval.
Based
on the beneficial ownership of our common stock as of March 25,
2020, our officers and directors, together with holders of 5% or
more of our common stock outstanding and our respective affiliates,
beneficially own approximately 35% of our common stock, which
reflects 9.99% beneficial ownership limitations included in certain
company instruments. Accordingly, these stockholders have
significant influence over the outcome of corporate actions
requiring stockholder approval, including the election of
directors, consolidation or sale of all or substantially all of our
assets or any other significant corporate transaction. The
interests of these stockholders may not be the same as or may even
conflict with your interests. For example, these stockholders could
delay or prevent a change of control of the company, even if such a
change of control would benefit the other stockholders, which could
deprive such other stockholders of an opportunity to receive a
premium for their common stock as part of a sale of the company or
company assets and might affect the prevailing market price of our
common stock. The significant concentration of stock ownership may
adversely affect the trading price of our common stock due to
investors’ perception that conflicts of interest may exist or
arise.
The price of our common stock may be volatile and fluctuate
substantially, and you may not be able to resell your shares at or
above the price you paid for them.
The
trading price of our common stock is highly volatile and could be
subject to wide fluctuations in response to various factors, some
of which are beyond our control, such as reports by industry
analysts, investor perceptions or negative announcements by other
companies involving similar technologies. The stock market in
general and the market for smaller companies, like us in
particular, have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. As
a result of this volatility, our stockholders may not be able to
sell their common stock at or above the price they paid for it. The
following factors, in addition to other factors described in this
“Risk Factors” section of our most recent filings with
the SEC, may have a significant impact on the market price of our
common stock:
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issuances
of new equity securities pursuant to a future offering, including
issuances of preferred stock;
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the
success of competitive products, services or
technologies;
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regulatory
or legal developments in the United States and other
countries;
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adverse actions taken by regulatory agencies with respect to
the services we
provide;
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developments
or disputes concerning patent applications, issued patents or other
proprietary rights;
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the
recruitment or departure of key personnel;
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actual
or anticipated changes in estimates as to financial results,
development timelines or recommendations by securities
analysts;
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variations
in our financial results or those of companies that are perceived
to be similar to us;
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variations in the costs of the services we provide;
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market
conditions in the market segments in which we operate;
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variations
in quarterly and annual operating results;
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announcements
of our new products and/or services or our
competitors;
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the
gain or loss of significant customers;
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changes
in analysts’ earnings estimates;
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short
selling shares of our common stock;
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litigation;
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changing
the exchange or quotation system on which shares of our common
stock are listed;
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trading volume of our common stock;
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sales of our common
stock by the company, our executive officers and directors
or our stockholders in the future;
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changes
in accounting principles; and
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general economic and market conditions and overall fluctuations in
the U.S. equity markets.
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In addition, broad market and industry factors may negatively
affect the market price of our common stock, regardless of our
actual operating
performance, and factors beyond our control may cause our
stock price to decline
rapidly and unexpectedly.
We may be subject to securities litigation, which is expensive and
could divert management attention.
Companies
that have experienced volatility in the market price of their stock
have frequently been the objects of securities class action
litigation. We may be the target of this type of litigation in the
future. Class action and derivative lawsuits could result in
substantial costs to the company and cause a diversion of our
management’s attention and resources, which could materially
harm our financial condition and results of
operations.
Risks Related to Intellectual Property
We may not be able to adequately protect our intellectual property
rights or may be accused of infringing the intellectual property
rights of third parties.
Our
business depends substantially on our intellectual property rights,
the protection of which is crucial to our business success. To
protect our proprietary rights, we rely or may in the future rely
on a combination of trademark law and trade secret protection,
copyright law and patent law. We also utilize contractual
agreements, including, in certain circumstances, confidentiality
agreements between the company and our employees, independent
contractors and other advisors. These afford only limited
protection, and unauthorized parties may attempt to copy aspects of
our website and mobile application features, software and
functionality, or to obtain and use information that we consider
proprietary or confidential, such as the technology used to operate
our website, our content and company trademarks. We may also
encounter difficulties in connection with the acquisition and
maintenance of domain names, and regulations governing domain names
may not protect our trademarks and similar proprietary
rights.
In
addition, we may become subject to third-party claims that we
infringe the proprietary rights of others. Such claims, regardless
of their merits, may result in the expenditure of significant
financial and managerial resources, injunctions against us or the
payment of damages. We may need to obtain licenses from third
parties who allege that we have infringed their rights, but such
licenses may not be available on terms acceptable to us or at
all.
ITEM 1B – UNRESOLVED STAFF
COMMENTS
None.
Our principal executive office is located at 1412 Broadway, Floor
21, New York City, New York 10018. We operate under a month to
month lease requiring 60 days’ notice. We believe our current
facility is suitable and adequate to meet our business
requirements. We intend to continue working from this or a nearby
facility in the same geographic location.
ITEM 3 – LEGAL
PROCEEDINGS
We are 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, other than as set forth below, 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, we were served an Amended Summons and Complaint
in the Supreme Court of the City of New York, Bronx county
originally served solely on an individual, our former customer, for
injuries sustained by plaintiffs alleging such injuries were caused
by either the customer, our valet operating the customer’s
vehicle or an unknown driver operating customer’s vehicle. We
to date have cooperated with the New York City Police Department
and no charges have been brought against any of our employees. We
have referred the matter to our insurance carrier. As of June 12,
2019, this case has been settled by the insurance
carrier.
On February 9, 2016, an employee of ours was transporting a
customer’s vehicle when the vehicle caught fire. On November
22, 2016, an insurance company (as subrogee of the vehicle’s
owner) filed for indemnification and subrogation against us in the
Supreme Court of the State of New York County of New York. Our
management believes that it is not responsible for the damage
caused by the vehicle fire and that the fire was not due to any
negligence on the part of us. In 2018, the parties reached a
settlement the case was closed.
As of December 31, 2019, we had accrued approximately $320,000 for
the settlement of multiple employment disputes. As of December 31,
2019, approximately $226,000 of this amount was for settled
matters. We still have outstanding potential liability of $94,000
related to the unsettled employment disputes.
As of December 31, 2019, we had accrued approximately $333,000 for
potential New York State Department of Labor (“DOL”)
spread-of-hours violation. At the end of December 2019, our labor
counsel notified the DOL that we have a number of issues/objections
with this decision we received on December 24, 2019. The
investigator confirmed receipt of our response. This case will
likely go to a hearing.
We were a defendant in a class action lawsuit which resulted in a
judgement entered into whereby we are required to pay legal fees in
the amount of $45,000 to the plaintiff’s counsel. As of
December 31, 2019, we recorded $45,000 as accrued expense in
relation to this lawsuit.
Proceedings by Former Employees
There is a pending claim of race and gender discrimination
involving our former employee, Joanne Lewis, at the New York City
Commission on Human Rights. Ms. Lewis also asserted a claim of
retaliation. In June 2015, we submitted a Verified Answer and
Position Statement denying all allegations of discrimination and
retaliation. We are confident in the factual and legal defenses to
Ms. Lewis’s claim. Since the submission of our Verified
Answer and Position Statement, we have not heard from the
Commission or Ms. Lewis. No amount was accrued for this case. In
March 2020, the U.S. EEOC adopted the finding of the Commission
related to the discrimination complaint and issued a notice of
dismissal.
In January 2019, the same DOL investigator who conducted the audit
of us notified us that two former employees – Joshua Dixon
and Ugur Gencaslan – had filed a complaint with the DOL,
wherein they alleged they were not properly paid for all overtime
worked during July 2017. On January 23, 2019, we provided the DOL
with a written response denying that any monies were owed to the
employees. In addition, we provided the DOL with time records and
pay records for each employee for the relevant time period. Since
the submission of these documents in January 2019, we have not
heard from the DOL. No amount was accrued for this
case.
Qasim Khan
This case involves a rear-end collision which occurred on August 1,
2018 in Manhattan when our driver hit the back of a car which had
reportedly stopped for a pedestrian. The suit was filed in Kings
County Supreme Court (Brooklyn) against us and the driver and the
owner of the car. Such a collision is virtually always judged to be
the fault of the car in back, regardless of the suddenness of the
stop.
The injuries alleged by the plaintiff at this early point in the
litigation, with the majority of medical records yet to be
produced, include the left shoulder requiring arthroscopic surgery,
to repair a rotator cuff tear, bursitis and synovitis, and a
partial tear of the labrum. MRIs are reported to have revealed
herniations in the plaintiff’s lumbar spine, as well as
bulges in his cervical spine; and plaintiff has had various claims
of headaches, neck, and knee and ankle pain, all while undergoing
extensive chiropractic care, as well as acupuncture and physical
therapy.
Evidence of the plaintiff’s having sought care for his left
shoulder only weeks before this accident raises questions of
causation/aggravation of existing injuries. At this point, due to
the unknowns, we assess the possible verdict range as being between
$80,000 and $275,000, given the very wide range of reported
shoulder operation verdicts, and back injury awards as well. The
present settlement value should be, we believe, regarded as between
$70,000 and $110,000. We anticipate that the final verdict will be
settled by our insurance carrier. No additional exposure is
expected as the deductible has been paid.
William Hart
This case stems from a rear-end collision on July 15, 2017 in
Manhattan, in which our driver struck the plaintiff’s vehicle
from behind, at what he reports as under 5 m.p.h. Plaintiff has
filed a motion for summary judgment on liability, which is likely
to be granted, as this is close to automatic, unless something
unusual happened such as the front vehicle darting in front of the
rear vehicle abruptly. Here, our client driver does not dispute the
plaintiff’s account, and thus liability will not be an
issue.
Causation of the allegedly very extensive injuries is very much an
issue, however. Plaintiff has produced records of having undergone
two shoulder operations, as well as separate cervical and lumbar
spinal fusion operations, with implanted cervical cages and plate,
and lumbar cage, instrumentation and bone graft. In addition, he
underwent multiple epidural injections. He is a man in his mid-50s,
with possibly prior-existing conditions, and who was in an accident
subsequent to this one, in January of this year, just several
months prior to his two spinal fusion operations. He did not report
injuries from that accident; however, it appears from the police
report and insurance report to have prompted bodily injuries to the
two people in the other car; and he appears to have been more at
fault. The question thus arises of whether he did not report
injuries because he was at fault and knew he had a separate ongoing
case of his own in which he did not have liability.
As noted above with respect to Burton, the cost of spinal fusions,
especially in the Bronx, can easily exceed $1 million. This legal
proceeding involves two spinal fusions, in addition to two shoulder
operations that were performed three months after the accident.
Based upon those operations, plaintiff’s counsel has tendered
the case to James River, seeking the full policy.
It is, however, too early to assess the likelihood of a
seven-figure verdict, or even the settlement value of the case.
This is because there are many more medical records to obtain, as
well as suspicious circumstances calling causation issues into
question, including the low-impact nature of the collision; the
plaintiff’s having refused medical treatment from nearby
emergency medical personnel immediately after the accident; and the
fusion operations coming so long after the accident, and only
months subsequent to another accident.
Daniel Gelbtuch
Daniel Gelbtuch, who was employed by us beginning July 2017 and
terminated on September 13, 2018, claimed $91,500 for the immediate
payment of outstanding salary and benefits owed. On April 22, 2019,
we offered Mr. Gelbtuch $10,500 to settle the matter. Neither Mr.
Gelbtuch nor his counsel has responded to the offer. We have
accrued $40,000 at December 31, 2019 and 2018 in relation to this
claim.
Martin Limchayseng
An accident occurred on or about October 4, 2017 at the location of
251 Ave C, New York, New York, between a vehicle operated and
controlled by Martin Limchayseng, who was our driver, which said
vehicle was owned by plaintiff’s subrogor, and a motor
vehicle owned by a third party which was damaged in sum of $7,280.
There was no physical injury in this damage claim. This case is
investigated internally. There are no updates on this case as of
January 27, 2020. As of December 31, 2019, we have accrued $7,280
as accrued expense in relation to this claim.
ITEM 4 – MINE SAFETY
DISCLOSURES
Not applicable.
PART II
ITEM 5 – MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is currently traded on The Nasdaq Capital Market
under the symbol “DCAR”.
As of March 25, 2020, we had 33 holders of record of our common
stock. As of March 25, 2020, the closing bid price of our common
stock was $0.43 per share.
Dividend Policy
We have never paid a cash dividend on our common stock and do not
anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings to fund
ongoing operations and future capital requirements of our business.
Any future determination to pay cash dividends will be at the
discretion of the Board, in compliance with Delaware corporate law
and will be dependent upon our financial conditions, results of
operations, capital requirements and such other factors as the
Board deems relevant. Our preferred stock has the right to
participate in any declared dividend on common shares to the same
extent as if such preferred holders had converted each preferred
share to common stock.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6 - SELECTED FINANCIAL
DATA
We are a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act, and are not required to provide the information
required under this item.
ITEM 7
– MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis should be
read in conjunction with our historical financial statements and
the related notes thereto. This management’s discussion and
analysis contains forward-looking statements, such as statements of
our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking
statements. When used, the words “believe,”
“plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect”
and the like, and/or future tense or conditional constructions
(“will,” “may,” “could,”
“should,” etc.), or similar expressions, identify
certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those
under “Risk Factors” in our filings with the Securities
and Exchange Commission that could cause actual results or events
to differ materially from those expressed or implied by the
forward-looking statements. Our actual results and the timing of
events could differ materially from those anticipated in these
forward-looking statements as a result of several
factors.
Overview
Strategy
Prior to January 30, 2018, DropCar was a privately-held provider of
automotive vehicle support, fleet logistics and concierge services
for both consumers and the automotive industry. In 2015, we
launched our cloud-based Enterprise Vehicle Assistance and
Logistics (“VAL”) platform and mobile application
(“App”) to assist consumers and automotive-related
companies reduce the costs, hassles and inefficiencies of owning a
car, or fleet of cars, in urban centers. Our VAL platform is a
web-based interface to our core service that coordinates the
movements and schedules of trained valets who pickup and drop off
cars at dealerships and customer locations. The App tracks progress
and provides email and/or text notifications on status to
customers, increasing the quality of communication and subsequent
satisfaction with the service. To date, we operate primarily in the
New York metropolitan area and may expand our territory in the
future.
We achieve this balance of increased consumer flexibility and lower
consumer cost by aggregating demand for parking and other
automotive services and redistributing their fulfillment to
partners in the city and on city outskirt areas that have not
traditionally had access to lucrative city business. Beyond the
immediate unit economic benefits of securing bulk discounts from
vendor partners, we believe there is significant opportunity to
further provide additional products and services to clients across
the vehicle lifecycle.
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, face a similar urban
mobility challenge: getting cars to and from service bays,
rebalancing vehicle availability to meet demand and getting
vehicles from dealer lots to fleet locations.
We are able to offer our enterprise services at a fraction of the
cost of alternatives, including other third parties or expensive
in-house resources, given our pricing model that reduces and/or
eliminates any downtime expense while also giving clients access to
a network of trained valets on demand that can be scaled up or down
based on the real time needs of the enterprise client. We support
this model by maximizing the utilization of our employee-valet
workforce across a curated pipeline for both the consumer and
business network.
While our business-to-business (“B2B”) and
business-to-consumer (“B2C”) services generate revenue
and help meet the unmet demand for vehicle support services, we are
also building-out a platform and customer base that positions us
well for developments in the automotive space where vehicle
ownership becomes more car-shared or access based with
transportation services and concierge options well-suited to match
a customer’s immediate needs. For example, certain car
manufacturers are testing new services in which customers pay the
manufacturer a flat fee per month to drive a number of different
models for any length of time. We believe that our unique blend of
B2B and B2C services make us well suited to introduce, and provide
the services necessary to execute, this next generation of
automotive subscription services.
Merger with AYRO
On December 19, 2019, we entered into the AYRO Merger Agreement
with Merger Sub, and AYRO, pursuant to which, among other matters,
and subject to the satisfaction or waiver of the conditions set
forth in the AYRO Merger Agreement, Merger Sub will merge with and
into AYRO, with AYRO continuing as our wholly owned subsidiary and
the surviving corporation of the AYRO Merger. The AYRO Merger
is intended to qualify for federal income tax purposes as a
tax-free reorganization under the provisions of
Section 368(a) of the Internal Revenue Code of 1986, as
amended.
Subject to the terms and conditions of the AYRO Merger Agreement,
at the closing of the AYRO Merger, (a) each outstanding share
of AYRO common stock and AYRO preferred stock will be converted
into the right to receive shares of our common stock (after giving
effect to a reverse stock split of our common stock, as described
below) equal to the Exchange Ratio described below; and
(b) each outstanding AYRO stock option and AYRO warrant that
has not previously been exercised prior to the closing of the AYRO
Merger will be assumed by us.
