AYRO, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2020
or
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from __________________ to
__________________
Commission File Number:
001-34643
DropCar, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware
|
98-0204758
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
DropCar, Inc.
1412 Broadway, Suite 2105
New York, New York 10018
(646) 342-1595
(Registrant’s telephone number, including area
code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common stock par value $0.0001 per share
|
DCAR
|
The Nasdaq Stock Market
|
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
☑
No
☐
Indicate by check mark whether the registrant has submitted
electronically Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
Yes
☑
No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer
|
|
☐
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Accelerated filer
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☐
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Non-accelerated filer
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|
☑
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Smaller reporting company
|
|
☑
|
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Emerging
growth company
|
|
☐
|
If an emerging growth company, indicate by a check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act)
Yes
☐
No
☑
As of May 11, 2020, there were 6,250,782 shares of the
registrant’s common stock, $0.0001 par value per share,
issued and outstanding.
EXPLANATORY NOTE
The disclosure included pursuant to Part I, Item 5 of this
Quarterly Report on Form 10-Q reflects information that would
otherwise have been filed on a voluntary basis under Item 8.01 on a
Current Report on Form 8-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
Certain statements in this report contain or may contain
forward-looking statements. These statements, identified by words
such as “plan,” “anticipate,”
“believe,” “estimate,”
“should,” “expect” and similar expressions,
include our expectations and objectives regarding our future
financial position, operating results and business strategy. These
statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by such
forward-looking statements. These forward-looking statements were
based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results
to differ materially from those in the forward-looking statements.
These factors include, but are not limited to, our ability to
consummate the anticipated merger with AYRO, Inc., our inability to
obtain adequate financing, our inability to expand our business,
existing or increased competition, stock volatility and
illiquidity, and the failure to implement our business plans or
strategies. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any
forward-looking statements that may be made herein. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Readers
should carefully review this report in its entirety, including but
not limited to our financial statements and the notes thereto and
the risks described in our Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the “SEC”) on
March 30, 2020, as subsequently amended on April 10, 2020, and
other reports we file with the SEC. We advise you to carefully
review the reports and documents we file from time to time with the
SEC, particularly our quarterly reports on Form 10-Q and our
current reports on Form 8-K. Except for our ongoing obligations to
disclose material information under the Federal securities laws, we
undertake no obligation to publicly release any revisions to any
forward-looking statements, to report events or to report the
occurrence of unanticipated events.
OTHER INFORMATION
When used in this report, the terms, “we,” the
“Company,” “our,” and “us”
refer to DropCar, Inc., a Delaware corporation, and its
consolidated subsidiaries.
TABLE OF CONTENTS
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Page No.
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PART I – FINANCIAL INFORMATION
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Item
1.
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Condensed
Consolidated Financial Statements (Unaudited)
|
4
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|
Condensed
Consolidated Balance Sheets as of March 31, 2020 and December 31,
2019
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4
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Condensed
Consolidated Statements of Operations for the three months ended
March 31, 2020 and 2019
|
5
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Condensed
Consolidated Statements of Changes in Stockholders’ Equity
for the three months ended March 31, 2020 and 2019
|
6
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Condensed
Consolidated Statements of Cash Flows for the three months ended
March 31, 2020 and 2019
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7
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Notes
to Condensed Consolidated Financial Statements
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8
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
24
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Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
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30
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Item
4.
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Controls
and Procedures.
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31
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Part II – OTHER INFORMATION
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Item
1.
|
Legal
Proceedings.
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32
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Item
1A.
|
Risk
Factors.
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32
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Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
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32
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Item
3.
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Defaults
Upon Senior Securities.
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32
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Item
4.
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Mine
Safety Disclosures.
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32
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Item
5.
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Other
Information.
|
32
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Item
6.
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Exhibits.
|
33
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Signatures.
|
34
|
3
Part I – Financial Information
Item 1 – Condensed Consolidated Financial Statements
(Unaudited).
DropCar, Inc., and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
March
31,
|
December
31,
|
|
|
2020
|
2019
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
$
3,551,393
|
$
4,259,091
|
|
Prepaid expenses
and other current assets
|
172,672
|
181,805
|
|
Current assets held
for sale
|
197,902
|
375,186
|
|
Total current
assets
|
3,921,967
|
4,816,082
|
|
|
|
|
|
Noncurrent assets
held for sale
|
390,832
|
441,395
|
|
|
|
|
|
TOTAL
ASSETS
|
$
4,312,799
|
$
5,257,477
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts payable
and accrued expenses
|
$
1,558,909
|
$
1,348,356
|
|
Current liabilities
held for sale
|
912,472
|
1,040,776
|
|
TOTAL
LIABILITIES
|
2,471,381
|
2,389,132
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
Preferred stock,
$0.0001 par value, 5,000,000 shares authorized
|
|
|
|
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 shares issued and
outstanding;
|
1
|
1
|
|
Convertible Series
H-5, 50,000 shares designated, zero and 34,722 shares issued and
outstanding;
|
-
|
3
|
|
Convertible Series
H-6, 50,000 shares designated, 29,822 and zero shares issued and
outstanding as of March 31, 2020 and December 31,
2019;
|
3
|
-
|
|
Common stock,
$0.0001 par value; 100,000,000 shares authorized, 4,551,882 and
