DropCar, Inc., and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
For the Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
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)
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.
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.
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.
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.
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.
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.
|
|
|
|
|
|
|
|
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.
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,
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
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
|
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Capitalized software costs included in non-current assets held for
sale consists of the following as of March 31, 2020 and 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.
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.
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.
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
|
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
|
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.
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.
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,
|
|
|
|
|
|
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.
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.
DropCar, Inc., and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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.