Under the exchange ratio formula in the AYRO Merger Agreement (the
“Exchange Ratio”), upon the closing of the AYRO Merger,
on a pro forma basis and based upon the number of shares of our
common stock to be issued in the AYRO Merger, our current
shareholders (along with our financial advisor) will own
approximately 20% of the combined company and current AYRO
investors will own approximately 80% of the combined company
(including the additional financing transaction referenced below).
For purposes of calculating the Exchange Ratio, the number of
outstanding shares of our common stock immediately prior to the
AYRO Merger does not take into effect the dilutive effect of shares
of our common stock underlying options, warrants or certain classes
of preferred stock outstanding as of the date of the AYRO Merger
Agreement.
In connection with the AYRO Merger, we will seek the approval of
our stockholders to amend our certificate of incorporation to:
(i) effect a reverse split of our common stock at a ratio to
be determined by us, which is intended to ensure that the listing
requirements of the Nasdaq Capital Market, or such other stock
market on which our common stock is trading, are satisfied and
(ii) change our name to AYRO, Inc., subject to the
consummation of the AYRO Merger.
Prior to the execution and delivery of the AYRO Merger Agreement,
and as a condition of the willingness of the parties to enter into
the AYRO Merger Agreement, certain stockholders have entered into
agreements with AYRO pursuant to which such stockholders have
agreed, subject to the terms and conditions of such agreements, to
purchase, prior to the consummation of the AYRO Merger, shares of
AYRO’s common stock (or common stock equivalents) and
warrants to purchase AYRO 's common stock for an aggregate purchase
price of $2.0 million (the “AYRO Pre-Closing
Financing”). The consummation of the transactions
contemplated by such agreements is conditioned upon the
satisfaction or waiver of the conditions set forth in the AYRO
Merger Agreement. After consummation of the AYRO Merger, AYRO
has agreed to cause us to register the resale of our common stock
issued and issuable pursuant to the warrants issued to the
investors in the AYRO Pre-Closing Financing.
Consummation of the AYRO Merger is subject to certain closing
conditions, including, among other things, approval by our
stockholders and the stockholders of AYRO, the continued listing of
our common stock on the Nasdaq Stock Market after the AYRO Merger
and satisfaction of minimum net cash thresholds by us and
AYRO. In accordance with the terms of the AYRO Merger
Agreement, (i) certain executive officers, directors and
stockholders of AYRO (solely in their respective capacities as AYRO
stockholders) holding approximately 57% of the outstanding AYRO
capital stock have entered into voting agreements with us to vote
all of their shares of AYRO capital stock in favor of adoption of
the AYRO Merger Agreement (the “AYRO Voting
Agreements”) and (ii) certain executive officers,
directors and stockholders of ours (solely in their respective
capacities as our stockholders) holding approximately 10% of the
outstanding our common stock have entered into voting agreements
with AYRO to vote all of their shares of our common stock in favor
of approval of the AYRO Merger Agreement (the “DropCar Voting
Agreements”, and together with the AYRO Voting Agreements,
the “Voting Agreements”). The Voting Agreements
include covenants with respect to the voting of such shares in
favor of approving the transactions contemplated by the AYRO Merger
Agreement and against any competing acquisition proposals. In
addition, concurrently with the execution of the AYRO Merger
Agreement, (i) certain executive officers, directors and
stockholders of AYRO and (ii) certain directors of ours have
entered into lock-up agreements (the “Lock-Up
Agreements”) pursuant to which they accepted certain
restrictions on transfers of shares of our common stock for the
one-year period following the closing of the AYRO
Merger.
The AYRO Merger Agreement contains certain termination rights for
both us and AYRO, and further provides that, upon termination of
the AYRO Merger Agreement under specified circumstances, either
party may be required to pay the other party a termination fee of
$1,000,000, or in some circumstances reimburse the other
party’s reasonable expenses.
At the effective time of the AYRO Merger, our Board of Directors is
expected to consist of seven members, three of whom will be
designated by AYRO, three of whom will be designated by us and one
of whom will be designated by the lead investor in the AYRO
Pre-Closing Financing. The AYRO Merger Agreement contains certain
provisions providing for the ability of AYRO to designate
additional members upon the achievement of certain business
milestones. As a condition to the consummation of the AYRO Merger,
we will immediately prior to the AYRO Merger enter into an
executive employment agreement with Rodney Keller, the current
chief executive officer of AYRO.
Simultaneously with the execution of the AYRO Merger Agreement,
AYRO entered into a Loan and Security Agreement, dated December 19,
2019 (the “Loan Agreement”), by and among AYRO and the
financial institutions and individuals signatories thereto,
pursuant to which, on December 19, 2019, AYRO received aggregate
gross proceeds of $1,000,000. Pursuant to the Loan Agreement, the
aggregate obligations of AYRO under the Loan Agreement are to
automatically, immediately prior to the consummation of the AYRO
Merger, convert into shares of AYRO common stock, subject to the
terms and provisions of the Loan Agreement. Pursuant to the Loan
Agreement, upon conversion of the term loans made by the investors
subject to the terms of the Loan Agreement, AYRO is required to
cause us to issue each bridge investor warrants to purchase our
common stock. Upon consummation of the AYRO Merger, AYRO has agreed
to cause us to register the resale of the warrant
shares.
In connection with the AYRO Merger, AYRO entered into the Stock
Subscription Agreement with an accredited investor, pursuant to
which, immediately prior to the AYRO Merger, AYRO will issue up to
an aggregate of 1,750,000 shares of AYRO common stock for the
nominal per share purchase price of $0.001 per share, or, if
applicable, pre-funded warrants to purchase AYRO common stock, in
lieu of AYRO common stock. The consummation of the transactions
contemplated by the Stock Subscription Agreement is conditioned
upon the satisfaction or waiver of the conditions set forth in the
AYRO Merger Agreement.
Discontinued Operations – DropCar Operating
On December 19, 2019 and concurrently upon entering in the AYRO
Merger Agreement, we entered into an asset purchase agreement
(“Asset Purchase Agreement”) by and among us,
DropCar Operating Company, Inc., a Delaware corporation and our
wholly owned subsidiary (“DropCar Operating”), and DC
Partners Acquisition, LLC (the “Purchaser”), Spencer
Richardson, our Co-Founder and Chief Executive Officer, and David
Newman, our Co-Founder and Chief Business Development Officer ,
pursuant to which we agreed to sell substantially all of the assets
associated with our DropCar Operating business of providing vehicle
support, fleet logistics and concierge services. The aggregate
purchase price for the purchased assets consists of the
cancellation of certain liabilities pursuant to those certain
employment agreements by and between DropCar Operating and each of
Mr. Richardson and Mr. Newman, plus the assumption of certain
liabilities relating to or arising out of workers’
compensation claims that occurred prior to the closing date of the
Asset Purchase Agreement. The sale of
DropCar Operating represented a strategic shift that has had a
major effect on our operations, and therefore, was presented as
discontinued operations in the consolidated statement of operations
and consolidated statement of cash flows.
Our Ability to Continue as a Going Concern
Our financial statements as of December 31, 2019 were prepared
under the assumption that we will continue as a going concern. The
independent registered public accounting firm that audited our 2019
financial statements, in their report, included an explanatory
paragraph referring to our recurring losses since inception and
expressing substantial doubt in our ability to continue as a going
concern. Our financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Our ability
to continue as a going concern depends on our ability to obtain
additional equity or debt financing, attain further operating
efficiencies, reduce expenditures, and, ultimately, to generate
additional revenue. We cannot assure you, however, that we will be
able to achieve any of the foregoing.
There
have been recent outbreaks in several countries, including the
United States, of the highly transmissible and pathogenic
coronavirus. The outbreak of such communicable diseases could
result in a widespread health crisis that could adversely affect
general commercial activity and the economies and financial markets
of many countries, including the United States. At the time of this
filing, the coronavirus has not had a material impact to our
operations or financial results, however any future impacts of the
coronavirus are highly uncertain and cannot be predicted. An
outbreak of communicable diseases, or the perception that such an
outbreak could occur, and the measures taken by the governments of
countries affected could adversely affect our business, financial
condition, and results of operations.
Merger with WPCS
On January 30, 2018, we completed our business combination with
DropCar, Inc. (“Private DropCar”) in accordance with
the terms of the Agreement and Plan of Merger and Reorganization,
dated as of September 6, 2017, as subsequently amended, by and
among us, DC Acquisition Corporation (“WPCS Merger
Sub”), and Private DropCar (as amended, the “WPCS
Merger Agreement”), pursuant to which WPCS Merger Sub merged
with and into Private DropCar, with Private DropCar surviving as
our wholly owned subsidiary (the “WPCS Merger”). On
January 30, 2018, in connection with, and prior to the completion
of, the WPCS Merger, we effected a 1:4 reverse stock split of our
common stock (the “Reverse Stock Split”), and on
January 30, 2018, immediately after completion of the WPCS Merger,
we changed our name to “DropCar, Inc.”
Under the terms of the WPCS Merger Agreement, we issued shares of
our common stock to Private DropCar’s stockholders, at an
exchange ratio of 0.3273 shares of our common stock (the
“WPCS Exchange Ratio”), after taking into account the
Reverse Stock Split, for each share of (i) Private DropCar common
stock and preferred stock and (ii) Private DropCar warrants, in
each case, outstanding immediately prior to the WPCS Merger. The
WPCS Exchange Ratio was determined through arms’-length
negotiations between us and Private DropCar.
In connection with the WPCS Merger, Private DropCar was deemed to
be the accounting acquirer because the stockholders of Private
DropCar effectively control the combined company following the WPCS
Merger. The WPCS Merger was treated as a reverse
acquisition.
Divestiture of Suisun City Operations, a wholly owned subsidiary of
DropCar, Inc.
On December 24, 2018, we completed the sale of 100% of the
corporate capital of WPCS International - Suisun City, Inc. (the
“Suisun City Operations”), our wholly owned subsidiary.
In accordance with accounting guidance, a business segment that is
disposed of meets the criteria to be classified as a discontinued
operation. As all of the required criteria for the discontinued
operation classification were met, the revenue and expenses for
this operation were included in the income from operations of
discontinued component, on the Consolidated Statement of
Operations. The net sales of this business in 2018 prior to the
divestiture were approximately $13.7 million. The sale price was
$3.5 million paid in cash and resulted in a loss on the sale in the
amount of $4.2 million. This loss is presented as part of
discontinued operations, separate from continuing operations, on
the Consolidated Statement of Operations, resulting in an increase
in loss per share of approximately $2.85 for the year ended
December 31, 2018.
Recent Developments
Nasdaq Hearing
On September 6, 2019, we received notification from The Nasdaq
Stock Market (“Nasdaq”) stating that we did not comply
with the minimum $1.00 bid price requirement for continued listing
set forth in Listing Rule 5550(a)(2) (the “Listing
Rule”). In accordance with Nasdaq listing rules, we were
afforded 180 calendar days (until March 4, 2020) to regain
compliance with the Listing Rule. On March 5, 2020, we received
notification from the Listing Qualification Department of Nasdaq
that we had not regained compliance with the Listing Rule. The
notification indicated that our common stock would be delisted from
the Nasdaq Capital Market unless we request an appeal of this
determination. On March 12, 2020, we requested a hearing to appeal
the determination with the Nasdaq Hearings Panel (the
“Panel”), which will stay the delisting of our
securities pending the Panel’s decision. The hearing is
scheduled for April 16, 2020. Our appeal to the Panel included a
plan that sets forth a commitment to consider all available options
to regain compliance with the Listing Rule, including the option to
effectuate a reverse stock split upon receipt of stockholder
approval, which we intend to seek in connection with the joint
proxy statement and consent solicitation statement/prospectus filed
with the Securities and Exchange Commission on February 14, 2020 in
connection with the AYRO Merger, in order to bring our stock price
over the $1.00 bid price requirement and to meet the $4.00 bid
price initial listing requirement. However, there can be no
assurance that we will be successful in regaining compliance with
the Listing Rule.
Exchange Agreements
On February 5, 2020, we entered into separate exchange agreements
(the “Exchange Agreements”) with the holders of
existing Series H-5 Convertible Preferred Stock (the
“Series H-5 Shares”), par value $0.0001 per
share, to exchange an equivalent number of shares of our
Series H-6 Convertible Preferred Stock (the “Series H-6
Shares”), par value $0.0001 per share (the
“Exchange”). The Exchange closed on February 5, 2020.
The purpose of the exchange was to include voting
rights.
On February 5, 2020, we filed the Certificate of Designations,
Preferences and Rights of the Series H-6 Shares (the “Series
H-6 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-6 Shares. We designated up
to 50,000 shares of Series H-6 Shares and each share has a stated
value of $72.00 (the “Stated Value”). Each Series H-6
Share is convertible at any time at the option of the holder
thereof, into a number of shares of common stock of the Company
determined by dividing the H-6 Stated Value by the initial
conversion price of $0.72 per share, subject to a 9.99% blocker
provision. The Series H-6 Shares have the same dividend rights as
the common stock, except as provided for in the Series H-6
Certificate of Designation or as otherwise required by law. The
Series H-6 Shares also have the same voting rights as the common
stock, except that in no event shall a holder of Series H-6 Shares
be permitted to exercise a greater number of votes than such holder
would have been entitled to cast if the Series H-6 Shares had
immediately been converted into shares of common stock at a
conversion price equal to $0.78 (subject to adjustment for stock
splits, stock dividends, recapitalizations, reorganizations,
reclassifications, combinations, reverse stock splits or other
similar events). In addition, a holder (together with its
affiliates) may not be permitted to vote Series H-6 Shares held by
such holder to the extent that such holder would beneficially
own more than 9.99% of our common stock. In the event of any
liquidation or dissolution, the Series H-6 Shares ranks senior to
the common stock in the distribution of assets, to the extent
legally available for distribution.
Securities Offerings
Private Placements
On March 8, 2018, we entered into a Securities Purchase Agreement
with certain institutional and accredited investors, pursuant to
which we issued to the investors an aggregate of 26,843 shares of
our Series H-4 Convertible Preferred Stock, par value $0.0001 per
share (the “Series H-4 Shares”), and warrants to
purchase 447,383 shares of our common stock, with an original
exercise price of $15.60 per share, subject to adjustments (the
“Series H-4 Warrants”). The purchase price per Series
H-4 Share 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 Series H-4 Warrants was approximately $6.0 million.
Subject to certain ownership limitations, the Series H-4 Warrants
are immediately exercisable will be exercisable for a period of
five years from the issuance date. The Series H-4 Shares are
convertible into aggregate of 447,383 shares of common
stock.
On March 8, 2018, we filed the Certificate of Designations,
Preferences and Rights of the Series H-4 Convertible Preferred
Stock (the “Series H-4 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 Shares. We designated up to 30,000 shares of Series H-4 Shares
and each share has a stated value of $235.50 (the “H-4 Stated
Value”). Each share of Series H-4 Shares is convertible at
any time at the option of the holder thereof, into a number of
shares of common stock determined by dividing the H-4 Stated Value
by the conversion price of $14.13 per share, subject to a 9.99%
blocker provision. The Series H-4 Shares have the same dividend
rights as the common stock, and no voting rights except as provided
for in the Series H-4 Certificate of Designation or as otherwise
required by law. In the event of any liquidation or dissolution of
the Company, the Series H-4 Shares rank senior to the common stock
in the distribution of assets, to the extent legally available for
distribution.
On March 26, 2019, we entered into a Securities Purchase Agreement
with certain existing investors, pursuant to which we sold, in a
registered public offering by us directly to the investors, an
aggregate of 478,469 shares of common stock, at an offering price
of $4.18 per share for proceeds of $1,985,001 net of offering
expenses of $15,000.
On December 6, 2019, we entered into a Securities Purchase
Agreement with certain institutional and accredited investors,
pursuant to which we issued to the investors an aggregate of 34,722
Series H-5 Shares convertible into an aggregate of 3,472,200 shares
of our common stock, and warrants to purchase 3,472,200 shares of
our common stock, with an exercise price of $0.792 per share,
subject to adjustments. The purchase price per Series H-5 Share was
$72.00, equal to (i) the closing price of the Common Stock on the
Nasdaq Capital Market on December 5, 2019, plus $0.125 multiplied
by (ii) 100. The aggregate purchase price for the Series H-5 Shares
and H-5 Warrants was approximately $2.5 million. Subject to certain
ownership limitations, the H-5 Warrants will be exercisable
beginning six months from the issuance date and will be exercisable
for a period of five years from the initial exercise date. As
described above under “Recent Developments – Exchange
Agreements,” on February 5, 2020, we entered into Exchange
Agreements with the holders of existing Series H-5
Shares to exchange an equivalent number of shares of our
Series H-6 Shares. The Exchange closed on February 5,
2020.