4,061,882 issued and outstanding as of March 31, 2020 and December
31, 2019, respectively
|
455
|
406
|
|
Additional paid in
capital
|
37,612,600
|
37,581,914
|
|
Accumulated
deficit
|
(35,771,641
)
|
(34,713,979
)
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
1,841,418
|
2,868,345
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
4,312,799
|
$
5,257,477
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
DropCar, Inc., and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
For the Three
Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
General and
administrative expenses
|
$
773,118
|
$
644,072
|
|
TOTAL
OPERATING EXPENSES
|
773,118
|
644,072
|
|
|
|
|
|
OPERATING
LOSS
|
(773,118
)
|
(644,072
)
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
(773,118
)
|
(644,072
)
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
Loss from
operations of discontinued component, net of taxes
|
(284,544
)
|
(1,331,634
)
|
|
LOSS
ON DISCONTINUED OPERATIONS
|
(284,544
)
|
(1,331,634
)
|
|
|
|
|
|
NET
LOSS
|
$
(1,057,662
)
|
$
(1,975,706
)
|
|
|
|
|
|
AMOUNTS
ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
|
|
Loss from
continuing operations
|
$
(773,118
)
|
$
(644,072
)
|
|
Loss from
discontinued operations
|
(284,544
)
|
(1,331,634
)
|
|
NET
LOSS
|
$
(1,057,662
)
|
$
(1,975,706
)
|
|
|
|
|
|
LOSS
PER SHARE FROM CONTINUING OPERATIONS:
|
|
|
|
Basic
|
$
(0.19
)
|
$
(0.30
)
|
|
Diluted
|
$
(0.19
)
|
$
(0.30
)
|
|
LOSS
PER SHARE FROM DISCONTINUED OPERATIONS:
|
|
|
|
Basic
|
$
(0.07
)
|
$
(0.63
)
|
|
Diluted
|
$
(0.07
)
|
$
(0.63
)
|
|
NET
LOSS PER SHARE:
|
|
|
|
Basic
|
$
(0.26
)
|
$
(0.93
)
|
|
Diluted
|
$
(0.26
)
|
$
(0.93
)
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
|
|
|
Basic
|
4,132,212
|
2,117,688
|
|
Diluted
|
4,132,212
|
2,117,688
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
DropCar Inc., and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
(Unaudited)
|
|
Series H
|
Series H-3
|
Series H-4
|
Series H-5
|
Series H-6
|
|
|
Additional
|
|
|
|||||
|
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Preferred Stock
|
Common Stock
|
Paid-in
|
Accumulated
|
|
||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2020
|
8
|
-
|
2,189
|
-
|
5,028
|
1
|
34,722
|
3
|
-
|
-
|
4,061,882
|
406
|
37,581,914
|
(34,713,979
)
|
2,868,345
|
|
Issuance of
H-6 preferred stock in exchange for H-5 preferred
stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(34,722
)
|
(3
)
|
34,722
|
3
|
-
|
-
|
-
|
-
|
-
|
|
Conversion of
Series H-6 preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,900
)
|
-
|
490,000
|
49
|
(49
)
|
-
|
-
|
|
Stock based
compensation for options issued to employees
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
30,735
|
-
|
30,735
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,057,662
)
|
(1,057,662
)
|
|
Balance, March
31, 2020
|
8
|
$
-
|
2,189
|
$
-
|
5,028
|
$
1
|
-
|
$
-
|
29,822
|
$
3
|
4,551,882
|
$
455
|
$
37,612,600
|
$
(35,771,641
)
|
$
1,841,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2019
|
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
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(19,361
)
|
-
|
(19,361
)
|
|
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
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,975,706
)
|
(1,975,706
)
|
|
Balance, March
31, 2019
|
8
|
$
-
|
2,189
|
$
-
|
5,028
|
$
1
|
-
|
$
-
|
-
|
$
-
|
3,918,727
|
$
392
|
$
35,286,073
|
$
(31,729,427
)
|
$
3,557,039
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
DropCar, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
For the Three
Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$
(1,057,662
)
|
$
(1,975,706
)
|
|
Loss from
discontinued operations
|
284,544
|
1,331,634
|
|
Loss from
continuing operations
|
(773,118
)
|
(644,072
)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Stock based
compensation
|
-
|
24,510
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Prepaid expenses
and other assets
|
9,133
|
(1,920
)
|
|
Accounts payable
and accrued expenses
|
210,552
|
(331,834
)
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES - CONTINUING
OPERATIONS
|
(553,433
)
|
(953,316
)
|
|
NET
CASH USED IN OPERATING ACTIVITIES - DISCONTINUED
OPERATIONS
|
(124,182
)
|
(919,138
)
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(677,615
)
|
(1,872,454
)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES - CONTINUING
OPERATIONS
|
-
|
-
|
|
NET
CASH USED IN INVESTING ACTIVITIES - DISCONTINUED
OPERATIONS
|
(30,083
)
|
(74,061
)
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(30,083
)
|
(74,061
)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds from the
sale of common stock
|
-
|
2,000,001
|
|
Financing fees in
connection with the sale of common stock
|
-
|
(15,000
)
|
|
Proceeds from
issuance of common stock in connection with exercise of H-4
warrants
|
-
|
16,667
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING
OPERATIONS
|
-
|
2,001,668
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES - DISCONTINUED
OPERATIONS
|
-
|
-
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
-
|
2,001,668
|
|
|
|
|
|
|
|
|
|
Net (decrease)
increase in cash, including cash classified within current assets
held for sale
|
(707,698
)
|
55,153
|
|
Less: Net increase
in cash classified within current assets held for sale
|
-
|
239,821
|
|
Net (decrease)
increase in cash
|
(707,698
)
|
294,974
|
|
|
|
|
|
Cash,
beginning of period
|
4,259,091
|
3,887,910
|
|
|
|
|
|
Cash,
end of period
|
$
3,551,393
|
$
4,182,884
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Cash paid for
interest
|
$
-
|
$
-
|
|
Cash paid for
taxes
|
$
-
|
$
-
|
|
Issuance of common
stock for accrued stock based compensation
|
$
-
|
$
4,724
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
7
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.
The
Company
DropCar Operating Business
The
Company partners with top parking providers to get customers access
to the best parking garages at the best rates via the
Company’s mobile application
(“App”).
In July
2018, the Company launched its mobility cloud platform which
provides automotive-related businesses with a 100% self-serve SaaS
version of its cloud-based Enterprise Vehicle Assistance and
Logistic (“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 during
the three months ended March 31, 2020 and 2019.
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 (“Self-Park Spaces”) 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.
The COVID-19 outbreak, which surfaced in Wuhan, China in December
2019 and which was subsequently declared a pandemic by the World
Health Organization in March 2020, has had a pronounced effect on
the domestic and global economies. The Company’s business has
been materially adversely impacted by the recent COVID-19 outbreak
and may continue to be materially adversely impacted in the future.
The extent of the impact of COVID-19 on the Company’s
business, financial results, liquidity and cash flows will depend
largely on future developments, including new information that may
emerge concerning the severity and action taken to contain or
prevent further spread within the U.S. and the related impact on
consumer confidence and spending, all of which are highly uncertain
and cannot be predicted.
8
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Merger with AYRO
On December 19, 2019, the Company, 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, ABC Merger Sub will merge with and
into AYRO, with AYRO continuing as a wholly owned subsidiary of the
Company 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 the Company’s 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 the Company.
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 shareholders of the Company (along with the
Company’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 certain prefunded 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 the
Company. Immediately following the AYRO merger, subject to the
approval of the Company’s current 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 the Company’s stock price
to at least $5.00 per share.