Warrants
On the December 6, 2019, the Company issued warrants to purchase
3,715,254 shares of common stock of the Company, with an exercise
price of $0.792 per share, subject to adjustments (the “H-5
Warrants”). Subject to certain ownership limitations, the H-5
Warrants will be exercisable beginning six months from the issuance
date and will be exercisable for a period of five years from the
initial exercise date.
The holders of the H-5 Warrants 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
exercise price (subject to a floor of $0.1584 per share).
The H-5 Warrants contain a blocker that prohibits the holder from
exercising the warrants if such exercise will result in the
beneficial ownership by the holder of more than 9.99% of the
Company’s outstanding shares.
During the year ended December 31, 2019, we issued 277,778 shares
of common stock upon the exercise of pre-funded Series K warrants
(the “Series K Warrants”) and received aggregate
proceeds of $16,667.
On April 19, 2018, we entered into separate Warrant Exchange
Agreements (the “Warrant Exchange Agreements”) with the
holders (the “Merger Warrant Holders”) of existing
merger warrants (the “Merger Warrants”) to purchase
shares of common
stock, pursuant to which, on
the closing date, the Merger Warrant Holders exchanged each Merger
Warrant for 1/18 of a share of common
stock and 1/12 of a
warrant to purchase a share of common
stock (collectively, the
“Series I Warrants”). The Series I Warrants have an
exercise price of $13.80 per share. In connection with the Warrant
Exchange Agreements, we issued an aggregate of (i) 48,786 new
shares of common stock and (ii) Series I Warrants to purchase an
aggregate of 73,178 shares of common stock.
On August 31, 2018, we offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of our
outstanding Series H-4 Warrants to purchase common stock issued on
March 8, 2018 (the “Series H-4 Warrants”) the
opportunity to exercise such Series H-4 Warrants for cash at a
reduced exercise price of $3.60 per share (the “Reduced
Exercise Price”) provided such Series H-4 Warrants were
exercised for cash on or before September 4, 2018 (the “End
Date”). The Series H-4 Warrants contain anti-dilution price
protection that was triggered upon the issuance of the Series H-5
Warrants, causing the exercise price to decrease from $3.60 per
share to $3.12 per share. In addition, we issued a
“reload” warrant (the “Series J Warrants”)
to each Holder who exercised their Series H-4 Warrants prior to the
End Date, covering one share for each Series H-4 Warrant exercised
during that period. The terms of the Series J Warrants are
substantially identical to the terms of the Series H-4 Warrants
except that (i) the exercise price is equal to $6.00, (ii) the
Series J Warrants may be exercised at all times beginning on the
6-month anniversary of the issuance date on a cash basis and also
on a cashless basis, (iii) the Series J Warrants do not contain any
provisions for anti-dilution adjustment and (iv) we have the right
to require the Holders to exercise all or any portion of the Series
J Warrants still unexercised for a cash exercise if the
volume-weighted average (as defined in the Series J Warrant) for
our common stock equals or exceeds $9.00 for not less than ten
consecutive trading days.
On September 4, 2018, we received executed Repricing Offer Letters
from a majority of the Holders, which resulted in the issuance of
260,116 shares of our common stock and Series J Warrants to
purchase up to 260,116 shares of our common stock. We received
gross proceeds of approximately $936,000 from the exercise of the
Series H-4 Warrants pursuant to the terms of the Repricing Offer
Letter.
On September 5, 2018, we received a request from Nasdaq to amend
our Series H-4 Warrants to provide that the Series H-4 Warrants may
not be exercised until we have obtained stockholder approval of the
issuance of common stock underlying the Series H-4 Warrants
pursuant to the applicable rules and regulations of Nasdaq. In
response to the request, on September 10, 2018, we entered into an
amendment (the “Warrant Amendment”) with the holders of
the Series H-4 Shares to provide for stockholder approval as
described above prior to the exercise of the Series H-4 Warrants.
We received stockholder approval of the issuance of common stock
underlying the Series H-4 Shares on November 15, 2018.
On November 14, 2018, we entered into a Securities Purchase
Agreement with an existing investor, pursuant to which we issued,
in a registered direct offering, the Series K Warrants to purchase
277,778 shares of common stock, in lieu of shares of common stock
because the purchase of common stock would have caused the
beneficial ownership of the purchaser, together with its affiliates
and certain related parties, to exceed 9.99% of our outstanding
common stock. The price to the purchaser for each
Series K Warrant was $3.54 and the Series K Warrants are
immediately exercisable at a price of $0.06 per share of common
stock. The Series K Warrants and shares of common stock for
which they may be exercised were offered pursuant to a registration
statement on Form S-3 (File No. 333-227858).
Consulting Agreement, Related Parties
On July 11, 2018, we entered into a consulting agreement (the
“Consulting Agreement”) with Ascentaur, LLC
(“Ascentaur”). Sebastian Giordano is the Chief
Executive Officer of Ascentaur. Mr. Giordano has served on our
board of directors since February 2013 and served as our Interim
Chief Executive Officer from August 2013 through April 2016 and as
our Chief Executive Officer from April 2016 through January
2018.
Pursuant to the terms of the Consulting Agreement, Ascentaur has
agreed to provide advisory services with respect to our strategic
development and growth, including advising us on market strategy
and overall strategy, advising us on the sale of our WPCS
International Incorporated (“WPCS”) business segment,
providing assistance to us in identifying and recruiting
prospective employees, customers, business partners, investors and
advisors that offer desirable administrative, financing,
investment, technical, marketing and/or strategic expertise, and
performing such other services pertaining to our business as we and
Ascentaur may from time to time mutually agree. As consideration
for its services under the Consulting Agreement, Ascentaur is
entitled to receive (i) a fee of $10,000 per month for a period of
nine months from the effective date of the Consulting Agreement,
(ii) a lump sum fee of $90,000 upon the closing of the sale of our
WPCS business segment and (iii) reimbursement for reasonable and
customary business expenses incurred in connection with
Ascentaur’s performance under the Consulting Agreement. The
term of the Consulting Agreement commenced on July 11, 2018 and
will continue until April 9, 2019 or until terminated in accordance
with the terms of the Consulting Agreement. During the year ended
December 31, 2019, we recorded $33,733 as general and
administrative related to the Consulting Agreement. For the year
ended December 31, 2019, approximately $130,557 was paid in cash
and $0 is recorded as accounts payable. During the year ended
December 31, 2018, we recorded $147,754 as general and
administrative related to the Consulting Agreement. As of December
31, 2018, approximately $51,000 was paid in cash and approximately
$97,000 was recorded as accounts payable. Of this amount, Ascentaur
received $90,000 in relation to the sale of Suisun City
Operations.
During 2018 and 2017, we entered into various financial
transactions with Alpha Capital Anstalt, including the issuance of
(i) $1,350,000 in convertible notes in 2017, (ii) 213,707 shares of
common stock in connection with the WPCS Merger on January 30, 2018
for merger related services and cost of providing capital, (iii)
11,093 Series A Preferred Stock for $2,612,500 in the March 8, 2018
PIPE transaction, and (iv) 277,778 Series K prefunded common stock
warrants on November 14, 2018 for proceeds of approximately
$983,000.
Palladium Capital Advisors (“Palladium”) has provided
investment banking services in connection with the WPCS Merger on
January 30, 2018 and received 35,558 shares of common stock for
merger related services, received 1,371 Series H-4 Shares and H-4
Warrants in the March 8, 2018 PIPE Transaction for advisory
services, and in connection with the December 6, 2019 transaction
received $200,000 and 243,054 H-5 Warrants.
On December 5, 2019, we entered into a placement agent and merger
advisory agreement with Palladium whereby we shall pay to Palladium
a cash fee equal to 8% of the aggregate gross proceeds raise in
closing of each financing transaction and warrants to purchase that
number of shares of our common stock equal to 7% of the aggregate
number of shares of common stock sold in each offering. The
warrants will be identical to any warrants issued to investors at
such closing, provide for a cashless exercise, have an exercise
price equal to the offering price per share in the closing, and
expire on the five year anniversary at such closing. In addition,
we shall pay Palladium compensation for advisory services in
connection with a possible business combination with an
unaffiliated third party whereby we shall issue the number of
shares of common stock of the post-merger entity immediately after
the AYRO Merger that represents 2.5% of the outstanding shares of
common stock in any surviving post-merger entity.
Results of Operations
We have never been profitable and have incurred significant
operating losses in each year since inception. Overall loss for the
years ended December 31, 2019 and 2018, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
|
Operating
expenses
|
$2.5
|
$2.2
|
|
Operating
loss
|
(2.5)
|
(2.2)
|
|
|
|
|
|
Interest
expense
|
-
|
(0.7)
|
|
|
|
|
|
Loss from
continuing operations
|
(2.5)
|
(2.9)
|
|
|
|
|
|
Loss from
operations of discontinued component
|
(2.4)
|
(11.7)
|
|
Loss on sale of
component
|
-
|
(4.2)
|
|
Consolidated net
loss
|
(4.9)
|
(18.8)
|
|
Deemed
dividend on Series H-4 warrant and preferred stock
modification
|
(0.1)
|
-
|
|
Deemed
dividend on exchange of warrants
|
-
|
(1.4)
|
|
Consolidated net
loss attributable to common stockholders
|
$(5.0)
|
$(20.2)
|
Substantially all of our operating losses from continuing
operations resulted from general and administrative costs
associated with our continuing operations. General and
administrative expenses consist primarily of costs associated with
our overall operations and being a public company. These costs
include personnel, legal and financial professional services,
insurance, investor relations, and compliance related fees.
As of December 31, 2019, we had a net
working capital of approximately $2.4 million.
Components of Statements of Operations
General and Administrative. General and administrative
expenses consist primarily of public company expenses for
administrative, human resources, legal, finance and accounting
personnel, professional fees, insurance and other corporate
expenses. We anticipate that we will incur additional personnel
expenses, professional service fees, including audit and legal,
investor relations, costs of compliance with securities laws and
regulations, and higher director and officer insurance costs
related to operating as a public company. As a result, we expect
that our general and administrative expenses will continue to
increase in the future.
Discontinued Operations
DropCar Operating
On December 19, 2019, we entered into the Asset Purchase Agreement
with DropCar Operating, DC Partners, Spencer Richardson, our
Co-Founder and Chief Executive Officer, and David Newman, our
Co-Founder and Chief Business Development Officer to sell substantially all of the assets associated
with the DropCar Operating business. Operating results for the
years ended December 31, 2019 and 2018 for the DropCar Operating
business are presented as discontinued operations and the assets
and liabilities classified as held for sale are presented
separately in the balance sheet.
A breakdown of the discontinued operations is presented as
follows:
|
|
|
|
|
|
|
|
SERVICE REVENUES
|
$4,579,745
|
$6,077,667
|
|
COST OF REVENUE
|
4,172,320
|
7,863,673
|
|
GROSS PROFIT (LOSS)
|
407,425
|
(1,786,006)
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
Research
and development
|
205,000
|
322,269
|
|
General
and administrative
|
2,245,394
|
9,119,772
|
|
Depreciation
and amortization
|
395,081
|
354,657
|
|
TOTAL OPERATING
EXPENSES
|
2,845,475
|
9,796,698
|
|
|
|
|
|
OPERATING
LOSS
|
(2,438,050)
|
(11,582,704)
|
|
|
|
|
|
Other
income, net
|
12,827
|
-
|
|
Interest
expense, net
|
-
|
(409,082)
|
|
|
|
|
|
LOSS FROM DROPCAR DISCONTINUED OPERATIONS
|
(2,425,223)
|
(11,991,786)
|
|
INCOME FROM SUISUN CITY DISCONTINUED OPERATIONS
|
-
|
315,119
|
|
LOSS FROM OPERATIONS OF DISCONTINUED
COMPONENTS
|
(2,425,223)
|
(11,676,667)
|
|
LOSS ON SALE OF SUISUN CITY COMPONENT
|
-
|
(4,169,718)
|
|
LOSS FROM DISCONTINUED
OPERATIONS
|
$(2,425,223)
|
$(15,846,385)
|
Assets and liabilities of discontinued operations held for sale
included the following:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$81,457
|
$415,569
|
|
Accounts
receivable, net
|
210,671
|
295,626
|
|
Prepaid
expenses and other current assets
|
83,058
|
107,768
|
|
Current
assets held for sale
|
$375,186
|
$818,963
|
|
|
|
|
|
Property
and equipment, net
|
$25,723
|
$39,821
|
|
Capitalized
software costs, net
|
410,261
|
659,092
|
|
Operating
lease right-of-use asset
|
1,886
|
-
|
|
Other
assets
|
3,525
|
3,525
|
|
Noncurrent
assets held for sale
|
$441,395
|
$702,438
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
737,862
|
1,033,489
|
|
Deferred
revenue
|
302,914
|
253,200
|
|
Current
liabilities held for sale
|
$1,040,776
|
$1,286,689
|
Suisun City Operations
On December 10, 2018, we signed a definitive agreement with a
private corporation and completed the sale on December 24, 2018 of
100% of the Suisun City Operations, our wholly owned subsidiary,
for a total cash consideration of $3.5 million. We recognized the
following loss on sale of component on the date of
sale:
|
Sales
price
|
$3,500,000
|
|
Commissions
and various transaction costs
|
(332,220)
|
|
Net
sales proceeds
|
3,167,780
|
|
|
|
|
Carrying
amounts of assets, net of liabilities*
|
7,337,498
|
|
Loss
on sale of Suisun City Operations
|
$(4,169,718)
|
* The carrying amounts of assets included cash of $1,504,366;
accounts receivable and contract asset of $4,177,568; prepaid
expenses and other current assets of $57,486; property and
equipment of $295,206; intangibles and goodwill of $5,048,247;
carrying amounts of liabilities included accounts payable and
accrued liabilities of $3,688,831 and loans of
$56,544.
The operations and cash flows of the Suisun City Operations were
eliminated from ongoing operations following its sale. The
operating results of the Suisun City Operations for
the consolidated period between January 30, 2018 and
December 24, 2018 were as follows:
|
Revenues
|
$13,730,252
|
|
Cost
of revenues
|
10,836,754
|
|
Gross
profit
|
2,893,498
|
|
|
|
|
Selling,
general and administrative expenses
|
2,285,661
|
|
Depreciation
and amortization
|
287,830
|
|
Total
Operating Expenses
|
2,573,491
|
|
|
|
|
Interest
expense, net
|
4,888
|
|
|
|
|
Net
income from operations of discontinued component
|
$315,119
|
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of our financial statements and related disclosures requires us to
make estimates, assumptions and judgments that affect the reported
amount of assets, liabilities, revenue, costs and expenses and
related disclosures. We believe that the estimates, assumptions and
judgments involved in the accounting policies described below have
the greatest potential impact on our financial statements and,
therefore, we consider these to be our critical accounting
policies. Accordingly, we evaluate our estimates and assumptions on
an ongoing basis. Our actual results may differ from these
estimates under different assumptions and conditions. See Note 3 to
our audited financial statements for the years ended December 31,
2019 and 2018 for information about these critical accounting
policies, as well as a description of our other significant
accounting policies.
Stock-based compensation
We account for all stock options using a fair value-based method.
The fair value of each stock option granted to employees is
estimated on the date of the grant using the Black-Scholes
option-pricing model and the related stock-based compensation
expense is recognized over the vesting period during which an
employee is required to provide service in exchange for the award.
The fair value of the options granted to non-employees is measured
and expensed as the options vest.
Comparison of Years Ended December 31, 2019 and 2018–
Continuing Operations
General and Administrative
General and administrative expenses for the year ended December 31,
2019 totaled $2.5 million, an increase of $0.3 million, compared to
$2.2 million recorded for the year ended December 31, 2018. This
was primarily attributable to an increase of $0.2 million in
stock-based compensation and $0.1 million in other
costs.
Interest Expense
Interest expense for the year ended December 31, 2019 totaled $0, a
decrease of $0.7 million, compared to $0.7 million recorded for the
year ended December 31, 2018. This was primarily attributable to
interest expense in relation to the Lock-Up Agreements recorded for
the year ended December 31, 2018 in the amount of $0.7
million.
Liquidity and Capital Resources
For the years ended December 31, 2019 and 2018, we had
net losses from continuing operations of approximately $2.5 million
and $2.9 million, respectively. At December 31, 2019, we had
an accumulated deficit of $34.7 million. We anticipate that we will
continue to incur net losses into the foreseeable future and will
need to raise additional capital to continue. At December 31, 2019,
we had cash and cash equivalents of $4.3 million. At these
capital levels, we believe we do not have sufficient funds to
continue to operate for a 12 month period from the date of the
financial statements included in this Annual Report on Form 10-K,
by which point we will need to become profitable, improve cash flow
from operations, begin selling property and equipment, or complete
a new capital raise. These factors raise substantial doubt about
the Company’s ability to continue as a going
concern.
Our operations may be affected by the recent and ongoing outbreak
of the coronavirus disease 2019 (COVID-19) which in March 2020, was
been declared a pandemic by the World Health Organization. The
ultimate disruption which may be caused by the outbreak is
uncertain; however, it may result in a material adverse impact on
our financial position, operations and cash flows. Possible areas
that may be affected include, but are not limited to, disruption to
our customers and revenue, labor workforce, and the decline in
value of assets held by us, including, property and equipment and
capitalized software.
On
February 12, 2020, we received a notice from the New York State
Department of Labor stating we have a negative balance in our
experience rating account of approximately $165,000. The notice
states we may make a voluntary payment of approximately $165,000.
We do not expect to make this payment which will result in an
increase to our future unemployment insurance rates. We will need
to pay the max rate for a three-year period for not making the
payment.
Our plans include raising funds from outside investors and
consummating our merger with AYRO. However, there is no assurance
that our merger with AYRO will be consummated, outside funding will
be available to us, outside funding will be obtained on favorable
terms or will provide us with sufficient capital to meet our
objectives. 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. As such, the consolidated financial
statements have been prepared under the assumption the Company will
continue as a Going Concern.
On March 26, 2019, we entered into a Securities Purchase Agreement
with certain existing investors, pursuant to which we issued to the
investors an aggregate of 478,469 shares of common stock, at an
offering price of $4.18 per share for proceeds of approximately
$2.0 million, net of offering expenses of $15,000.
On December 6, 2019, we entered into the a Securities Purchase
Agreement, pursuant to which we issued to the investors an
aggregate of 34,722 shares of our Series H-5 Shares and the Series
H-5 Warrants. The aggregate purchase price for the Series H-5
Shares and H-5 Warrants was approximately $2.3 million, net of
offering expenses of $200,000.
During the year ended December 31, 2019, we issued 277,778 shares
of common stock upon the exercise of Series K Warrants and received
aggregate proceeds of $16,667.
Our independent registered public accounting firm included an
explanatory paragraph about the existence of substantial doubt
concerning our ability to continue as a going concern in its report
on our financial statements as of and for the year ended
December 31, 2019. Note 2 to our financial statements includes
management’s discussion on our ability to fulfill our
obligations as dependent upon our ability to raise additional
financing.
Our future capital requirements and the period for which we expect
our existing resources to support our operations may vary
significantly from what we currently expect. Our monthly spending
levels vary based on new and ongoing technology developments and
corporate activities.
We have historically financed our activities through the sale of
our equity securities (including convertible preferred stock) and
the issuance of convertible notes. We will need to raise
significant additional capital and we plan to continue to fund our
current operations, and the associated losses from continuing
operations, through future issuances of debt and/or equity
securities and potential collaborations or strategic partnerships
with other entities. The capital raises from issuances of
convertible debt and equity securities could result in additional
dilution to our stockholders. In addition, to the extent we
determine to incur additional indebtedness, our incurrence of
additional debt could result in debt service obligations and
operating and financing covenants that would restrict our
operations. We can provide no assurance that financing will be
available in the amounts we need or on terms acceptable to us, if
at all. If we are not able to secure adequate additional working
capital when it becomes needed, we may be required to make
reductions in spending, extend payment terms with suppliers,
liquidate assets where possible and/or suspend or curtail
operations. Any of these actions could materially harm our
business.
Cash Flows
Operating Activities – Continuing Operations
We have historically experienced negative cash outflows. Our
primary uses of cash from operating activities are the costs
associated with continuing as a public company.
Net cash used in operating activities for the year ended December
31, 2019 was approximately $2.1 million, which includes a net loss
from continuing operations of approximately $2.5 million, offset by
non-cash expenses of approximately $0.3 million related to
stock-based compensation expense, and approximately $0.1 million of
cash provided by a change in net working capital items principally
related to the decrease in prepaid expenses and other
assets.
Net cash used in operating activities for the year ended December
31, 2018 was approximately $1.1 million, which includes a net loss
from continuing operations of approximately $2.9 million, offset by
non-cash expenses of approximately $0.8 million principally related
to $0.7 million of non-cash interest expense, and approximately
$1.1 million of cash provided from a change in net working capital
items principally related to $1.3 million for the increase in
accounts payable and accrued expenses, partially offset by $0.2
million of cash used from the increase in prepaid expenses and
other assets.
Investing Activities – Continuing Operations
There were no cash flows from investing activities for the year
ended December 31, 2019.
Cash provided by investing activities for the year ended December
31, 2018 of approximately $7.0 primarily resulted from cash
received upon acquisition of $5.0 million and proceeds from sale of
components, net of cash relinquished of approximately $2.0
million.
Financing Activities – Continuing Operations
Cash provided by financing activities for the year ended December
31, 2019 totaled approximately $4.1 million, primarily resulting
from proceeds of $2.0 million from the sale of the common stock and
net proceeds of $2.3 million from the sale of Series H-5 Shares and
Series H-5 Warrants, partially offset by excess tax benefits paid
of approximately $0.2 million.
Cash provided by financing activities for the year ended December
31, 2018 totaled approximately $8.1 million, primarily resulting
from proceeds of $6.0 million from the sale of the Series H-4
Shares and Series H-4 Warrants, $0.9 million from the issuance of
common stock in connection with exercise of Series H-4 Warrants,
$0.3 million from the sale of common stock and $1.0 million
for the sale of Series K Warrants, offset by financing costs
related to the Series H-4 Shares and Series H-4 Warrants of
approximately $0.1 million.
Off-Balance Sheet Arrangements
We did not engage in any “off-balance sheet
arrangements” (as that term is defined in Item 303(a)(4)(ii)
of Regulation S-K) and do not have any holdings in variable
interest entities as of December 31, 2019.
ITEM 7A
– QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act, and are not required to provide the information
required under this item.
ITEM 8
– FINANCIAL STATEMENTS
Our audited consolidated financial statements as of, and for the
years ended December 31, 2019 and 2018 are included beginning on
Page F-1 immediately following the signature page to this report.
See Item 15 for a list of the financial statements included
herein.
ITEM 9
– CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
– CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company maintains disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are
designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms and that such information is accumulated and
communicated to our management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), as
appropriate, to allow timely decisions regarding required
disclosure.
Our management, including the CEO and CFO, evaluated the design and
operation of our disclosure controls and procedures pursuant to
Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December
31, 2019. Based on such evaluation, our CEO and CFO concluded the
disclosure controls and procedures were not effective due to the
material weaknesses in internal control over financial reporting
described below.
(b)
Management’s report on internal control over financial
reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal
control over financial reporting is a process designed under the
supervision of our Chief Executive Officer and Chief Financial
Officer to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles
generally accepted in the United States of America
("GAAP").
Management’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of
the Company (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with GAAP and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements on a
timely basis. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of
compliance with policies and procedures may
deteriorate.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement
of the Company’s annual or interim financial statements will
not be prevented or detected on a timely basis. Management
conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2019
based on the criteria set forth in Internal
Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO").
Based on management’s assessment, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the
Company did not maintain effective internal control over financial
reporting as of December 31, 2019 as a result of the material
weaknesses described below:
A.
Control environment, control activities and
monitoring:
The Company did not design and maintain effective internal control
over financial reporting related to control environment, control
activities and monitoring based on the criteria established in the
COSO Framework including more specifically:
●
Competency
of resources: Management did not effectively execute a strategy to
hire, train and retain a sufficient complement of personnel with an
appropriate level of training, knowledge and experience in certain
areas important to financial reporting; and
●
Deployment
and oversight of control activities: Management did not implement
effective oversight to support deployment of control activities due
to (a) failure to establish clear accountability for the
performance of internal control over financial reporting
responsibilities in certain areas important to financial reporting
and (b) a limited segregation of duties amongst Company employees
with respect to the Company’s control activities, primarily
as a result of the Company’s limited number of
employees.
B.
Review of the Financial Reporting Process:
The Company did perform an adequate review of the financial
reporting process (i.e., untimely accounting for certain
significant transactions, inadequate review of journal entries, and
financial statements and related footnotes) which resulted in
material corrected misstatements and disclosure
adjustments.
This annual report does not include an attestation report by
Friedman LLP, our independent registered public accounting firm,
regarding internal control over financial reporting. As a smaller
reporting company, our management's report was not subject to
attestation by our independent registered public accounting firm
pursuant to rules of the SEC that permit us to provide only
management's report in this Annual Report.
(c) Changes in internal control over financial
reporting.
Our remediation efforts were ongoing during the fiscal year ended
December 31, 2019. Other than the remediation steps described
above, there were no other material changes in our internal control
over financial reporting identified in management’s
evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the
Exchange Act during the fiscal year ended December 31, 2019 that
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B
– OTHER INFORMATION
Not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
DropCar,
Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheet of DropCar,
Inc. and Subsidiaries (the “Company”) as of December
31, 2018, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the year then ended,
and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31,
2018, and the consolidated results of their operations and their
cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of
America.
Going Concern
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has an accumulated
deficit of approximately $29.8 million and negative cash flow from
continuing operations of approximately $10.6 million that raise
substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audit we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis
for our opinion.
We
served as the Company’s auditor from 2017 to
2019.
/s/
EISNERAMPER LLP
New
York, New York
April
1, 2019 (except for the matter described in Note 4, as to which the
date is March 30, 2020)
DropCar,
Inc., and Subsidiaries
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
$4,259,091
|
$3,887,910
|
|
Prepaid expenses
and other current assets
|
181,805
|
220,845
|
|
Current assets held
for sale
|
375,186
|
818,963
|
|
Total current
assets
|
4,816,082
|
4,927,718
|
|
|
|
|
|
Noncurrent assets
held for sale
|
441,395
|
702,438
|
|
|
|
|
|
TOTAL
ASSETS
|
$5,257,477
|
$5,630,156
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts payable
and accrued expenses
|
$1,348,356
|
$1,305,071
|
|
Current liabilities
held for sale
|
1,040,776
|
1,286,689
|
|
TOTAL
LIABILITIES
|
2,389,132
|
2,591,760
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
Preferred stock,
$0.0001 par value, 5,000,000 shares authorized
|
|
|
|
Series seed
preferred stock, 842,405 shares authorized, zero issued and
outstanding;
|
-
|
-
|
|
Series A preferred
stock, 1,963,877 shares authorized, zero issued and
outstanding;
|
-
|
-
|
|
Convertible Series
H, 8,500 shares designated, 8 shares issued and
outstanding;
|
-
|
-
|
|
Convertible Series
H-1, 9,488 shares designated, zero shares issued and
outstanding;
|
-
|
-
|
|
Convertible Series
H-2, 3,500 shares designated, zero shares issued and
outstanding;
|
-
|
-
|
|
Convertible Series
H-3, 8,461 shares designated, 2,189 shares issued and
outstanding;
|
-
|
-
|
|
Convertible Series
H-4, 30,000 shares designated, 5,028 and 26,619 shares issued and
outstanding;
|
1
|
3
|
|
Convertible Series
H-5, 50,000 shares designated, 34,722 and zero shares issued and
outstanding as of December 31, 2019 and 2018;
|
3
|
-
|
|
Common stock,
$0.0001 par value; 100,000,000 shares authorized, 4,061,882 and
1,633,394 issued and outstanding as of December 31, 2019 and 2018,
respectively
|
406
|
163
|
|
Additional paid in
capital
|
37,581,914
|
32,791,951
|
|
Accumulated
deficit
|
(34,713,979)
|
(29,753,721)
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
2,868,345
|
3,038,396
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$5,257,477
|
$5,630,156
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
DropCar,
Inc., and Subsidiaries
|
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
General and
administrative expenses
|
$2,477,160
|
$2,230,634
|
|
TOTAL
OPERATING EXPENSES
|
2,477,160
|
2,230,634
|
|
|
|
|
|
OPERATING
LOSS
|
(2,477,160)
|
(2,230,634)
|
|
|
|
|
|
Interest
expense
|
-
|
(672,144)
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
(2,477,160)
|
(2,902,778)
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
Loss from
operations of discontinued components, net of taxes
|
(2,425,223)
|
(11,676,667)
|
|
Loss on sale of
component, net of taxes
|
-
|
(4,169,718)
|
|
LOSS
ON DISCONTINUED OPERATIONS
|
(2,425,223)
|
(15,846,385)
|
|
|
|
|
|
NET
LOSS
|
$(4,902,383)
|
$(18,749,163)
|
|
|
|
|
|
Deemed dividend on
Series H-4 warrant and preferred stock modification
|
(57,875)
|
-
|
|
Deemed dividend on
exchange of warrants
|
-
|
(1,399,661)
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$(4,960,258)
|
$(20,148,824)
|
|
|
|
|
|
AMOUNTS
ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
|
|
Loss from
continuing operations
|
$(2,535,035)
|
$(4,302,439)
|
|
Loss from
discontinued operations
|
(2,425,223)
|
(15,846,385)
|
|
NET
LOSS
|
$(4,960,258)
|
$(20,148,824)
|
|
|
|
|
|
LOSS
PER SHARE FROM CONTINUING OPERATIONS:
|
|
|
|
Basic
|
$(0.72)
|
$(3.18)
|
|
Diluted
|
$(0.72)
|
$(3.18)
|
|
LOSS
PER SHARE FROM DISCONTINUED OPERATIONS:
|
|
|
|
Basic
|
$(0.68)
|
$(11.71)
|
|
Diluted
|
$(0.68)
|
$(11.71)
|
|
NET
LOSS PER SHARE:
|
|
|
|
Basic
|
$(1.40)
|
$(14.89)
|
|
Diluted
|
$(1.40)
|
$(14.89)
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
Basic
|
3,541,511
|
1,352,826
|
|
Diluted
|
3,541,511
|
1,352,826
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
DropCar
Inc., and Subsidiaries
|
CONDENSED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
9,792,139
|
-
|
9,792,188
|
|
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
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
26,843
|
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
|
|
Issuance of
Pre-Funded Series K Warrants net of costs of
$15,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
968,329
|
-
|
968,329
|
|
Stock based
compensation for options issued to employees (net of
forfeitures)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
434,555
|
-
|
434,555
|
|
Stock based
compensation for restricted stock units issued to
employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,954,124
|
-
|
2,954,124
|
|
Stock based
compensation for common stock issued to service
providers
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
60,262
|
6
|
478,979
|
-
|
478,985
|
|
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
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,019,040
|
(1,019,040)
|
-
|
|
Deemed
dividend on modification of H-4 Warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
63,760
|
(63,760)
|
-
|
|
Conversion of
Series H-4 Preferred Stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(224)
|
-
|
-
|
-
|
14,653
|
1
|
(1)
|
-
|
-
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(18,749,163)
|
(18,749,163)
|
|
Balance,
December 31, 2018
|
-
|
$-
|
-
|
-
|
8
|
-
|
2,189
|
-
|
26,619
|
3
|
-
|
-
|
1,633,394
|
163
|
32,791,951
|
(29,753,721)
|
3,038,396
|
|
Issuance of
common stock for cash net of costs of $15,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
478,469
|
48
|
1,984,953
|
-
|
1,985,001
|
|
Exercise of
warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
277,778
|
28
|
16,639
|
-
|
16,667
|
|
Conversion of
Series H-4 preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(21,591)
|
(2)
|
-
|
-
|
1,412,420
|
141
|
(139)
|
-
|
-
|
|
Stock based
compensation for options issued to employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
86,811
|
-
|
86,811
|
|
Stock based
compensation for restricted stock units issued to
employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
289,842
|
-
|
289,842
|
|
Stock based
compensation for common stock issued to service
providers
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
116,666
|
12
|
222,188
|
-
|
222,200
|
|
Stock based
compensation for restricted stock issued to the board of
directors
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
25,000
|
-
|
25,000
|
|
Issuance of
common stock upon vesting of restricted stock
units
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
276,290
|
27
|
(27)
|
-
|
-
|
|
Common stock
reserved and retired for excess tax benefits from stock based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(133,135)
|
(13)
|
(193,176)
|
-
|
(193,189)
|
|
Issuance of
Series H-5 preferred stock and warrants in private placement net of
costs of $200,000
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
34,722
|
3
|
-
|
-
|
2,299,997
|
-
|
2,300,000
|
|
Deemed
dividend on modificaiton of H-4 warrants
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
57,875
|
(57,875)
|
-
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,902,383)
|
(4,902,383)
|
|
Balance,
December 31, 2019
|
-
|
$-
|
-
|
$-
|
8
|
$-
|
2,189
|
$-
|
5,028
|
$1
|
34,722
|
$3
|
4,061,882
|
$406
|
$37,581,914
|
$(34,713,979)
|
$2,868,345
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-6
DropCar,
Inc., and Subsidiaries
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$(4,902,383)
|
$(18,749,163)
|
|
Loss from
discontinued operations
|
2,425,223
|
15,846,385
|
|
Loss from
continuing operations
|
(2,477,160)
|
(2,902,778)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Stock based
compensation
|
280,275
|
82,436
|
|
Non-cash interest
expense
|
-
|
672,144
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Prepaid expenses
and other assets
|
39,040
|
(220,845)
|
|
Accounts payable
and accrued expenses
|
48,009
|
1,305,071
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES - CONTINUING
OPERATIONS
|
(2,109,836)
|
(1,063,972)
|
|
NET
CASH USED IN OPERATING ACTIVITIES - DISCONTINUED
OPERATIONS
|
(1,485,004)
|
(9,502,946)
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(3,594,840)
|
(10,566,918)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Cash received upon
acquisition
|
-
|
4,947,023
|
|
Proceeds from sale
of component, net of cash relinquished
|
-
|
1,995,634
|
|
|
|
|
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES - CONTINUING
OPERATIONS
|
-
|
6,942,657
|
|
NET
CASH USED IN INVESTING ACTIVITIES - DISCONTINUED
OPERATIONS
|
(142,458)
|
(497,102)
|
|
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
|
(142,458)
|
6,445,555
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds from the
sale of common stock
|
2,000,001
|
300,000
|
|
Financing fees in
connection with the sale of common stock
|
(15,000)
|
-
|
|
Common stock
reserved and retired in connection with excess tax benefits
paid
|
(193,189)
|
-
|
|
Proceeds from the
sale of Series H-5 preferred stock and warrants
|
2,500,000
|
-
|
|
Financing fees in
connection with the sale of Series H-5 preferred stock and
warrants
|
(200,000)
|
-
|
|
Proceeds from the
sale of Series H-4 preferred stock and warrants
|
-
|
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
|
16,667
|
936,423
|
|
Proceeds from the
sale of Series K Warrants
|
-
|
983,333
|
|
Financing costs
from the sale of Series K warrants
|
-
|
(15,000)
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING
OPERATIONS
|
4,108,479
|
8,103,095
|
|
NET
CASH USED IN FINANCING ACTIVITIES - DISCONTINUED
OPERATIONS
|
-
|
(50,263)
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
4,108,479
|
8,052,832
|
|
|
|
|
|
|
|
|
|
Net increase in
cash, including cash classified within current assets held for
sale
|
371,181
|
3,931,469
|
|
Less: Net increase
in cash classified within current assets held for sale
|
-
|
(43,559)
|
|
Net increase in
cash
|
371,181
|
3,887,910
|
|
|
|
|
|
Cash,
beginning of year
|
3,887,910
|
-
|
|
|
|
|
|
Cash,
end of year
|
$4,259,091
|
$3,887,910
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash paid for
interest
|
$-
|
$-
|
|
Cash paid for
taxes
|
$-
|
$-
|
|
Issuance of common
stock for accrued stock based compensation
|
$4,724
|
$-
|
|
Assets acquired
under operating leases included in assets held for
sale
|
$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
|
|
Deemed dividends on
warrant issuances
|
$-
|
$1,399,656
|
|
Deemed dividend on
Series H-4 warrant and preferred stock modification
|
$57,875
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-7
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
DropCar Operating Business
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, Washington DC,
and Los Angeles, respectively. These three new market expansions
are with an OEM customer.