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 the Company 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.
9
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 its
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 or agreed to enter into lock-up
agreements (the “Lock-Up Agreements”) pursuant to which
they will accept 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 the Company 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
the combined company is expected to consist of seven members, three
of whom will be directors designated by the Company’s board
and will include Joshua Silverman, the Company’s current
director and chairman of the board of directors, as chairman of the
board of directors of the combined company, as well as Sebastian
Giordano and Greg Schiffman, each of whom are current directors of
the Company, Zvi Joseph, who is a current member of the
Company’s Board of Directors, will be designated by Alpha
Capital Anstalt, the lead investor in the AYRO private placement,
and the three remaining directors will be the current directors of
AYRO. It is anticipated that the AYRO designees will be Rodney C.
Keller, Jr., George Devlin, and Mark Adams. 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 (the “Asset Purchase Agreement”) by and among
the Company,
DropCar Operating Company, Inc., a Delaware
corporation and wholly owned subsidiary of the Company
(“DropCar Operating”), and DC Partners Acquisition, LLC
(“DC Partners”), Spencer Richardson, the
Company’s Co-Founder and Chief Executive Officer, and David
Newman, the Company’s 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, is presented as
discontinued operations in the consolidated statement of operations
and consolidated statement of cash flows.
10
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 the Company 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.
Trading of Company’s stock
The Company’s shares of common stock 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 6, 2019, the Company received notification from the
Nasdaq Stock Market (“Nasdaq”) stating that it 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
would be delisted from the Nasdaq Capital Market unless the Company
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 stayed the
delisting of the Company’s securities pending the
Panel’s decision. The hearing occurred on April 16, 2020.
The Company’s appeal to the Panel included a plan that
set 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 the Company intends to seek in connection with the
joint proxy statement and consent solicitation statement/prospectus
in connection with the AYRO Merger, which was declared effective by
the Securities and Exchange Commission on April 24, 2020, 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. On April 27, 2020, the Company received notice from
Nasdaq that the Panel had granted the Company’s request for
continued listing, subject to the requirements that on or before
May 29, 2020, the Company shall have completed the AYRO Merger and
established compliance with all initial listing criteria outlined
in Listing Rule 5505. While the Company intends to complete
the AYRO Merger and establish compliance prior to such date, there
can be no assurance that DropCar will be successful in regaining
compliance with the Listing Rule.
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
March 31, 2020, the Company has an accumulated deficit of $35.8
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 May 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-Q.
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.
11
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3.
Basis
of Presentation and Summary of Accounting Policies
Basis of Presentation and Principles of Consolidation
The
accompanying unaudited condensed consolidated financial statements
were prepared using generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Article 8 of Regulation S-X. Accordingly, these unaudited condensed
consolidated financial statements do not include all information or
notes required by generally accepted accounting principles for
annual financial statements and should be read in conjunction with
the Company’s annual consolidated financial statements
included within the Company’s Form 10-K for the fiscal year
ended December 31, 2019, as filed with the SEC on March 30, 2020
and subsequently amended on April 10, 2020.
The
unaudited condensed consolidated financial statements include the
accounts of the Company and subsidiaries, all of which are wholly
owned. All significant intercompany transactions and balances have
been eliminated in consolidation. In the opinion of management, the
unaudited condensed consolidated financial statements included
herein contain all adjustments necessary to present fairly the
Company's financial position and the results of its operations and
cash flows for the interim periods presented. Such adjustments are
of a normal recurring nature. The results of operations for the
three months ended March 31, 2020 may not be indicative of results
for the full year.
Significant Accounting Policies
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles (“US
GAAP”) requires management to make estimates and assumptions
that affect amounts reported therein. Generally, matters subject to
estimation and judgement include amounts related to accounts
receivable realization, asset impairments, useful lives of property
and equipment and capitalized software costs, deferred tax asset
valuation allowances, and operating expense accruals. Actual
results could differ from those estimates.
Revenue Recognition
The Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09,
codified as ASC 606: Revenue from Contracts with Customers, which
provides a single comprehensive model for entities to use in
accounting for revenue arising from contracts with
customers.
Revenue from contracts with customers is recognized when, or as,
the Company satisfies its performance obligations by transferring
the promised goods or services to the customers. A good or service
is transferred to a customer when, or as, the customer obtains
control of that good or service. A performance obligation may be
satisfied over time or at a point in time. Revenue from a
performance obligation satisfied over time is recognized by
measuring the Company’s progress in satisfying the
performance obligation in a manner that depicts the transfer of the
goods or services to the customer. Revenue from a performance
obligation satisfied at a point in time is recognized at the point
in time that the Company determines the customer obtains control
over the promised good or service. The amount of revenue recognized
reflects the consideration the Company expects to be entitled to in
exchange for those promised goods or services (i.e., the
“transaction price”). In determining the transaction
price, the Company considers multiple factors, including the
effects of variable consideration. Variable consideration is
included in the transaction price only to the extent it is probable
that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainties with respect to
the amount are resolved. In determining when to include variable
consideration in the transaction price, the Company considers the
range of possible outcomes, the predictive value of its past
experiences, the time period of when uncertainties expect to be
resolved and the amount of consideration that is susceptible to
factors outside of the Company’s influence, such as the
judgment and actions of third parties.
12
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
Loss Per Share
Basic
income (loss) per share is computed by dividing net loss
attributable to common shareholders (the numerator) by the
weighted-average number of common shares outstanding (the
denominator) for the period. In periods when the Company has
income, the Company calculates basic earnings per share using the
two-class method, if required, pursuant to ASC 260 Earnings Per
Share. The two-class method was required effective with the
issuance of convertible preferred stock in the past because this
class of stock qualified as a participating security, giving the
holder the right to receive dividends should dividends be declared
on common stock. Under the two-class method, earnings for a period
are allocated on a pro rata basis to the common stockholders and to
the holders of convertible preferred stock based on the weighted
average number of common shares outstanding and number of shares
that could be issued upon conversion. In periods of losses, diluted
loss per share is computed on the same basis as basic loss per
share as the inclusion of any other potential shares outstanding
would be anti-dilutive.