Merger and Exchange Ratio - WPCS
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 “WPCS Merger.” The
WPCS Merger was effected pursuant to an Agreement and Plan of
Merger and Reorganization (the “WPCS Merger
Agreement”), dated September 6, 2017, by and among WPCS,
Private DropCar and Merger Sub.
As a result of the WPCS 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 WPCS Merger, holders of WPCS’s common stock immediately
prior to the WPCS Merger owned approximately 22.9% on a fully
diluted basis, and holders of Private DropCar common stock
immediately prior to the WPCS Merger owned approximately 77.1% on a
fully diluted basis, of WPCS’s common stock.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
The WPCS 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 WPCS 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 WPCS 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 WPCS Merger, the combined company changed
its name from WPCS International Incorporation to DropCar, Inc. The
combined company following the WPCS Merger may be referred to
herein as “the combined company,”
“DropCar,” or the “Company.”
Merger with AYRO
On December 19, 2019, DropCar, ABC Merger Sub, Inc., a
Delaware corporation and a wholly owned subsidiary of DropCar
(“ABC Merger Sub”), and Ayro, Inc., a Delaware
corporation (“AYRO”), entered into an Agreement and
Plan of Merger and Reorganization (the “AYRO Merger
Agreement”), pursuant to which, among other matters, and
subject to the satisfaction or waiver of the conditions set forth
in the AYRO Merger Agreement, Merger Sub will merge with and into
AYRO, with AYRO continuing as a wholly owned subsidiary of DropCar
and the surviving corporation of the merger (the “AYRO
Merger”).
Subject to the terms and conditions of the AYRO Merger Agreement,
at the closing of the AYRO Merger, (a) each outstanding share
of AYRO common stock and AYRO preferred stock will be converted
into the right to receive shares of DropCar common stock (the
“DropCar Common Stock”) (after giving effect to a
reverse stock split of DropCar Common Stock, as described
below) equal to the exchange ratio described below; and
(b) each outstanding AYRO stock option and AYRO warrant that
has not previously been exercised prior to the closing of the AYRO
Merger will be assumed by DropCar.
Under the exchange ratio formula in the AYRO Merger Agreement, upon
the closing of the AYRO Merger, on a pro forma basis and based upon
the number of shares of DropCar common stock to be issued in the
AYRO Merger, current DropCar shareholders (along with
DropCar’s financial advisor) will own approximately 20% of
the combined company and current AYRO investors will own
approximately 80% of the combined company (including the additional
financing transaction referenced below). For purposes of
calculating the exchange ratio, the number of outstanding shares of
DropCar common stock immediately prior to the Merger does not take
into effect the dilutive effect of shares of DropCar common stock
underlying options, warrants or certain classes of preferred stock
outstanding as of the date of the AYRO Merger
Agreement.
If the AYRO merger is completed, holders of outstanding shares of
AYRO common stock and preferred stock (collectively referred to
herein as the AYRO equity holders) will be entitled to receive
shares of DropCar common stock at an agreed upon exchange ratio per
share of AYRO common stock they hold or into which their shares of
preferred stock convert (the “AYRO Exchange Ratio”).
Upon completion of the AYRO merger and the transactions
contemplated in the AYRO Merger Agreement and assuming the exercise
of the Pre-funded Warrants, (i) AYRO equity holders (including the
investors in the bridge financing, the AYRO private placements, and
the nominal stock subscription and a consultant to AYRO) will own
the majority of the outstanding equity of DropCar. Immediately
following the AYRO merger, subject to the approval of the current
DropCar stockholders, it is anticipated that the combined company
will effect a reverse stock split with respect to its issued and
outstanding common stock. The reverse stock split will increase
DropCar’s stock price to at least $5.00 per
share.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Prior to the execution and delivery of the AYRO Merger Agreement,
and as a condition of the willingness of the parties to enter into
the AYRO Merger Agreement, certain stockholders have entered into
agreements with AYRO pursuant to which such stockholders have
agreed, subject to the terms and conditions of such agreements, to
purchase, prior to the consummation of the AYRO Merger, shares of
Ayro’s common stock (or common stock equivalents) and
warrants to purchase Ayro's common stock for an aggregate purchase
price of $2.0 million (the “AYRO Pre-Closing
Financing”). The consummation of the transactions
contemplated by such agreements is conditioned upon the
satisfaction or waiver of the conditions set forth in the AYRO
Merger Agreement. After consummation of the AYRO Merger, Ayro
has agreed to cause DropCar to register the resale of the DropCar
Common Stock issued and issuable pursuant to the warrants issued to
the investors in the AYRO Pre-Closing Financing.
Consummation
of the AYRO Merger is subject to certain closing conditions,
including, among other things, approval by the stockholders of the
Company and AYRO, the continued listing of the Company’s
common stock on The Nasdaq Stock Market after the AYRO Merger and
satisfaction of minimum net cash thresholds by the Company and
AYRO. The impact of the Company’s appeal to The Nasdaq Stock
Market as discussed below and COVID-19 could negatively affect our
stock price. In accordance with the terms of the AYRO Merger
Agreement, (i) certain executive officers, directors and
stockholders of AYRO (solely in their respective capacities as AYRO
stockholders) holding approximately 57% of the outstanding AYRO
capital stock have entered into voting agreements with the Company
to vote all of their shares of AYRO capital stock in favor of
adoption of the AYRO Merger Agreement (the “AYRO Voting
Agreements”) and (ii) certain executive officers, directors
and stockholders of the Company (solely in their respective
capacities as stockholders of the Company) holding approximately
10% of the Company’s outstanding common stock have entered
into voting agreements with AYRO to vote all of their shares of the
Company’s common stock in favor of approval of the AYRO
Merger Agreement (the “DropCar Voting Agreements” and,
together with the AYRO Voting Agreements, the “Voting
Agreements”). The Voting Agreements include covenants with
respect to the voting of such shares in favor of approving the
transactions contemplated by the AYRO Merger Agreement and against
any competing acquisition proposals. In addition, concurrently with the execution of
the AYRO Merger Agreement, (i) certain executive officers,
directors and stockholders of AYRO and (ii) certain directors
of the Company have entered into lock-up agreements (the
“Lock-Up Agreements”) pursuant to which they accepted
certain restrictions on transfers of shares of the Company’s
common stock for the one-year period following the closing of the
AYRO Merger.
The AYRO Merger Agreement contains certain termination rights for
both DropCar and AYRO, and further provides that, upon termination
of the AYRO Merger Agreement under specified circumstances, either
party may be required to pay the other party a termination fee of
$1,000,000, or in some circumstances reimburse the other
party’s reasonable expenses.
At the effective time of the AYRO Merger, the Board of Directors of
DropCar is expected to consist of seven members, three of whom will
be designated by AYRO, three of whom will be designated by DropCar
and one of whom will be designated by the lead investor in the AYRO
Pre-Closing Financing. The AYRO Merger Agreement contains certain
provisions providing for the ability of AYRO to designate
additional members upon the achievement of certain business
milestones.
Discontinued Operations – DropCar Operating
On December 19, 2019 and concurrently upon entering in the AYRO
Merger Agreement, the Company entered into an asset purchase
agreement (“Asset Purchase Agreement”) by and among
Company, DropCar Operating Company, Inc., a Delaware
corporation and wholly owned subsidiary of the Company
(“DropCar Operating”), and DC Partners Acquisition, LLC
(the “Purchaser”), Spencer Richardson, our Co-Founder
and Chief Executive Officer, and David Newman, our Co-Founder and
Chief Business Development Officer, pursuant to which the Company
agreed to sell substantially all of the assets associated with its
DropCar Operating business of providing vehicle support, fleet
logistics and concierge services. The aggregate purchase price for
the purchased assets consists of the cancellation of certain
liabilities pursuant to those certain employment agreements by and
between DropCar Operating and each of Mr. Richardson and Mr.
Newman, plus the assumption of certain liabilities relating to or
arising out of workers’ compensation claims that occurred
prior to the closing date of the Asset Purchase Agreement.
The sale of DropCar Operating
represented a strategic shift that has had a major effect on the
Company’s operations, and therefore, was presented as
discontinued operations in the consolidated statement of operations
and consolidated statement of cash flows.
Completion
of the Asset Purchase Agreement is subject to certain conditions,
including customary closing conditions relating to the
(i) consummation of a Change in Control (as defined in the
Asset Purchase Agreement), including the AYRO Merger and (ii) the
receipt by DropCar of the affirmative vote of the holders of the
majority of the shares of DropCar common stock entitled to vote on
such matters with respect to the matters contemplated by the Asset
Purchase Agreement.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Discontinued Operations – Suisun City Operations
On December 10, 2018, the Company signed a definitive agreement
with a private corporation and completed the sale on December 24,
2018 of 100% of the Suisun City Operations, its wholly owned
subsidiary, for a total cash consideration of $3.5 million. The
sale of Suisun City Operations represented a strategic shift that
has had a major effect on the Company’s operations, and
therefore, was presented as discontinued operations in the
consolidated statement of operations and consolidated statement of
cash flows.
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 (the "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
informing it that it had regained compliance with Listing Rule
5550(a)(2).
On
August 19, 2019, the Company received a letter from the Listing
Qualifications Department of the Nasdaq indicating that the Company
no longer complies with the minimum stockholders' equity
requirement under Nasdaq Listing Rule 5550(b)(1) for continued
listing on The Nasdaq Capital Market because the Company's
stockholders' equity of $2,466,776, as reported in the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2019,
was below the required minimum of $2,500,000. In December
2019, the Company received notification it has regained
compliance.
On September 6, 2019, the Company received notification from Nasdaq
stating that the Company did not comply with the minimum $1.00 bid
price requirement for continued listing set forth in Listing Rule
5550(a)(2) (the “Listing Rule”). In accordance with
Nasdaq listing rules, the Company was afforded 180 calendar days
(until March 4, 2020) to regain compliance with the Listing
Rule. On March 5, 2020, the Company received notification
from the Listing Qualification Department of Nasdaq that it had not
regained compliance with the Listing Rule. The notification
indicated that the Company’s common stock will be delisted
from the Nasdaq Capital Market unless it requested an appeal of
this determination. On March 12, 2020, the Company requested a
hearing to appeal the determination with the Nasdaq Hearings Panel
(the “Panel”), which will postpone the delisting of the
Company’s securities pending the Panel’s decision. The
hearing is scheduled for April 16, 2020. The Company’s appeal
to the Panel included a plan that sets forth a commitment to
consider all available options to regain compliance with the
Listing Rules, including the option to effectuate a reverse stock
split upon receipt of stockholder approval, which the Company
intend to seek in connection with the joint proxy statement and
consent solicitation statement/prospectus filed with the Securities
and Exchange Commission on February 14, 2020 in connection with the
AYRO Merger, in order to bring the Company’s stock price over
the $1.00 bid price requirement and to meet the $4.00 bid price
initial listing requirement. However, there can be no assurance
that the Company will be successful in regaining compliance with
the Listing Rule.
The
Nasdaq notification has no effect at this time, or during the
appeal period, on the listing of the Company’s common stock
on the Nasdaq.
2.
Liquidity and Going Concern
The Company has a limited operating history and the sales and
income potential of its business and market are unproven. As of
December 31, 2019, the Company has an accumulated deficit of $34.7
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 through March 2021. 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-K.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Management’s plan includes raising funds from outside
investors and consummating the AYRO Merger. However, there is no
assurance that the AYRO Merger will be consummated or that outside
funding will be available to the Company, or that outside funding
will be obtained on favorable terms or will provide the Company
with sufficient capital to meet its objectives. There have
been recent outbreaks in several countries, including the United
States, of the highly transmissible and pathogenic coronavirus. The
outbreak of such communicable diseases could result in a widespread
health crisis that could adversely affect general commercial
activity and the economies and financial markets of many countries,
including the United States. An outbreak of communicable diseases,
or the perception that such an outbreak could occur, and the
measures taken by the governments of countries affected could
adversely affect the Company’s business, financial condition,
and results of operations. 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.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
These consolidated financial statements of DropCar, Inc., a
Delaware corporation, are prepared in accordance with U.S.
generally accepted accounting principles (“US GAAP”)
and include the accounts of its wholly-owned subsidiaries. All
significant intercompany transactions and amounts have been
eliminated. The results of businesses acquired and disposed of are
included in the consolidated financial statements from the date of
the acquisition or up to the date of disposal, respectively. During
the year ended December 31, 2018, the Company completed a reverse
merger with WPCS International Incorporated, the parent company of
WPCS International – Suisun City, Inc. (the “Suisun
City Operations”), a wholly-owned subsidiary. Subsequently,
the Company completed the sale of the wholly-owned Suisun City
Operations and is reported in discontinued operations.
Additionally, on December 19, 2019, the Company entered into an the
Asset Purchase Agreement to sell the wholly-owned DropCar Operating
component and is reported in discontinued operations. See Note 4 to
the financial statements for further details.