The following securities were excluded from weighted average
diluted common shares outstanding because their inclusion would
have been antidilutive.
|
|
As of March 31,
|
|
|
|
2020
|
2019
|
|
Common
stock equivalents:
|
|
|
|
Common
stock options
|
307,202
|
381,412
|
|
Series A, H-1, H-3, H-4, H-5, H-6, I, J, K and Merger common stock
purchase warrants
|
4,300,560
|
585,306
|
|
Series
H, H-3, H-4, H-6, Convertible Preferred Stock
|
3,410,354
|
338,069
|
|
Restricted
shares (unvested)
|
-
|
244,643
|
|
Totals
|
8,018,116
|
1,549,430
|
Adoption of New Accounting Standards
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 did not have a material impact on the
Company’s consolidated financial position or results of
operations.
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.
13
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4.
Discontinued
Operations
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 three
months ended March 31, 2020 and 2019 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:
|
|
For the
Three Months Ended
March 31,
|
|
|
|
2020
|
2019
|
|
SERVICE REVENUES
|
$
1,012,261
|
$
1,099,443
|
|
COST OF REVENUE
|
842,642
|
1,127,045
|
|
GROSS PROFIT (LOSS)
|
169,619
|
(27,602
)
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
Research
and development
|
42,634
|
68,982
|
|
General
and administrative
|
333,069
|
1,129,025
|
|
Depreciation
and amortization
|
78,760
|
107,749
|
|
TOTAL OPERATING
EXPENSES
|
454,463
|
1,305,756
|
|
|
|
|
|
OPERATING
LOSS
|
(284,844
)
|
(1,333,358
)
|
|
|
|
|
|
Other
income, net
|
300
|
1,724
|
|
|
|
|
|
LOSS FROM DISCONTINUED OPERATIONS
|
$
(284,544
)
|
$
(1,331,634
)
|
Assets and liabilities of discontinued operations held for sale
included the following:
|
|
March 31,
2020
|
December 31,
2019
|
|
|
|
|
|
Cash
|
$
65,807
|
$
81,457
|
|
Accounts
receivable, net
|
96,665
|
210,671
|
|
Prepaid
expenses and other current assets
|
35,430
|
83,058
|
|
Current
assets held for sale
|
$
197,902
|
$
375,186
|
|
|
|
|
|
Property
and equipment, net
|
$
23,191
|
$
25,723
|
|
Capitalized
software costs, net
|
364,116
|
410,261
|
|
Operating
lease right-of-use asset
|
-
|
1,886
|
|
Other
assets
|
3,525
|
3,525
|
|
Noncurrent
assets held for sale
|
$
390,832
|
$
441,395
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
671,856
|
737,862
|
|
Deferred
revenue
|
240,616
|
302,914
|
|
Current
liabilities held for sale
|
$
912,472
|
$
1,040,776
|
14
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5.
Capitalized
Software
Capitalized software costs included in non-current assets held for
sale consists of the following as of March 31, 2020 and December
31, 2019:
|
|
March 31,
2020
|
December 31,
2019
|
|
Software
|
$
1,498,757
|
$
1,467,008
|
|
Accumulated
amortization
|
(1,134,641
)
|
(1,056,747
)
|
|
Total
|
$
364,116
|
$
410,261
|
Amortization
expense for the three months ended March 31, 2020 and 2019 is
$77,894 and $106,829, respectively and included in loss from
discontinued operations.
6.
Commitments
and Contingencies
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 three months ended March 31, 2020 and
2019, rent expense for the Company’s New York City and Buenos
Aires offices was approximately $11,347 and $22,900, 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.
Other
As of January 1, 2019, the Company had accrued approximately
$232,000 for the settlement of multiple employment disputes. During
the three months ended March 31, 2019, approximately $39,000 of
this amount was settled upon payment. For the three months ended
March 31, 2019, $16,000 was expensed and accrued for settlements.
As of March 31, 2019, approximately $209,000 remained accrued for
the settlement of employment disputes. As of January 1, 2020,
approximately $134,000 remained accrued as accounts payable and
accrued expenses for the settlement of employment disputes. For the
three months ended March 31, 2020, approximately $40,000 was
recorded as a reduction in loss from operations of discontinued
component for the reversal of previously accrued settlements.
Further, approximately $26,000 was settled upon payment. As of
March 31, 2020, approximately $68,000 remains accrued as accounts
payable and accrued expenses for the settlement of employment
disputes.
On March 23, 2018, DropCar was made aware of an audit being
conducted by the New York State Department of Labor
(“DOL”) regarding a claim filed by an employee. The DOL
is investigating whether DropCar properly paid overtime for which
DropCar has raised several defenses. In addition, the DOL is
conducting its audit to determine whether the Company owes spread
of hours pay (an hour’s pay for each day an employee worked
or was scheduled for a period over ten hours in a day). If the DOL
determines that monies are owed, the DOL will seek a backpay order,
which management believes will not, either individually or in the
aggregate, have a material adverse effect on DropCar’s
business, consolidated financial position, results of operations or
cash flows. During the three months ended March 31, 2020 and 2019,
the Company expensed as loss from operations of discontinued
component approximately $0 in relation to these matters. As of
March 31, 2020 and December 31, 2019, the Company has accrued as
accounts payable and accrued expenses approximately $333,000 in
relation to these matters.
15
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 component. As of
March 31, 2020, the balance due remains $45,000.
On
February 12, 2020, the Company received a notice from the New York
State Department of Labor stating it has a negative balance in the
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 the future unemployment insurance
rates. The Company will need to pay the max rate for a three-year
period for not making the payment.
7.
Stockholders’
Equity
Common Stock
On
March 26, 2019, the Company entered into a Securities Purchase
Agreement with certain existing investors, pursuant to which the
Company sold, in a registered public offering by the Company
directly to the investors an aggregate of 478,469 shares of common
stock, par value $0.0001 per share, at an offering price of $4.18
per share for proceeds of $1,985,001 net of offering expenses of
$15,000.
During the period ended March 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 period ended March 31, 2019, the Company issued 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 period ended March 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 period ended March 31, 2020, the Company issued 490,000
shares of common stock from the conversion of 4,900 shares of
Series H-6 Convertible Preferred Stock.
Preferred Stock
In accordance with the Certificate of Incorporation, there are
5,000,000 authorized preferred shares at a par value of $
0.0001.
Series H Convertible Preferred Stock
Under the terms of the Series H Certificate of Designation, each
share of the Company’s Series H Convertible Preferred Stock
(the “Series H Preferred Stock”) has a stated value of
$154 and is convertible into shares of the Company’s common
stock, equal to the stated value divided by the conversion price of
$36.96 per share (subject to adjustment in the event of stock
splits or dividends). The Company is prohibited from effecting the
conversion of the Series H Preferred Stock to the extent that, as a
result of such conversion, the holder would beneficially own more
than 9.99%, in the aggregate, of the issued and outstanding shares
of the Company’s common stock calculated immediately after
giving effect to the issuance of shares of common stock upon such
conversion.
16
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 March 31,
2020, such payment would be calculated as follows:
|
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 March 31,
2020
|
$
0.45
|
|
Equals
the payment
|
$
15
|
Series H-1 and H-2 Convertible Preferred Stock
The Company has designated 9,488 Series H-1 Convertible Preferred
Stock and designated 3,500 Series H-2 Convertible Preferred Stock,
none of which are outstanding.
Series H-3 Convertible Preferred Stock
Pursuant to the Series H-3 Certificate of Designation (as defined
below), the holders of the Company’s Series H-3 Convertible
Preferred Stock (the “Series H-3 Preferred Stock”) 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 Preferred Stock (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 Preferred Stock 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 Preferred Stock 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 Preferred Stock.
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 March
31, 2020, such payment would be calculated as follows:
|
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 March 31,
2020
|
$
0.45
|
|
Equals
the payment
|
$
4,104
|
17
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Series H-4 Convertible Preferred Stock
On March 8, 2018, the Company entered into a Securities Purchase
Agreement 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 Preferred Stock
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 “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 Convertible Preferred Stock (the
“Series H-4 Preferred Stock”). The Company designated
up to 30,000 shares of Series H-4 Preferred Stock and each share
has a stated value of $235.50 (the “H-4 Stated Value”).
Each share of Series H-4 Preferred 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 H-4 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 Preferred Stock has 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 Preferred 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 Preferred 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 Preferred Stock. If any such
dilutive issuance occurs prior to the conversion of the Series H-4
Preferred 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 Preferred 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.
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 March
31, 2020, such payment would be calculated as follows:
|
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 March 31,
2020
|
$
0.45
|
|
Equals
the payment
|
$
188,550
|
18
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Preferred Stock”)
convertible into 3,472,200 shares of common stock of the Company.
The purchase price per Series H-5 Preferred 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 Preferred Stock was
approximately $2.5 million.
December 6, 2019, the Company filed the Certificate of
Designations, Preferences and Rights of the Series H-5 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
Preferred Stock. The Company designated up to 50,000 shares of
Series H-5 Preferred Stock and each share has a stated value of
$72.00 (the “H-5 Stated Value”). Each share of Series
H-5 Preferred 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 H-5 Stated Value by the conversion price of $0.72
per share, subject to a 9.99% blocker provision. The Series H-5
Preferred Stock has the same dividend rights as the common stock,
and no voting rights except as provided for in the H-5 Certificate
of Designation or as otherwise required by law. In the event of any
liquidation or dissolution of the Company, the Series H-5 Preferred
Stock ranks senior to the common stock in the distribution of
assets, to the extent legally available for
distribution.
Exchange of Series H-5 Preferred Stock for Series H-6 Convertible
Preferred Stock
On February 5, 2020 the Company entered into separate Exchange
Agreements (the “Exchange Agreements”) with the holders
of existing Series H-5 Preferred Stock, to exchange an equivalent
number of shares of the Company’s Series H-6 Convertible
Preferred Stock (the “Series H-6 Preferred Stock”), par
value $0.0001 per share (the “Exchange”). The purpose
of the exchange was to include voting rights. The Company accounted
for the Exchange as a modification
which
resulted in no impact to the condensed consolidated statement of
operations
.
On February 5, 2020, the Company filed the Certificate of
Designations, Preferences and Rights of the Series H-6 Preferred
Stock (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 Preferred Stock. The Company designated up to 50,000 shares of
Series H-6 Preferred Stock and each share has a stated value of
$72.00 (the “H-6 Stated Value”). Each share of Series
H-6 Preferred Stock 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 Preferred Stock has 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 Preferred Stock also has the same voting rights as the
common stock, except that in no event shall a holder of Series H-6
Preferred Stock be permitted to exercise a greater number of votes
than such holder would have been entitled to cast if the Series H-6
Preferred Stock had immediately been converted into shares of
common stock at a conversion price equal to $0.78 (subject to
adjustment). In addition, a holder (together with its affiliates)
may not be permitted to vote Series H-6 Preferred Stock 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 Preferred Stock ranks
senior to the common stock in the distribution of assets, to the
extent legally available for distribution.
The holders of Series H-6 Preferred 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-6 Preferred Stock. If any such
dilutive issuance occurs prior to the conversion of the Series H-6
Preferred Stock, the conversion price will be adjusted downward to
a price that cannot be less than 20% of the exercise price or
$0.1584.
19
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In the event of liquidation, the holders of the Series H-6
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-6 Preferred Stock into common
stock immediately prior to the date of such payment. As of March
31, 2020, such payment would be calculated as follows:
|
Number
of Series H-6 Preferred Stock outstanding
|
29,822
|
|
Multiplied
by the stated value
|
$
72.00
|
|
Equals
the gross stated value
|
$
2,147,184
|
|
Divided
by the conversion price
|
$
0.72
|
|
Equals
the convertible shares of common stock
|
2,982,200
|
|
Multiplied
by the fair market value of common stock at March 31,
2020
|
$
0.45
|
|
Equals
the payment
|
$
1,341,990
|
Stock Based Compensation
Amended and Restated 2014 Equity Incentive Plan
The Company has one equity incentive plan which was amended in 2018
to increase the number of shares of common stock available for
issuance, the 2014 Equity Incentive Plan (the “Plan”),
with 706,629 shares of common stock reserved for issuance. As
of March 31, 2020, there were 123,137 shares available for grant
under the Plan.
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. During the three months ended
March 31, 2019, the Company recorded $289,842 as loss from
operations of discontinued component as stock based compensation in
relation to the RSUs.
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 $0 and 6,138 in the consolidated statement of
operations for the three months ended March 31, 2020 and 2019 in
relation to the consulting agreement. The Company paid the cash
upon entering the agreement and issued the shares of common stock
upon completion of the contract in February
2019.
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.