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. As of December 31, 2018, the
acquisition accounting was completed and there were no further
adjustments to the assumptions. 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 million was as
follows:
|
Fair value of
equity consideration, 506,423 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)
|
|
Property and
equipment
|
376,000
|
|
|
|
|
Intangible assets
(2)
|
|
|
Customer
contracts
|
1,200,000
|
|
Trade
name
|
600,000
|
|
Goodwill
|
3,410,000
|
|
|
|
|
Total allocation of
purchase price consideration
|
$9,950,000
|
(1) Net working capital consisted of cash of $4,947,000; accounts
receivable and contract assets of $3,934,000; other assets of
$317,000; accounts payable and accrued liabilities of
$2,534,000.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
(2) The useful lives related to
the acquired customer
relationships and trade name were expected to be
approximately 10 years.
Use of Estimates
The preparation of consolidated financial statements in conformity
with US GAAP 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. 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.
Cash
The
Company considers all highly liquid investment with an original maturity of three months or less to be
cash. At times, cash deposits may exceed FDIC-insured limits. At
December 31, 2019 and 2018, the amount the Company had on deposit
that exceeded the FDIC-insured limits was approximately $4.0
million.
Accounts receivable
Accounts receivable are carried at original invoice amount less an
estimate made for holdbacks and doubtful receivables based on a
review of all outstanding amounts. The Company determines the
allowance for doubtful accounts by regularly evaluating individual
customer receivables and considering a customer’s financial
condition, credit history and current economic conditions and set
up an allowance for doubtful accounts when collection is uncertain.
Customers’ accounts are written off when all attempts to
collect have been exhausted. Recoveries of accounts receivable
previously written off are recorded as income when received. At
December 31, 2019 and 2018, the accounts receivable allowance was
approximately $2,000 and included in current assets held for
sale.
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 Consolidated Financial Statements
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.
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 is
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.
Property and Equipment
The Company accounts for property and equipment at cost less
accumulated depreciation. The Company computes depreciation using
the straight-line method over the estimated useful lives of the
assets. The Company generally depreciates property and equipment
over a period of three to seven years. Depreciation for property
and equipment commences once they are ready for its intended
use.
Capitalized Software
Costs related to website and internal-use software development are
accounted for in accordance with Accounting Standards Codification
(“ASC”) Topic
350-50 — Intangibles — Website
Development Costs. Such software is primarily related to our
websites and mobile apps, including support systems. We begin to
capitalize our costs to develop software when preliminary
development efforts are successfully completed, management has
authorized and committed project funding, it is probable that the
project will be completed, and the software will be used as
intended. Costs incurred prior to meeting these criteria are
expensed as incurred and recorded within General and administrative
expenses within the accompanying consolidated statements of
operations. Costs incurred for enhancements that are expected to
result in additional features or functionality are capitalized.
Capitalized costs are amortized over the estimated useful life of
the enhancements, generally between two and
three years.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Impairment of Long-Lived Assets
Long-lived assets are primarily comprised of intangible assets,
property and equipment, and capitalized software costs. The Company
evaluates its Long-Lived Assets for impairment whenever events or
changes in circumstances indicate the carrying value of an asset or
group of assets may not be recoverable. If these circumstances
exist, recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset group to future
undiscounted net cash flows expected to be generated by the asset
group. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. There
were no impairments to long-lived assets for the years ended
December 31, 2019 and 2018.
Income Taxes
The Company provides for income taxes using the asset and liability
approach. Deferred tax assets and liabilities are recorded based on
the differences between the financial statement and tax bases of
assets and liabilities and the tax rates in effect when these
differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. As of December 31,
2019 and 2018, the Company had a full valuation allowance against
deferred tax assets.
Fair Value Measurement
The Company accounts for financial instruments in accordance with
ASC 820, “Fair Value Measurements and Disclosures”
(“ASC 820”). ASC 820 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy under ASC 820 are described
below:
Level 1 – Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2 – Quoted prices in markets that are not active or
financial instruments for which all significant inputs are
observable, either directly or indirectly; and
Level 3 – Prices or valuations that require inputs that are
both significant to the fair value measurement and
unobservable.
Financial instruments with carrying values approximating fair value
include cash, accounts receivable, other assets, convertible notes
and accounts payable due to their short-term nature.
Loss Per Share
Basic loss per share is computed by dividing net loss attributable
to common shareholders (the numerator) by the weighted-average
number of common shares outstanding (the denominator) for the
period. Diluted loss per share is computed by assuming that any
dilutive convertible securities outstanding were converted, with
related preferred stock dividend requirements and outstanding
common shares adjusted accordingly. It also assumes that
outstanding common shares were increased by shares issuable upon
exercise of those stock options for which market price exceeds the
exercise price, less shares which could have been purchased by the
Company with the related proceeds. In periods of losses, diluted
loss per share is computed on the same basis as basic loss per
share as the inclusion of any other potential shares outstanding
would be anti-dilutive.
The following securities were excluded from weighted average
diluted common shares outstanding because their inclusion would
have been antidilutive.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
|
|
|
|
|
|
|
|
Common
stock equivalents:
|
|
|
|
Common
stock options
|
380,396
|
302,773
|
|
Series A, H-1, H-3, H-4, H-5, I, J, K and Merger common stock
purchase warrants
|
4,300,560
|
863,084
|
|
Series
H, H-3, H-4, H-5 Convertible Preferred Stock
|
3,900,354
|
1,796,251
|
|
Restricted
shares (unvested)
|
-
|
244,643
|
|
Totals
|
8,581,310
|
3,206,751
|
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
consolidated statement of operations as incurred, which is included
in loss from operations from discontinued operations. Total
research and development expenses included in loss from
discontinued operations were $205,000 and $322,269 for the years
ended December 31, 2019 and 2018, respectively.
Adoption of New Accounting Standards
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;
●
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.
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
7, Lease Agreements.
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.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the
FASB or other standard setting bodies. Unless otherwise discussed,
the Company believes that the impact of recently issued standards
that are not yet effective will not have a material impact on its
consolidated financial position or results of operations upon
adoption.
In 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 adoption
of ASU 2018-13 is not expected to have a material impact on the
Company’s consolidated financial position or results of
operations.
4.
Discontinued Operations and Disposition of Operating
Segments
DropCar Operating
On December 19, 2019, the Company entered into the Asset Purchase
Agreement to sell substantially all of the assets associated with
the DropCar Operating business. Operating results for the years
ended December 31, 2019 and 2018 for the DropCar Operating business
are presented as discontinued operations and the assets and
liabilities classified as held for sale are presented separately in
the balance sheet.
A breakdown of the discontinued operations is presented as
follows:
|
|
|
|
|
|
|
|
SERVICE REVENUES
|
$4,579,745
|
$6,077,667
|
|
COST OF REVENUE
|
4,172,320
|
7,863,673
|
|
GROSS PROFIT (LOSS)
|
407,425
|
(1,786,006)
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
Research
and development
|
205,000
|
322,269
|
|
General
and administrative
|
2,245,394
|
9,119,772
|
|
Depreciation
and amortization
|
395,081
|
354,657
|
|
TOTAL OPERATING
EXPENSES
|
2,845,475
|
9,796,698
|
|
|
|
|
|
OPERATING
LOSS
|
(2,438,050)
|
(11,582,704)
|
|
|
|
|
|
Other
income, net
|
12,827
|
-
|
|
Interest
expense, net
|
-
|
(409,082)
|
|
|
|
|
|
LOSS FROM DROPCAR DISCONTINUED OPERATIONS
|
(2,425,223)
|
(11,991,786)
|
|
INCOME FROM SUISUN CITY DISCONTINUED OPERATIONS
|
-
|
315,119
|
|
LOSS FROM OPERATIONS OF DISCONTINUED
COMPONENTS
|
(2,425,223)
|
(11,676,667)
|
|
LOSS ON SALE OF SUISUN CITY COMPONENT
|
-
|
(4,169,718)
|
|
LOSS FROM DISCONTINUED
OPERATIONS
|
$(2,425,223)
|
$(15,846,385)
|
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Assets and liabilities of discontinued operations held for sale
included the following:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$81,457
|
$415,569
|
|
Accounts
receivable, net
|
210,671
|
295,626
|
|
Prepaid
expenses and other current assets
|
83,058
|
107,768
|
|
Current
assets held for sale
|
$375,186
|
$818,963
|
|
|
|
|
|
Property
and equipment, net
|
$25,723
|
$39,821
|
|
Capitalized
software costs, net
|
410,261
|
659,092
|
|
Operating
lease right-of-use asset
|
1,886
|
-
|
|
Other
assets
|
3,525
|
3,525
|
|
Noncurrent
assets held for sale
|
$441,395
|
$702,438
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
737,862
|
1,033,489
|
|
Deferred
revenue
|
302,914
|
253,200
|
|
Current
liabilities held for sale
|
$1,040,776
|
$1,286,689
|
Suisun City Operations
On December 10, 2018, the Company signed a definitive agreement
with a private corporation and completed the sale on December 24,
2018, of 100% of the corporate capital of Suisun City Operations, a
wholly owned subsidiary of DropCar, Inc, for a total cash
consideration of $3.5 million. The Company recognized the following
loss on sale of component on the date of sale:
|
Sales
price
|
$3,500,000
|
|
Commissions
and various transaction costs
|
(332,220)
|
|
Net
sales proceeds
|
3,167,780
|
|
|
|
|
Carrying
amounts of assets, net of liabilities
|
7,337,498*
|
|
Loss
on sale of Suisun City Operations
|
$(4,169,718)
|
* The carrying amounts of assets included cash of $1,504,366;
accounts receivable and contract asset of $4,177,568; prepaid
expenses and other current assets of $57,486; property and
equipment of $295,206; intangibles and goodwill of $5,048,247;
carrying amounts of liabilities included accounts payable and
accrued liabilities of $3,688,831 and loans of
$56,544.
The operations and cash flows of the Suisun City Operations were
eliminated from ongoing operations following its sale. The
operating results of the Suisun City Operations for the year
ended December 31, 2018 were as
follows:
|
Revenues
|
$13,730,252
|
|
Cost
of revenues
|
10,836,754
|
|
Gross
profit
|
2,893,498
|
|
|
|
|
Selling,
general and administrative expenses
|
2,285,661
|
|
Depreciation
and amortization
|
287,830
|
|
Total
Operating Expenses
|
2,573,491
|
|
|
|
|
Interest
expense, net
|
4,888
|
|
|
|
|
Net
income from discontinued operations
|
$315,119
|
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
5. Capitalized
Software
Capitalized software costs included in non-current assets held for
sale consists of the following as of December 31, 2019 and
2018:
|
|
|
|
|
|
|
|
Software
|
$1,467,008
|
$1,324,275
|
|
Accumulated
amortization
|
(1,056,747)
|
(665,183)
|
|
Total
|
$410,261
|
$659,092
|
|
|
|
|
Amortization
expense for the years ended December 31, 2019 and 2018, was
$391,564 and $350,385, respectively and included in loss from
discontinued operations.
6. 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 in the Merger. The
length of the lock-up period is up to 120 days. For the year ended
December 31, 2018, the Company recorded $672,144 as interest
expense in relation to the lock-up agreements in the accompanying
consolidated statement of operations.
At
December 31, 2018, the aggregate carrying value of the Notes was
$0. The Notes were fully converted during the year ended December
31, 2018.
7. Commitments and
Contingencies
Lease Agreements
The Company leases office space in New York City and Buenos Aires,
Argentina on a month-to-month basis, with a condition of a 60-day
notice to terminate. For the years ended December 31, 2019 and
2018, rent expense for the Company’s New York City and Buenos
Aires offices was approximately $58,000 and $158,000, respectively,
and included in loss from discontinued operations.
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, the Company 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, the
Company’s former customer, for injuries sustained by
plaintiffs alleging such injuries were caused by either the
customer, the Company’s valet operating the customer’s
vehicle or an unknown driver operating customer’s vehicle.
The Company to date has cooperated with the NYC Police Department
and no charges have been brought against any of its employees. The
Company has referred the matter to its insurance carrier. As of
June 12, 2019, this case was settled by the insurance
carrier.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Other
As of January 1, 2018, the Company had accrued approximately
$96,000 for the settlement of multiple employment disputes. During
the year ended December 31, 2018, approximately $70,000 of this
amount was settled upon payment. An additional $207,000 was
expensed as loss from operations of discontinued components and
accrued as accounts payable and accrued expenses for settlements
during the year ended December 31, 2018. As of December 31, 2018,
approximately $232,000 remained accrued as accounts payable and
accrued expenses for the settlement of employment disputes. During
the year ended December 31, 2019, approximately $186,000 of this
amount was settled upon payment. For the year ended December 31,
2019 $108,000 was expensed as loss from operations of discontinued
components and accrued as accounts payable and accrued expenses for
settlements and $20,000 was recorded as a reduction in loss from
operations of discontinued components for the reversal of
previously accrued settlements. As of December 31, 2019,
approximately $134,000 remains accrued as accounts payable and
accrued expenses for the settlement of employment disputes. As of
December 31, 2019 and 2018, the Company has entered into multiple
settlement agreements with former employees for which it has agreed
to make monthly settlement payments which were paid during the year
ended December 31, 2019.
On March 23, 2018, DropCar was made aware of an audit being
conducted by the New York State Department of Labor
(“DOL”) regarding a claim filed by an employee. The DOL
is investigating whether DropCar properly paid overtime for which
DropCar has raised several defenses. In addition, the DOL is
conducting its audit to determine whether the Company owes spread
of hours pay (an hour’s pay for each day an employee worked
or was scheduled for a period over ten hours in a day). If the DOL
determines that monies are owed, the DOL will seek a backpay order,
which management believes will not, either individually or in the
aggregate, have a material adverse effect on DropCar’s
business, consolidated financial position, results of operations or
cash flows. During the years ended December 31, 2019 and 2018, the
Company expensed as loss from operations of discontinued components
approximately $273,000 and $60,000, respectively, in relation to
these matters. As of December 31, 2019 and 2018, the Company has
accrued as accounts payable and accrued expenses approximately
$333,000 and $60,000, respectively, in relation to these
matters.
The Company was a defendant in a class action lawsuit which
resulted in a judgement entered into whereby the Company is
required to pay legal fees in the amount of $45,000 to the
plaintiff’s counsel. As of and for the year ended December
31, 2019, the Company recorded $45,000 as current liabilities held
for sale and loss from operations of discontinued
components.
8. Income Taxes
The Company files corporate income tax returns in the United States
(federal) and in New York. The Company is subject to federal, state
and local income tax examinations by tax authorities from
inception.
At December 31, 2019, the Company has approximately $17,233,000 of
operating loss carryforwards for both federal and state tax
purposes that may be applied against future taxable income. The net
operating loss carryforwards will begin to expire in the year 2037
if not utilized prior to that date. Net operating losses generated
after 2017 are limited to 80% of current years income and can be
carried forward indefinitely. There is no provision for income
taxes because the Company has historically incurred operating
losses and maintains a full valuation allowance against its net
deferred tax assets. The valuation allowance increased by
approximately $1,206,000 and $5,619,000 during the years 2019 and
2018, respectively, and was approximately $9,885,000 and $8,679,000
at December 31, 2019 and 2018, respectively.
A reconciliation of the statutory U.S. Federal rate to the
Company's effective tax rate is as follows:
|
|
|
|
|
|
|
|
Federal
income tax benefit at statutory rate
|
21.00%
|
21.00%
|
|
State
income tax, net of federal benefits
|
5.44%
|
7.80%
|
|
Permanent
items
|
(0.01)%
|
(9.88)%
|
|
Return
to Provision
|
(1.85)%
|
-%
|
|
Other
|
-%
|
0.49%
|
|
Change
in valuation allowance
|
(24.58)%
|
(19.41)%
|
|
Provision
for income taxes
|
-
|
-
|
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
The tax effect of temporary differences that gave rise to
significant portion of the deferred tax assets were as
follows:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards - Federal
|
$3,619,000
|
$2,785,000
|
|
Net
operating loss carryforwards - State
|
2,115,000
|
1,827,000
|
|
Stock
based compensation
|
1,470,000
|
1,335,000
|
|
Capital
loss carryforward
|
2,721,000
|
2,776,000
|
|
Capitalized
Software
|
(148,000)
|
(182,000)
|
|
Settlement
reserve
|
140,000
|
122,000
|
|
Depreciation
and amortization
|
(50,000)
|
1,000
|
|
Allowance
for doubtful accounts
|
18,000
|
15,000
|
|
Valuation
allowance
|
(9,885,000)
|
(8,679,000)
|
|
Net
deferred tax assets
|
$-
|
$-
|
An adjustment was made to the opening balance of deferred tax
assets amounting to $2 million for net operating losses and other
tax attributes that were not previously reported. The assets are
subject to full valuation allowance.