During the period ended March 31, 2020, pursuant to employment
agreements with Spencer Richardson, the Company’s Co-Founder
and Chief Executive Officer, and David Newman, the Company’s
Co-Founder and Chief Business Development Officer, the Company
agreed to issue options equivalent to 1% of the outstanding shares
of the Company on a fully diluted basis pursuant to the equity
incentive plan. There are not enough shares in the Company’s
equity incentive plan to issue the 251,400 options to be granted,
in the aggregate. As of and for the three months ended March 31,
2020, the Company recorded $18,608 as current liabilities held for
sale and loss from operations of discontinued component in relation
to this option issuance. The Company valued the options to be
issued using the Black-Scholes option pricing model under the
following assumptions, (i) expected life of 5 years, (ii)
volatility of 153%, (iii) risk-free rate of 1.57%, and (iv)
dividend rate of zero.
20
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes stock option activity during the
three months ended March 31, 2020:
|
|
Shares
Underlying Options
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2019
|
380,396
|
$
14.43
|
6.84
|
-
|
|
Expired
|
(73,194
)
|
35.53
|
-
|
|
|
Outstanding at
March 31, 2020
|
307,202
|
$
9.39
|
8.20
|
-
|
At March 31, 2020, unamortized stock compensation for stock options
was approximately $
100,957
,
with a weighted-average recognition period of 0.82
years.
At March 31, 2020, outstanding options to purchase
256,415
shares of common stock were
exercisable with a weighted-average exercise price per share of
$10.74.
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 three months ended March 31, 2020 and 2019:
|
|
Three Months ended March 31,
|
|
|
|
2020
|
2019
|
|
Research
and development
|
3,758
|
3,717
|
|
Selling, general
and administrative
|
45,586
|
484,240
|
|
Total
$
|
49,344
|
$
487,957
|
Warrants
Series I Warrants
On April 19, 2018, the Company entered into separate Warrant
Exchange Agreements (the “Exchange Agreements”) with
the holders of existing warrants previously issued (collectively,
the “Series I Warrants”). The Series I Warrants have an
exercise price of $13.80 per share. 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 March 8, 2018, the Company issued warrants to purchase an
aggregate of 447,383 shares of common stock (the “Series H-4
Warrants”). The Series H-4 Warrants were initially
exercisable at an exercise price equal to $15.60 per share. On
August 31, 2018, the Company offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of 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.
21
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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.
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 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.
Issuance of Series H-5 Warrants
On 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. Of the 3,715,254 granted, 243,054 were
granted to Palladium, see Note 8.
Upon the receipt of approval of the Company’s stockholders,
which approval has not yet been obtained, the holders of the H-5
Warrants will be 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
activity is as follows:
|
|
Shares
Underlying Warrants
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
December 31, 2019
|
4,300,560
|
$
1.77
|
5.06
|
-
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised/Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding at
March 31, 2020
|
4,300,560
|
$
1.77
|
4.81
|
-
|
The Series H-5 warrants are exercisable beginning June 6,
2020.
The
warrants expire through the years 2020-2024, except for the Series
K Warrant which has no expiration date.
22
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8.
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 terminated on April 9, 2019. During
the three months ended March 31, 2019, the Company recorded $30,400
as loss from operations of discontinued component related to this
consulting agreement. As of December 31, 2019, the balance in
accounts payable was $0.
Palladium Capital Advisors (“Palladium”), an advisor to
the Company and AYRO, has provided investment banking services to
the Company and in connection with the December 6, 2019 Series H-5
Preferred 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.
9.
Subsequent
Events
On April 8, 2020, DropCar Operating entered into a U.S. Small
Business Administration Paycheck Protection Program
(“PPP”) promissory note in the principal amount of
$345,294 payable to Chase Bank (the “Bank”) evidencing
a PPP loan from the Bank (the “PPP Loan”). The Board of
Directors of the Company is currently evaluating whether to return
any of the PPP Loan funds in connection with its review of the
financing needs of each of the Company and DropCar
Operating.
Subsequent to the period ended March 31, 2020, investors converted
12,489 shares of Series H-6 Convertible Preferred Stock into
1,248,900 shares of Common Stock.
Subsequent to the period ended March 31, 2020, the Company issued
450,000 shares of common stock from the exercise of 450,000 Series
H-5 Warrants and received cash proceeds of $356,400.
23
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following management’s discussion and analysis should be
read in conjunction with our historical financial statements and
the related notes thereto. This management’s discussion and
analysis contains forward-looking statements, such as statements of
our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking
statements. When used, the words “believe,”
“plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect”
and the like, and/or future tense or conditional constructions
(“will,” “may,” “could,”
“should,” etc.), or similar expressions, identify
certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those
under “Risk Factors” in our filings with the Securities
and Exchange Commission that could cause actual results or events
to differ materially from those expressed or implied by the
forward-looking statements. Our actual results and the timing of
events could differ materially from those anticipated in these
forward-looking statements as a result of several
factors.
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.
24
COVID-19-Related Considerations
The COVID-19 outbreak, which surfaced in Wuhan, China in December
2019 and which was subsequently declared a pandemic by the World
Health Organization in March 2020, has had a pronounced effect on
the domestic and global economies. Our business has been materially
adversely impacted by the recent COVID-19 outbreak and may continue
to be materially adversely impacted in the future. The extent of
the impact of COVID-19 on our business, financial results,
liquidity and cash flows will depend largely on future
developments, including new information that may emerge concerning
the severity and action taken to contain or prevent further spread
within the U.S. and the related impact on consumer confidence and
spending, all of which are highly uncertain and cannot be
predicted.
Merger with AYRO
On December 19, 2019, we entered into the AYRO Merger Agreement
with ABC 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, ABC 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.
25
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 or agreed to enter into lock-up agreements (the
“Lock-Up Agreements”) pursuant to which they will
accept 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
directors designated by our board and will include Joshua
Silverman, our current director and chairman of the board, as
chairman of the board of directors of the combined company, as well
as Sebastian Giordano and Greg Schiffman, each of whom are current
directors of ours, Zvi Joseph, who is a current member of our board
of directors, will be designated by Alpha Capital Anstalt, the lead
investor in the AYRO private placement, and the three remaining
directors will be the current directors of AYRO. It is anticipated
that the AYRO designees will be Rodney C. Keller, Jr., George
Devlin, and Mark Adams. 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.
26
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 DropCar
Operating, and DC Partners, 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 March 31, 2020 were prepared under
the assumption that we will 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. 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.