The federal and state net operating loss may be subject to the
limitations provided in the Internal Revenue Code
(“IRC”) Sections 382 and 383. The net operating loss
and tax credit carryforwards are subject to review by the Internal
Revenue Service in accordance with the provisions of Section 382 of
the Internal Revenue Code. Under this Internal Revenue Code
section, substantial changes in the Company’s ownership may
limit the amount of net operating loss carryforwards that could be
utilized annually in the future to offset the Company’s
taxable income. Specifically, this limitation may arise in the
event of a cumulative change in ownership of the Company of more
than 50% within a three-year period. Any such annual limitation may
significantly reduce the utilization of the Company’s net
operating loss carryforwards before they expire. The closing of the
Company’s merger alone or together with transactions that
have occurred or that may occur in the future, may trigger an
ownership change pursuant to Section 382, which could limit the
amount of net operating loss carryforwards that could be utilized
annually in the future to offset the Company’s taxable
income, if any. Any such limitation as the result of the
Company’s additional sales of common stock by the Company
could have a material adverse effect on the Company’s results
of operations in future years.
There are no liabilities from unrecognized tax benefits included in
the Company's consolidated balance sheets as of December 31, 2019
and 2018, and therefore the Company has not incurred any penalties
or interest.
Common Stock
On January 18, 2018, the Company sold 10,057 shares of common stock
for proceeds of $300,000.
On January 30, 2018, the Company converted $3,682,502, the net
carrying value of the principal balance of $4,840,000 convertible
notes payable, into 136,785 shares of common stock just prior to
the WPCS Merger.
On April 19, 2018, the Company entered into separate Warrant
Exchange Agreements with the holders of existing warrants issued in
the WPCS Merger to purchase shares of common stock, pursuant to
which, on the closing date, the Merger Warrant Holders exchanged
each Merger Warrant for 1/18 of a share of common stock and
1/12 of a warrant to purchase a share of common stock. In
connection with the Exchange Agreements, the Company issued an
aggregate of (i) 48,786 new shares of common stock and (ii) Series
I Warrants to purchase an aggregate of 73,178 shares of common
stock. The Company valued (a) the stock and warrants issued in the
amount of $972,368, (b) the warrants retired in the amount of
$655,507, and (c) recorded the difference as deemed dividend in the
amount of $316,861. See below under “Warrants” for
further details.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
During the year ended December 31, 2018, the Company converted
$159,584 of accrued interest related to the convertible notes into
4,518 shares of common stock.
During the year ended December 31, 2018, the Company granted 3,333
shares of common stock to a service provider and recorded $31,800
as general and administrative expense in the Company’s
consolidated statements of operations.
On September 4, 2018, the Company issued 260,116 shares of common
stock from the exercise of Series H-4 Warrants.
On December 17, 2018, the Company issued 14,653 shares of common
stock from the conversion of 224 shares of Series H-4 Convertible
Preferred 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 year ended December 31, 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 year ended December 31, 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 year ended December 31, 2019, the Company issued 277,778
shares of common stock from the exercise of Series K Warrants and
received cash proceeds of $16,667.
During the year ended December 31, 2019, the Company issued 31,646
shares of common stock to a director and recorded $25,000 stock
based compensation as part of general and administrative expenses
in the Company’s consolidated statements of operations.
Concurrently and upon vesting, the Company paid $9,857 of personal
withholding taxes for the grantee and reserved 12,477 shares of
common stock as consideration for the cash paid which was
immediately retired.
Preferred Stock
In accordance with the amended and restated certificate of
incorporation, there are 5,000,000 authorized preferred shares at a
par value of $ 0.0001.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
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 WPCS 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 WPCS Merger.
Series H Convertible Preferred Stock
On January 30, 2018, in accordance with the WPCS 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
(“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.
In the event of liquidation, the holders of the Series H Preferred
Stock are entitled, pari passu with the holders of common stock, to
receive a payment in the amount the holder would receive if such
holder converted the Series H Preferred Stock into common stock
immediately prior to the date of such payment. As of December 31,
2019, such payment would be calculated as follows at December 31,
2019:
|
Number
of Series H Preferred Stock outstanding
|
8
|
|
Multiplied
by the stated value
|
$154
|
|
Equals
the gross stated value
|
$1,232
|
|
Divided
by the conversion price
|
$36.96
|
|
Equals
the convertible shares of common stock
|
33
|
|
Multiplied
by the fair market value of common stock at December 31,
2019
|
$0.88
|
|
Equals
the payment
|
$29
|
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 WPCS Merger the Company
issued 2,189 shares of Series H-3 Convertible Preferred
Stock.
Also, 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 Consolidated Financial Statements
In the event of liquidation, the holders of the Series H-3
Preferred Stock are entitled, pari passu with the holders of common
stock, to receive a payment in the amount the holder would receive
if such holder converted the Series H-3 Preferred Stock into common
stock immediately prior to the date of such payment. As of December
31, 2019, such payment would be calculated as follows at December
31, 2019:
|
Number
of Series H-3 Preferred Stock outstanding
|
2,189
|
|
Multiplied
by the stated value
|
$138
|
|
Equals
the gross stated value
|
$302,082
|
|
Divided
by the conversion price
|
$33.12
|
|
Equals
the convertible shares of common stock
|
9,121
|
|
Multiplied
by the fair market value of common stock at December 31,
2019
|
$0.88
|
|
Equals
the payment
|
$8,026
|
Series H-4 Convertible Preferred Stock
On March 8, 2018, the Company entered into a Securities Purchase
Agreement with investors pursuant to which the Company issued to
the investors an aggregate of 25,472 shares of the Company’s
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 original
exercise price of $15.60 per share (the “H-4 Exercise
Price”), subject to adjustments (the “Series H-4
Warrants”). The purchase price per Series H-4 Shares and
Series H-4 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 Series H-4 Warrants was approximately
$6.0 million. Subject to certain ownership limitations, the Series
H-4 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
original conversion price of $14.13 per share (the
“Conversion Price”), 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 $2.826 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. On
December 6, 2019, the Company entered into Series H-5 securities
purchase agreement, causing the Conversion Price to decrease from
$3.60 per share to $2.826 per share. As a result, the Company
recorded a deemed dividend of $55,853 which represents the fair
value transferred to the Series H-4 shareholders from the
anti-dilution protection being triggered. The deemed dividend was
recorded as an increase to accumulated deficit and increase in
additional paid-in capital and reduced net income available to
common shareholders by the same amount. The Company valued (a) the
fair value of the Series H-4 Shares immediately before the
re-pricing in the amount of $203,927, (b) the fair value of the
Series H-4 Shares immediately after the re-pricing in the amount of
$259,780, and (c) recorded the difference as deemed dividend in the
amount of $55,853. The Series H-4 Shares were valued at fair market
value on the date of the exchange using the following assumptions:
(a) the stated value of $1,184,094 divided by the conversion price
of $3.60 multiplied by the fair market value per shares of $0.62
results in $203,927, and (b) stated value $1,184,094 divided by the
conversion price of $2.826 multiplied by the fair market value of
$0.62 per shares results in $259,780. See “Issuance of Series
H-5 Warrants”.
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.
In the event of liquidation, the holders of the Series H-4
Preferred Stock are entitled, pari passu with the holders of common
stock, to receive a payment in the amount the holder would receive
if such holder converted the Series H-4 Preferred Stock into common
stock immediately prior to the date of such payment. As of December
31, 2019, such payment would be calculated as follows at December
31, 2019:
|
Number
of Series H-4 Preferred Stock outstanding
|
5,028
|
|
Multiplied
by the stated value
|
$235.50
|
|
Equals
the gross stated value
|
$1,184,094
|
|
Divided
by the conversion price
|
$2.826
|
|
Equals
the convertible shares of common stock
|
419,000
|
|
Multiplied
by the fair market value of common stock at December 31,
2019
|
$0.88
|
|
Equals
the payment
|
$368,720
|
On November 15, 2018, the initial conversion price of Series H-4
Shares was adjusted upon obtaining stockholder approval in
accordance with Nasdaq rules and regulations which resulted in the
25,475 Series H-4 Shares being convertible into 1,666,490 shares of
common stock of the Company.
On December 17, 2018, an investor converted 224 shares of Series
H-4 into 14,653 shares of Common Stock.
During the year ended December 31, 2019, investors converted 21,591
shares of Series H-4 Stock into 1,412,420 shares of Common
Stock.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Series H-5 Convertible Preferred Stock
On December 6, 2019, the Company entered into a Securities Purchase
Agreement with investors pursuant to which the Company issued to
the investors an aggregate of 34,722 shares of the Company’s
newly designated Series H-5 Convertible Preferred Stock, par value
$0.0001 per share (the “Series H-5 Stock”) convertible
into 3,472,200 shares of common stock of the Company. The purchase
price per Series H-5 Stock was $72.00, equal to (i) the closing
price of the Common Stock on the Nasdaq Capital Market on December
5, 2019, plus $0.125 multiplied by (ii) 100. The aggregate purchase
price for the Series H-5 Stock was approximately $2.5
million.
December 6, 2019, the Company filed the Certificate of
Designations, Preferences and Rights of the Series H-5 Convertible
Preferred Stock (the “H-5 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-5 Convertible Preferred Stock (the “Series H-5
Stock”). The Company designated up to 50,000 shares of Series
H-5 Stock and each share has a stated value of $72.00 (the
“Stated Value”). Each share of Series H-5 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 $0.72 per share, subject to a
9.99% blocker provision. The Series H-5 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-5 Stock ranks senior to the Common Stock in the
distribution of assets, to the extent legally available for
distribution.
The holders of Series H-5 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-5 Stock. If any such dilutive
issuance occurs prior to the conversion of the Series H-5 Stock,
the conversion price will be adjusted downward to a price that
cannot be less than 20% of the exercise price or
$0.1584.
In the event of liquidation, the holders of the Series H-5
Preferred Stock are entitled, pari passu with the holders of common
stock, to receive a payment in the amount the holder would receive
if such holder converted the Series H-5 Preferred Stock into common
stock immediately prior to the date of such payment. As of December
31, 2019, such payment would be calculated as follows at December
31, 2019:
|
Number
of Series H-5 Preferred Stock outstanding
|
34,722
|
|
Multiplied
by the stated value
|
$72.00
|
|
Equals
the gross stated value
|
$2,499,984
|
|
Divided
by the conversion price
|
$0.72
|
|
Equals
the convertible shares of common stock
|
3,472,200
|
|
Multiplied
by the fair market value of common stock at December 31,
2019
|
$0.88
|
|
Equals
the payment
|
$3,055,536
|
As described in Note 11, on February 5, 2020, the Company entered
into Exchange Agreement with the holders of existing Series H-5
Stock to exchange an equivalent number of shares of its Series H-6
Stock. The Exchange closed on February 5, 2020. The purpose of the
exchange was to include voting rights.
Stock Based Compensation
Amended and Restated 2014 Equity Incentive Plan
The Company has one equity incentive plan, the 2014 Equity
Incentive Plan (the “Plan”), with 706,629 shares
of common stock reserved for issuance. As of December 31, 2019,
there were 49,943 shares available for grant under the
Company’s equity plan. The Plan was amended in 2018 to
increase the number of shares of common stock available for
issuance thereunder by 285,417, which amendment was approved by the
Company’s stockholders on November 15, 2018.
Service Based Restricted Stock Units and Common Stock
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.
On July 30, 2019, the Board of Directors approved of certain
modification to directors compensation. As consideration for
services to the Board the Chairman of the Board received (i) an
annual cash retainer equal to $90,000 and, as compensation for the
period from February 1, 2019 through January 31, 2020, a grant of
shares of restricted stock in an amount equal to $60,000 and (ii)
each non-Chairman member of the Board receives an annual cash
retainer equal to $30,000 and, as compensation for the period from
February 1, 2019 through January 31, 2020, a grant of shares of
restricted stock in an amount equal to $50,000, each to be paid as
determined by the Compensation Committee.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Due to the limited number of shares available for grant pursuant to
the DropCar, Inc. Amended and Restated 2014 Equity Incentive Plan,
the restricted stock grants referred to in the forgoing paragraph
could not be granted in full in fiscal 2019. The Company issued
31,646 shares of common stock to one board member; 132,913 vested
shares were not issued. On November 14, 2019 the board of directors
modified the terms to convert the grant to a contingent payment
payable upon a merger or change in control within twelve months.
Upon a merger or change in control, the board of directors will
have the option to satisfy the director payments in the form of
cash or equity, if available. During the year ended December 31,
2019, the Company recorded $237,855 as general and administrative expense related to
this grant, of which $25,000 was recorded as stock-based
compensation. From this grant, the Company issued 31,646 shares on
August 27, 2019 to one grantee and recognized a total of $25,000 as
a credit to additional paid in capital for restricted stock units
issued to the board of directors. The balance of the accrual is
recorded and carried forward through accounts payable and accrued
expenses.
Service Based Common Stock
On January 30, 2018 the Company issued 213,707 and 35,558 and
shares of common stock to Alpha Capital Anstalt and Palladium
Capital Advisors, respectively, in connection with the WPCS Merger.
For the Alpha Capital Anstalt issuance, the Company recorded 90% of
the issuance or 192,336 common shares as cost of capital raise and
10% of the issuance or 21,371 common shares as advisory services.
The merger costs in the amount of $1,510,722 were recorded as a
reduction to additional paid in capital and the advisory service
costs in the amount of $167,858 were recorded as general and
administrative expense in the consolidated statement of operations.
For the Palladium Capital Advisors issuance, the Company recorded
$279,327 as general and administrative expense in the consolidated
statement of operations.
Service Based Warrants
On March 8, 2018, in connection with the financing discussed above,
the Company issued 1,371 Series H-4 Shares and 22,850 common stock
warrants to a service provider. The Company valued these warrants
using the Black-Scholes option pricing model with the following
inputs: exercise price of $15.60; fair market value of underlying
stock of $13.20; expected term of 5 years; risk free rate of 2.63%;
volatility of 120.63%; and dividend yield of 0%. For the year ended
December 31, 2018, the Company recorded the fair market value of
the Series H-4 Shares and warrants as an increase and decrease to
additional paid in capital in the amount of $568,648 as these
services were provided in connection with the sale of the Series
H-4 shares.
Consulting Agreement
The Company entered into a two-month consulting agreement with a
vendor to receive public relations services beginning on December
24, 2018. The compensation terms are $20,000 cash payment and
33,333 shares of common stock. In accordance with ASC 505, the
shares were valued as of December 31, 2018, the reporting date. The
Company recorded $61,318 and $6,982 as sales and marketing
expense in the consolidated statement of operations for the year
ended December 31, 2019 and 2018, respectively. The Company paid
the cash upon entering the agreement and issued the shares of
common stock upon completion of the contract in February
2019.
Modification Expense
The Company modified 60,516 options that were subject to expiration
within 90 days following the sale of Suisun City Operations for
WPCS employees, during the year ended December 31, 2018. The
Company extended the expiration date in accordance with the
options’ original terms. The Company recorded a modification
expense related to the extension of the expiration date and
recorded $74,109 as a selling, general and administrative expense
for the year ended December 31, 2018 as part of discontinued
operations in the consolidated statement of operations. The expense
was based on the change in the fair value before and after the
modification using the Black-Scholes option-pricing model on the
date of the modification using the following
assumptions: pre-modification (a)
exercise prices of $28.56 to $633.60, (b) fair value of common
stock $2.40, (c) expected volatility of 231%, (d) dividend yield of
0%, (e) risk-free interest rate of 2.45%, (f) expected life of 0.25
years; and post-modification (a)
exercise prices of $285.56 to $633.60, (b) fair value of common
stock $2.40, (c) expected volatility of 152%, (d) dividend yield of
0%, (e) risk-free interest rate of 2.62% to 2.69%, (f) expected
life of 6.02 years to 8.35 years.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Employee and Non-employee Stock Options
On January 30, 2019, the Company issued options to purchase 99,072
shares of common stock to two members of management. The options
vest quarterly over two years and have an exercise price of $2.32
per share. The options were valued at $213,444, in the aggregate,
on the date of grant using the Black-Scholes options pricing model
and amortized over the vesting period.
The following table summarizes stock option activity during the
years ended December 31, 2019 and 2018:
|
|
Shares
Underlying Options
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
January 1, 2018
|
-
|
-
|
-
|
-
|
|
Acquired in
Merger
|
133,711
|
$36.42
|
3.88
|
-
|
|
Granted
|
214,239
|
5.58
|
9.72
|
-
|
|
Forfeited
|
(45,178)
|
11.64
|
-
|
-
|
|
Outstanding at
December 31, 2018
|
302,772
|
18.3
|
7.20
|
-
|
|
Granted
|
99,072
|
2.32
|
9.09
|
-
|
|
Forfeited
|
(21,448)
|
13.09
|
-
|
-
|
|
Outstanding at
December 31, 2019
|
380,396
|
$14.43
|
6.84
|
-
|
At December 31, 2019, unamortized stock compensation for stock
options was approximately $131,693, with a weighted-average recognition period of
1.07 years.
At December 31, 2019, outstanding options to purchase
317,381 shares of common stock were
exercisable with a weighted-average exercise price per share of
$16.78.
The following table sets forth total non-cash stock-based
compensation for common stock, RSUs, options and warrants issued to
employees and non-employees by operating statement classification
for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
Selling, general
and administrative
|
$280,275
|
$82,436
|
|
Loss from
operations of discontinued components, net of taxes
|
338,854
|
3,711,084
|
|
Total
|
$619,129
|
$3,793,520
|
Stock option pricing model
The fair value of the stock options granted during the year ended
December 31, 2019 and 2018, was estimated at the date of grant
using the Black-Scholes options pricing model with the following
assumptions:
|
|
For the year
ended December 31,
|
|
|
|
|
|
Fair
value of common stock $
|
2.32
|
$1.62
- 13.26
|
|
Expected
volatility
|
151.76%
|
118.10% - 151.79%
|
|
Dividend
yield
|
-
|
-
|
|
Risk-free
interest
|
2.70%
|
2.79%
- 3.00%
|
|
Expected
life (years)
|
5.5
|
5.13
- 5.50
|
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Merger Warrants and Warrant Exchange
The warrants to purchase common stock (the “Merger
Warrants”) issued in connection with the convertible debt in
2017 are fully vested and exercisable for five years through
November 14, 2021. The warrants were valued using the Black-Scholes
option-pricing model with the following inputs: exercise price of
$59.04; fair market value of underlying stock of $16.68 and $17.40;
expected term of 5 years; risk free rate of 1.61%, 1.70%, and
2.01%; volatility of 161%, 147%, and 150%; and a dividend yield of
0.00%. The Company accounted for these warrants as debt discount.
The Company recorded amortization of $176,000 for the year ended
December 31, 2018.
On April 19, 2018, the Company entered into separate Warrant
Exchange Agreements (the “Exchange Agreements”) with
the holders (the “Merger Warrant Holders”) of existing
warrants issued in the Merger (the “Merger Warrants”)
to purchase shares of common stock, pursuant to which, on the
closing date, the Merger Warrant Holders exchanged each Merger
Warrant for 1/18 of a share of common stock and 1/12 of a
warrant to purchase a share of common stock (collectively, the
“Series I Warrants”). The Series I Warrants have an
exercise price of $13.80 per share. In connection with the Exchange
Agreements, the Company issued an aggregate of (i) 48,786 new
shares of common stock and (ii) Series I Warrants to purchase an
aggregate of 73,178 shares of common stock. The Company valued (a)
the stock and warrants issued in the amount of $972,368, (b) the
warrants retired in the amount of $655,507, and (c) recorded the
difference as deemed dividend in the amount of $316,861. The
warrants were valued using the Black-Scholes option-pricing model
on the date of the exchange using the following assumptions: (a)
fair value of common stock $10.32, (b) expected volatility of 103%
and 110%, (c) dividend yield of 0%, (d) risk-free interest rate of
2.76% and 2.94%, (e) expected life of 3 years and 4.13
years.
If at any time (i) the volume weighted average price
(“VWAP”) of the Common Stock exceeds $27.60 for not
less than 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 I Warrants still
unexercised for a cash exercise.
Exercise of Series H-4 Warrants and Issuance of Series J
Warrants
On August 31, 2018, the Company offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of the
Company’s outstanding Series H-4 Warrants to purchase common
stock of the Company issued on March 8, 2018 (the “Series H-4
Warrants”) the opportunity to exercise such Series H-4
Warrants for cash at a reduced exercise price of $3.60 per share
(the “Reduced Exercise Price”) provided such Series H-4
Warrants were exercised for cash on or before September 4, 2018
(the “End Date”). In addition, the Company issued a
“reload” warrant (the “Series J Warrants”)
to each Holder who exercised their Series H-4 Warrants prior to the
End Date, covering one share for each Series H-4 Warrant exercised
during that period. The terms of the Series J Warrants are
substantially identical to the terms of the Series H-4 Warrants
except that (i) the exercise price is equal to $6.00, (ii) the
Series J Warrants may be exercised at all times beginning on the
6-month anniversary of the issuance date on a cash basis and also
on a cashless basis, (iii) the Series J Warrants do not contain any
provisions for anti-dilution adjustment and (iv) the Company has
the right to require the Holders to exercise all or any portion of
the Series J Warrants still unexercised for a cash exercise if the
volume-weighted average price (as defined in the Series J Warrant)
for the Company’s common stock equals or exceeds $9.00 for
not less than ten consecutive trading days.
If at any time (i) the VWAP of the Common Stock exceeds $9.00 for
not less than 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 J Warrants still
unexercised for a cash exercise.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
On September 4, 2018, the Company received executed Repricing Offer
Letters from a majority of the Holders, which resulted in the
issuance of 260,116 shares of the Company’s common stock and
Series J Warrants to purchase up to 260,116 shares of the
Company’s common stock. The Company received gross proceeds
of $936,423 from the exercise of the Series H-4 Warrants pursuant
to the terms of the Repricing Offer Letter.
On September 5, 2018, the Company received a request from Nasdaq to
amend its Series H-4 Warrants to provide that the Series H-4
Warrants may not be exercised until the Company has obtained
stockholder approval of the issuance of Common Stock underlying the
Series H-4 Warrants pursuant to the applicable rules and
regulations of Nasdaq. In response to the request, on September 10,
2018, the Company entered into an amendment (the “Warrant
Amendment”) with the holders of the Series H-4 Stock to
provide for stockholder approval as described above prior to the
exercise of the Series H-4 Warrants. On November 15, 2018, the
Company obtained such stockholder approval.
The Company considers the warrant amendment for the Reduced
Exercise Price and issuance of the Series J Warrants to be of an
equity nature as the amendment and issuance allowed the warrant
holders to exercise warrants and receive a share of common stock
and warrant which, represents an equity for equity exchange.
Therefore, the change in the fair value before and after the
modification and the fair value of the Series J warrants will be
treated as a deemed dividend in the amount of $1,019,040. The cash
received upon exercise in excess of par is accounted through
additional paid in capital.
The Company valued the deemed dividend as the sum of: (a) the
difference between the fair value of the modified award and the
fair value of the original award at the time of modification of
$129,476, and (b) the fair value of the Series J Warrants in the
amount of $889,564. The warrants were valued using the
Black-Scholes option-pricing model on the date of the modification
and issuance using the following assumptions: (a) fair value of
common stock $3.90, (b) expected volatility of 144.3%, (c) dividend
yield of 0%, (d) risk-free interest rate of 2.77% and 2.78%, (e)
expected life of 4.51 years and 5 years.
At the March 8, 2018 closing, the Company issued Series H-4
Warrants that entitled the holders to purchase, in aggregate, up to
447,383 shares of its common stock. As referenced above, on
September 4, 2018, the Company received executed Repricing Offer
Letters from a majority of the investors resulting in the exercise
of Series H-4 Warrants to purchase 260,116 shares of common stock.
The Series H-4 Warrants were initially exercisable at an exercise
price equal to $15.60 per share. On November 15, 2018, the Company
obtained shareholder approval to reduce the exercise price from
$15.60 per share to $3.60 per share for 187,267 Series H-4
Warrants. The Company considers the modification to the warrant
exercise price to be of an equity nature. Therefore, the change in
the fair value before and after the modification is accounted for
as a deemed dividend in the amount of $63,760.
The Series H-4 Warrants contain anti-dilution price protection that
was triggered on December 6, 2019 upon the issuance of the series
H-5 Warrants (as defined below), causing the exercise price to
decrease from $3.60 per share to $3.12 per share. As a result, the
Company recorded a deemed dividend of $2,022 which represents the
fair value transferred to the Series H-4 warrant holders from the
anti-dilution protection being triggered. The deemed dividend was
recorded as an increase to accumulated deficit and increase in
additional paid-in capital and reduced net income available to
common shareholders by the same amount. The Company valued (a) the
fair value of the Series H-4 Shares immediately before the
re-pricing in the amount of $77,084, (b) the fair value of the
Series H-4 Shares immediately after the re-pricing in the amount of
$79,106, and (c) recorded the difference as deemed dividend in the
amount of $2,022. The Series H-4 Warrants were valued using the
Black-Scholes option-pricing model on the date of the exchange
using the following assumptions: (a) fair value of common stock
$0.62, (b) expected volatility of 155.1%, (c) dividend yield of 0%,
(d) risk-free interest rate of 1.64%, (e) expected life of 3.25
years.
Issuance of Pre-Funded Series K Warrants
On November 14, 2018, the Company entered into a securities
purchase agreement with an investor, pursuant to which the Company
agreed to issue and sell, in a registered direct offering, a
Pre-Funded Series K Warrant (the “Series K Warrant) to
purchase 277,778 shares of common stock, in lieu of shares of
common stock to the extent that the purchase of common stock would
cause the beneficial ownership of the purchaser to exceed 9.99% of
the Company’s common stock. The Pre-Funded Series K Warrants
were sold at an offering price of $3.54 per share for gross
proceeds of $983,329, are immediately exercisable for $0.06 per
share of common stock and do not have an expiration
date.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
Issuance of Series H-5 Warrants
At the December 6, 2019 closing of the H-5 Securities Purchase
Agreement, the Company issued warrants to purchase 3,715,254 shares
of common stock of the Company, with an exercise price of $0.792
per share, subject to adjustments (the “H-5 Warrants”).
Subject to certain ownership limitations, the H-5 Warrants will be
exercisable beginning six months from the issuance date and will be
exercisable for a period of five years from the initial exercise
date.
The holders of the H-5 Warrants 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
exercise price (subject to a floor of $0.1584 per share).
The H-5 Warrants contain a blocker that prohibits the holder from
exercising the warrants if such exercise will result in the
beneficial ownership by the holder of more than 9.99% of the
Company’s outstanding shares.
A summary of the Company’s warrants to purchase common stock
is as follows:
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (years)
|
|
January 1,
2018
|
146,358
|
$59.04
|
4.50
|
|
Acquired, H-1
warrants
|
50,744
|
29.04
|
1.55
|
|
Acquired, H-3
warrants
|
14,001
|
33.12
|
3.25
|
|
Granted, H-4
warrants
|
447,383
|
3.60
|
4.18
|
|
Granted, I
warrants
|
73,178
|
13.80
|
2.30
|
|
Granted, Reload
warrants
|
260,116
|
6.00
|
2.60
|
|
Granted, K
warrants
|
277,778
|
0.06
|
*
|
|
Exercised, H-4
warrants
|
(260,116)
|
3.60
|
-
|
|
Retired, Merger
warrants
|
(146,358)
|
59.04
|
-
|
|
Outstanding,
December 31, 2018
|
863,084
|
$6.00
|
2.51
|
|
Exercised, K
Warrants
|
(277,778)
|
0.06
|
-
|
|
Granted, H-5
warrants**
|
3,715,254
|
0.792
|
5.00
|
|
Outstanding,
December 31, 2019
|
4,300,560
|
$1.77
|
5.06
|
* The Series K warrants do not have an expiration
date.
** The Series H-5 warrants are exercisable beginning June 6, 2020.
Of the 3,715,254 granted, 243,054 were granted to Palladium, see
Note 10.
The warrants expire through the years 2020 - 2024, except for the
Series K Warrant which has no expiration date.
10. Related Parties
On July 11, 2018, the Company entered into a consulting agreement
(the “Consulting Agreement”) with Ascentaur, LLC
(“Ascentaur”). Sebastian Giordano is the Chief
Executive Officer of Ascentaur. Mr. Giordano has served on the
board of directors of the Company since February 2013 and served as
the Company’s Interim Chief Executive Officer from August
2013 through April 2016 and as the Company’s Chief Executive
Officer from April 2016 through January 2018.
Pursuant to the terms of the Consulting Agreement, Ascentaur has
agreed to provide advisory services with respect to the strategic
development and growth of the Company, including advising the
Company on market strategy and overall Company strategy, advising
the Company on the sale of the Company’s Suisun City
Operations, providing assistance to the Company in identifying and
recruiting prospective employees, customers, business partners,
investors and advisors that offer desirable administrative,
financing, investment, technical, marketing and/or strategic
expertise, and performing such other services pertaining to the
Company’s business as the Company and Ascentaur may from time
to time mutually agree. The term of the Consulting Agreement
commenced on July 11, 2018 and will continue until terminated in
accordance with the terms of the Consulting Agreement. During the
year ended December 31, 2019, the Company recorded $33,733 as
general and administrative expense related to this consulting
agreement. For the year ended December 31, 2019, approximately
$130,557 was paid in cash and $0 is recorded as accounts payable.
During the year ended December 31, 2018, the Company recorded
$147,754 as general and administrative related to this consulting
agreement. As of December 31, 2018, approximately $51,000 was paid
in cash and approximately $97,000 is recorded as accounts payable.
Of this amount, Ascentaur received $90,000 in relation to the sale
of Suisun City Operations.
DropCar, Inc., and Subsidiaries
Notes
to Consolidated Financial Statements
During 2018 and 2017, the Company entered into various financial
transactions with Alpha Capital Anstalt, a majority shareholder,
through the issuance of $1,350,000 convertible notes in 2017,
issued 213,707 shares of common stock in connection with the merger
on January 30, 2018 for merger related services and cost of
providing capital, issued 11,093 Series A Preferred Stock for
$2,612,500 in the March 8, 2018 PIPE transaction, and was issued
277,778 Series K prefunded common stock warrants on November 14,
2018 for proceeds of approximately $983,000.
Palladium Capital Advisors (“Palladium”), and advisor
to the Company and AYRO, has provided investment banking services
in connection with the merger on January 30, 2018 and received
35,558 shares of common stock for merger related services, received
1,371 Series H-4 preferred shares and warrants in the March 8, 2018
PIPE transaction for advisory services, and in connection with the
December 6, 2019 Series H-5 Stock transaction received $200,000 and
243,054 H-5 Warrants.
On December 5, 2019, the Company entered into a placement agent and
merger advisory agreement with Palladium whereby the Company shall
pay to Palladium a cash fee equal to 8% of the aggregate gross
proceeds raise in closing of each financing transaction and
warrants to purchase that number of shares of common stock of the
Company equal to 7% of the aggregate number of shares of common
stock sold in each offering. The warrants will be identical to any
warrants issued to investors at such closing, provide for a
cashless exercise, have an exercise price equal to the offering
price per share in the closing, and expire on the five year
anniversary at such closing. In addition, the Company shall pay
Palladium compensation for advisory services in connection with a
possible business combination of the Company with an unaffiliated
third party whereby the Company shall issue the number of shares of
common stock of the post-merger entity immediately after the merger
that represents 2.5% of the outstanding shares of common stock in
any surviving post-merger entity.
11. Subsequent Events
The Company has analyzed its operations subsequent to December 31,
2019 and noted the following subsequent events:
The Company’s operations may be affected by the recent and
ongoing outbreak of the coronavirus disease 2019 (COVID-19) which
in March 2020, was been declared a pandemic by the World Health
Organization. The ultimate disruption which may be caused by the
outbreak is uncertain; however it may result in a material adverse
impact on the Company’s financial position, operations and
cash flows. Possible areas that may be affected include, but are
not limited to, disruption to the Company’s customers and
revenue, labor workforce, and the decline in value of assets held
by the Company, including, property and equipment.
On February 5, 2020 the Company entered into separate Exchange
Agreements (the “Exchange Agreements”) with the holders
of existing Series H-5 Convertible Preferred Stock (the
“Series H-5 Shares”), par value $0.0001 per share, to
exchange an equivalent number of shares of the Company’s
Series H-6 Convertible Preferred Stock (the “Series H-6
Shares”), par value $0.0001 per share (the
“Exchange”). The Exchange closed on February 5,
2020.
On
February 12, 2020, the Company received a notice from the New York
State Department of Labor stating the Company has a negative
balance in their experience rating account of approximately
$165,000. The notice states the Company may make a voluntary
payment of approximately $165,000. The Company does not expect to
make this payment which will result in an increase to their future
unemployment insurance rates. The Company will need to pay the max
rate for a three-year period for not making the
payment.
Subsequent to December 31, 2019, investors converted 4,900 shares
of Series H-6 Shares into 490,000 shares of Common
Stock.