Recent Developments
Nasdaq Hearing
On September 6, 2019, we received notification from 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 requested 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 stayed the delisting of our securities
pending the Panel’s decision. The hearing occurred on April
16, 2020. Our appeal to the Panel included a plan that set
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 in
connection with the AYRO Merger, which was declared effective by
the Securities and Exchange Commission on April 24, 2020, 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. On April
27, 2020, we received notice from Nasdaq that the Panel had granted
our request for continued listing, subject to the requirements that
on or before May 29, 2020, we shall have completed the AYRO Merger
and established compliance with all initial listing criteria
outlined in Listing Rule 5505. While we intend to complete
the AYRO Merger and establish compliance prior to such date, there
can be no assurance that we will be successful in regaining
compliance with the Listing Rule.
27
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 Preferred Stock”), 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
Preferred Stock”), 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 Convertible Preferred
Stock (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 Preferred Stock. We designated up to 50,000 shares of Series
H-6 Preferred Stock and each share has a stated value of $72.00
(the “H-6 Stated Value”). Each share of Series H-6
Preferred Stock 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 Preferred Stock has 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 Preferred Stock also has the same voting rights as the
common stock, except that in no event shall a holder of Series H-6
Preferred Stock be permitted to exercise a greater number of votes
than such holder would have been entitled to cast if the Series H-6
Preferred Stock 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
Preferred Stock 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
Preferred Stock ranks senior to the common stock in the
distribution of assets, to the extent legally available for
distribution.
Results of Operations
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
three months ended March 31, 2020 and 2019 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:
|
|
For the
Three Months Ended
March 31,
|
|
|
|
2020
|
2019
|
|
SERVICE REVENUES
|
$
1,012,261
|
$
1,099,443
|
|
COST OF REVENUE
|
842,642
|
1,127,045
|
|
GROSS PROFIT (LOSS)
|
169,619
|
(27,602
)
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
Research
and development
|
42,634
|
68,982
|
|
General
and administrative
|
333,069
|
1,129,025
|
|
Depreciation
and amortization
|
78,760
|
107,749
|
|
TOTAL OPERATING
EXPENSES
|
454,463
|
1,305,756
|
|
|
|
|
|
OPERATING
LOSS
|
(284,844
)
|
(1,333,358
)
|
|
|
|
|
|
Other
income, net
|
300
|
1,724
|
|
|
|
|
|
LOSS FROM DISCONTINUED OPERATIONS
|
$
(284,544
)
|
$
(1,331,634
)
|
28
Assets and liabilities of discontinued operations held for sale
included the following:
|
|
March 31,
2020
|
December 31,
2019
|
|
|
|
|
|
Cash
|
$
65,807
|
$
81,457
|
|
Accounts
receivable, net
|
96,665
|
210,671
|
|
Prepaid
expenses and other current assets
|
35,430
|
83,058
|
|
Current
assets held for sale
|
$
197,902
|
$
375,186
|
|
|
|
|
|
Property
and equipment, net
|
$
23,191
|
$
25,723
|
|
Capitalized
software costs, net
|
364,116
|
410,261
|
|
Operating
lease right-of-use asset
|
-
|
1,886
|
|
Other
assets
|
3,525
|
3,525
|
|
Noncurrent
assets held for sale
|
$
390,832
|
$
441,395
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
671,856
|
737,862
|
|
Deferred
revenue
|
240,616
|
302,914
|
|
Current
liabilities held for sale
|
$
912,472
|
$
1,040,776
|
Comparison of the Three Months Ended March 31, 2020 and 2019
– Continuing Operations
General and Administrative
General and administrative expenses for the three months ended
March 31, 2020 totaled $0.8 million, an increase of $0.1 million,
compared to $0.7 million recorded for the three months ended March
31, 2019. This was primarily attributable to an increase of less
than $0.1 million in stock-based compensation and $0.1 million in
other legal, professional and public company costs.
Liquidity and Capital Resources
For the three months ended March 31, 2020 and 2019, we had net
losses from continuing operations of approximately $0.8 million
and $0.7 million, respectively. At March 31, 2020, we had an
accumulated deficit of $35.8 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 March 31, 2020, we
had cash and cash equivalents of $3.6 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 Form 10-Q, 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
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.
29
On April 8, 2020, DropCar Operating entered into a U.S. Small
Business Administration Paycheck Protection Program
(“PPP”) promissory note in the principal amount of
$345,294 payable to Chase Bank (the “Bank”) evidencing
a PPP loan from the Bank (the “PPP Loan”). Our Board of
Directors is currently evaluating whether to return any of the PPP
Loan funds in connection with its review of our financing needs and
the financing needs of DropCar Operating.
Our plans include raising funds from outside investors and
consummating the AYRO Merger. However, there is no assurance that
the AYRO merger 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 unaudited condensed
consolidated financial statements have been prepared under the
assumption the Company will continue as a going
concern.
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 three months ended
March 31, 2020 was approximately $0.6 million, which includes a net
loss from continuing operations of approximately $0.8 million,
offset by cash provided by a change in net working capital items of
$0.2 million related to the increase in accounts payable and
accrued expenses of $0.2 million and the decrease in prepaid
expenses and other assets of less than $0.1
million.
Net cash used in operating activities for the three months ended
March 31, 2019 was approximately $1.0 million, which includes a net
loss from continuing operations of approximately $0.6 million,
partially offset by non-cash expenses of less than $0.1 million
related to stock-based compensation expense, and cash used from the
change in net working capital items of $0.3 million principally
related to the decrease in accounts payable and accrued expenses of
$0.3 million and the increase in prepaid expenses and other assets
of less than $0.1 million.
Investing Activities – Continuing Operations
There were no cash flows from investing activities for the three
months ended March 31, 2020 and 2019.
Financing Activities – Continuing Operations
There were no cash flows from financing activities for the three
months ended March 31, 2020.
Cash provided by financing activities for the three months ended
March 31, 2019 totaled approximately $2.0 million, primarily
resulting from proceeds of $2.0 million from the sale of the common
stock.
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 March 31, 2020.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
Not
applicable.
30
Item 4. Controls and Procedures.
(a)
Evaluation of Disclosure Controls and Procedures
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 March
31, 2020. 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.
Management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting as of
March 31, 2020 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 March 31, 2020 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.
Remediation Efforts
Management is committed to the remediation of the material
weaknesses described above, as well as the continued improvement of
our internal control over financial reporting. We have identified
and implemented, and continue to implement, the actions described
below to remediate the underlying causes of the control
deficiencies that gave rise to the material weaknesses. As we
continue our evaluation and improve our internal control over
financial reporting, management may modify the actions described
below or identify and take additional measures to address control
deficiencies. Until the remediation efforts described below,
including any additional measures management identifies as
necessary, are completed, the material weaknesses described above
will continue to exist.
To address the material weakness noted above, the Company is in the
process of:
●
hiring
additional personnel who possess the requisite skillsets in certain
areas important to financial reporting;
●
assessing
the required training needs to ascertain continuous development of
existing personnel;
●
performing
a comprehensive review of current procedures to ensure a lack of
segregation of duties and compliance with the Company’s
accounting policies and GAAP;
●
hiring
additional personnel in order to mitigate the risk of a lack of
segregation of duties.
31
We believe these measures will remediate the material weaknesses
noted. While we have completed some of these measures as of the
date of this report, we have not completed and tested all of the
planned corrective processes, enhancements, procedures and related
evaluation that we believe are necessary to determine whether the
material weaknesses have been fully remediated. We believe the
corrective actions and controls need to be in operation for a
sufficient period of time for management to conclude that the
control environment is operating effectively and has been
adequately tested through audit procedures. Accordingly, the
material weaknesses have not been fully remediated as of the date
of this report. As we continue to evaluate and work to remediate
the control deficiencies that gave rise to the material weaknesses,
we may determine that additional measures or time are required to
address the control deficiencies or that we need to modify or
otherwise adjust the remediation measures described above. We will
continue to assess the effectiveness of our remediation efforts in
connection with our evaluation of our internal control over
financial reporting.
(b)
Changes in Internal Controls over Financial Reporting
Our remediation efforts were ongoing during the fiscal quarter
ended March 31, 2020. Other than the remediation steps described
above and the appointment of our Chief Financial Officer described
above, there were no other material changes in our internal control
over financial reporting during the quarter ended March 31, 2020
that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 1. Legal Proceedings.
There have been no material changes to the legal proceedings
disclosed in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019.
Item 1A. Risk Factors.
Except
as set forth below, there have been no material changes to the risk
factors contained in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2019, as filed with the SEC on March 30,
2020 and as amended on April 10, 2020.
The recent COVID-19 outbreak has had and
may continue to have an adverse effect our business
operations, financial condition, liquidity and cash
flow.
The COVID-19 outbreak, which was declared a pandemic by the World
Health Organization on March 11, 2020 and has rapidly spread
throughout the United States and many other parts of the world, is
having an impact on the global economy, resulting in rapidly
changing market and economic conditions. Our business has been
materially adversely impacted by the recent COVID-19 outbreak due
to restrictions on travel, the loss of B2B clients who have
suspended or reduced operations as a result of the pandemic and the
loss of B2C clients as residents have moved away from densely
populated areas or found alternate parking arrangements. This has
had and may continue to have a materially adverse impact on our
cash flows from operations and liquidity. Ongoing significant
reductions in business related activities could result
in further loss of sales and profits and other material
adverse effects. The extent of the impact of COVID-19 on our
business, financial results, liquidity and cash flows will depend
largely on future developments, including new information that may
emerge concerning the severity and action taken to contain or
prevent further spread within the U.S. and the related impact on
consumer confidence and spending, all of which are highly uncertain
and cannot be predicted. As the outbreak of COVID-19 continues to
spread rapidly in the U.S. and globally, related government and
private sector responsive actions may continue
to adversely affect our business operations. It is impossible
to predict the effect and ultimate impact of the COVID-19 pandemic
as the situation is rapidly evolving. If the COVID-19 outbreak
continues and persists for an extended period of time, we
expect there will be significant and material
disruptions to our operations, which will have a material adverse
effect on our business, financial condition and results of
operations.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not
applicable.
Item 5. Other Information.
PPP Loan
On April 8, 2020, DropCar Operating entered into a U.S. Small
Business Administration (“SBA”) Paycheck Protection
Program (“PPP”) promissory note in the principal amount
of $345,294 payable to Chase Bank (the “Bank”)
evidencing a PPP loan from the Bank (the “PPP Loan”).
The PPP Loan will bear interest at a rate of 0.98% per annum. No
payments will be due on the PPP Loan during a six month deferral
period commencing on April 8, 2020. Commencing one month after the
expiration of the deferral period, and continuing on the same day
of each month thereafter until the maturity date of the PPP Loan,
DropCar Operating will be obligated to make monthly payments of
principal and interest, each in such equal amount required to fully
amortize the principal amount outstanding on the PPP Loan by the
maturity date. The maturity date is April 8, 2022.
The principal amount of the PPP Loan is subject to forgiveness
under the PPP upon DropCar Operating’s request to the extent
that PPP Loan proceeds are used to pay expenses permitted by the
PPP, including payroll, rent, and utilities. The Bank may forgive
interest accrued on any principal forgiven if the SBA pays the
interest. There can be no assurance that any part of the PPP Loan
will be forgiven. The PPP Loan contains customary borrower default
provisions and lender remedies, including the right of the Bank to
require immediate repayment in full the outstanding principal
balance of the PPP Loan with accrued interest.
The Board of Directors of the Company is currently evaluating
whether to return any of the PPP Loan funds in connection with its
review of the financing needs of each of the Company and DropCar
Operating. The Company intends to provide an update once the Board
of Directors reaches its decision.
32
Item 6. Exhibits.
|
Exhibit
Number
|
|
Description
|
|
|
Certification of
the President and Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
|
Certification of
the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification of
the President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification of
the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
|
101*
|
|
The following
financial information from this Quarterly Report on Form 10-Q for
the period ended March 31, 2020, formatted in XBRL (Extensible
Business Reporting Language): (i) the Condensed Consolidated
Statements of Operations; (ii) the Condensed Consolidated Balance
Sheets; (iii) the Consolidated Statements of Changes in
Shareholders’ Equity; (iv) the Condensed Consolidated
Statements of Cash Flows; and (v) the Notes to Consolidated
Financial Statements, tagged as blocks of text.
|
* Filed
herewith
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
|
|
DropCar,
Inc.
|
|
|
|
|
|
|
Date:
May 14, 2020
|
By:
|
/s/
Spencer Richardson
|
|
|
|
Spencer
Richardson
|
|
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
Date:
May 14, 2020
|
By:
|
/s/
Mark Corrao
|
|
|
|
Mark
Corrao
|
|
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
34
TABLE OF CONTENTS
Part I Financial InformationItem 1 Condensed Consolidated Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits