UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM 10-K


(Mark
One)


[ X ]  ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934





For the
fiscal year ended December 31,
2018





OR





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





For the
transition period from  to





Commission file
number: 001-34643





DROPCAR, INC.


(Exact name of registrant as specified in its charter)





Delaware
(State or other jurisdiction of incorporation or
organization)

1412 Broadway, Suite 2105
New York, New York
(Address of principal executive offices)
98-0204758
(I.R.S. Employer Identification No.)


10018
(Zip Code)





Registrant’s
telephone number, including area code (646) 342-1595





Securities
registered pursuant to Section 12(b) of the Exchange
Act:





Title of each
class

Name of each
exchange on which registeredCommon Stock, $0.0001 Par Value Per
Share

The Nasdaq Stock Market LLC





Securities
registered pursuant to Section 12(g) of the Exchange Act:
None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes 
☐   No ☑





Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes  ☐    No ☑











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





Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ☐





Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one).





Large
accelerated filer ☐
Accelerated
filer ☐Non-accelerated
filer ☑
Smaller
reporting company ☑Emerging
growth company ☐





If an
emerging growth company, indicate by 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  ☑





The
aggregate market value of the registrant’s voting and
non-voting common stock held by non-affiliates of the registrant
(without admitting that any person whose shares are not included in
such calculation is an affiliate) computed by reference to the
price at which the common stock was last sold, or the average bid
and asked price of the common stock, as of the last business day of
the registrant’s most recently completed second fiscal
quarter was $5,724,980.





As of
March 27, 2019 there were 3,440,258 shares of registrant’s
common stock outstanding.





DOCUMENTS INCORPORATED BY REFERENCE





Certain
information called for in Item 12 of Part III will be included in
an amendment to this Annual Report on Form 10-K.











TABLE OF CONTENTS





PAGEPART IItem
1.
Business
1Item
1A.
Risk
Factors
8Item
1B.
Unresolved Staff
Comments
23Item
2.
Properties
23Item
3.
Legal
Proceedings
23Item
4.
Mine Safety
Disclosures
23PART IIItem
5.
Market for
Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
24Item
6.
Selected Financial
Data
25Item
7.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
25Item
7A.
Quantitative and
Qualitative Disclosures about Market Risk
38Item
8.
Financial
Statements and Supplementary Data
38 [F1-
F30]Item
9.
Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
39Item
9A.
Controls and
Procedures
39Item
9B.
Other
Information
41PART IIIItem
10.
Directors,
Executive Officers and Corporate Governance
42Item
11.
Executive
Compensation
48Item
12.
Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters
53Item
13.
Certain
Relationships and Related Transactions, and Director
Independence
53Item
14.
Principal
Accounting Fees and Services
54PART IVItem
15.
Exhibits,
Financial Statement Schedules
55Item
16.
Summary
59Signatures
58











NOTE
ABOUT FORWARD-LOOKING STATEMENTS





This
Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements contained in this Annual Report on Form
10-K other than statements of historical fact, including statements
regarding our future results of operations and financial position,
our business strategy and plans, and our objectives for future
operations, are forward-looking statements. The words "believe,"
"may," "will," "estimate," "continue," "anticipate," "intend,"
"expect," and similar expressions are intended to identify
forward-looking statements. We have based these forward-looking
statements largely on our current expectations and projections
about future events and trends that we believe may affect our
financial condition, results of operations, business strategy,
short-term and long-term business operations and objectives, and
financial needs. These forward-looking statements are subject to a
number of risks, uncertainties, and assumptions, including those
described in Part I, Item 1A, "Risk Factors" in this Annual Report
on Form 10-K. It is not possible for our management to predict all
risks, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in
any forward-looking statements we may make. In light of these
risks, uncertainties and assumptions, the future events and trends
discussed in this Annual Report on Form 10-K may not occur and
actual results could differ materially and adversely from those
anticipated or implied in the forward-looking
statements.





We
assume no obligation to revise or publicly release the results of
any revision to these forward-looking statements, except as
required by law. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements.





This
Annual Report on Form 10-K includes the accounts of DropCar, Inc.
(“DropCar”) and its current and former wholly and
majority-owned subsidiaries collectively referred to as
“we”, “us”, “our” or the
"Company". United States-based subsidiaries include or included
WPCS International – Suisun City, Inc. (the “Suisun
City Operations”). The Suisun City Operations has been sold
and is treated as a discontinued operation.











PART 1





ITEM 1 – BUSINESS





Recent Developments





Intention to Explore Strategic Opportunities





On March 8, 2019, we announced that we had initiated a process to evaluate
strategic opportunities to maximize shareholder value. While
management continues to focus on our business activities and
operations, this process will consider a range of potential
strategic opportunities including, but not limited to, business
combinations.





Sale of Suisun City Operations





On
December 24, 2018, we completed the previously announced sale of
WPCS International – Suisun City, Inc., a California
corporation (the “Suisun City Operations”), our
wholly-owned subsidiary, pursuant to the terms of a stock purchase
agreement, dated December 10, 2018 (the “Purchase
Agreement”) by and between us and World Professional Cabling
Systems, LLC, a California limited liability company (the
“Purchaser”). Upon the closing of the sale, the
Purchaser acquired all of the issued and outstanding shares of
common stock, no par value per share, of Suisun City Operations,
for an aggregate purchase price of $3,500,000.





Departure and Appointment of Chief Financial Officer





On
February 14, 2019, our Board approved (1) the termination of Paul
Commons as Chief Financial Officer and any other positions on which
he served with respect to us and our subsidiaries and
affiliates, and (2) the appointment of Mark Corrao as our new Chief
Financial Officer, in each case effective as of February 28,
2019.





Reverse Stock Split





On March 8, 2019, we filed a certificate of amendment to our
amended and restated certificate of incorporation with the
Secretary of State of the State of Delaware to effect a one-for-six
reverse stock split of our outstanding shares of common stock. Such
amendment and ratio were previously approved by our stockholders
and board of directors, respectively. As a result of the reverse
stock split, every six shares of our outstanding pre-reverse split
common stock were combined and reclassified into one share of
common stock. Proportionate voting rights and other rights of
common stock holders were not affected by the reverse stock split.
Stockholders who would otherwise have held a fractional share of
common stock received payment in cash in lieu of any such resulting
fractional shares of common stock, as the post-reverse split
amounts of common stock were rounded down to the nearest full
share. Unless otherwise noted, all share and pershare data included
in these financial statements retroactively reflect the 1-for-6
reverse stock split.





Business





Merger





On January 30, 2018, we completed our business combination with
DropCar, Inc. (“Private DropCar”) in accordance with
the terms of the Agreement and Plan of Merger and Reorganization,
dated as of September 6, 2017, as subsequently amended, by and
among us, DC Acquisition Corporation (“Merger Sub”),
and Private DropCar (as amended, the “Merger
Agreement”), pursuant to which Merger Sub merged with and
into Private DropCar, with Private DropCar surviving as our wholly
owned subsidiary (the “Merger”). On January 30, 2018,
in connection with, and prior to the completion of, the Merger, we
effected a 1:4 reverse stock split of our common stock (the
“Reverse Stock Split”), and on January 30, 2018,
immediately after completion of the Merger, we changed our name to
“DropCar, Inc.”





1





Under the terms of the Merger Agreement, we issued shares of our
common stock to Private DropCar’s stockholders, at an
exchange ratio of 0.3273 shares of our common stock, after taking
into account the Reverse Stock Split, for each share of (i) Private
DropCar common stock and preferred stock and (ii) Private DropCar
warrants, in each case, outstanding immediately prior to the
Merger. The exchange ratio was determined through
arms’-length negotiations between us and Private
DropCar.





Immediately after the Merger, there were 1,301,987 shares of our
common stock outstanding. Immediately after the Merger, the former
security holders of Private DropCar, together with Private DropCar
advisors in connection with the Merger, Alpha Capital Anstalt and
Palladium Capital Advisors, owned approximately 77.1% of our
outstanding common stock, with our stockholders immediately prior
to the Merger owning approximately 22.9% of our outstanding common
stock.





In connection with the Merger, Private DropCar was deemed to be the
accounting acquirer because the stockholders of Private DropCar
effectively control the combined company following the Merger. The
Merger was treated as a reverse acquisition.





We issued 22,850 warrants and paid approximately $208,000 in cash
to Palladium Capital Advisors, LLC for services rendered
in connection with the exercise of
outstanding warrants prior to the merger.





DropCar





We are a New York City based corporation incorporated in the State
of Delaware on December 18, 1997 under the name
“Internet International Communications Ltd.” Pursuant
to a Certificate of Amendment to our Certificate of Incorporation
filed on December 23, 2004, our name was changed to
“WPCS International
Incorporated.”On January 30, 2018, we completed the Merger (as
described above) and our name was changed to DropCar,
Inc.





We provide consumer and enterprise solutions to urban
automobile-related logistical challenges. The DropCar business is a
provider of automotive vehicle support, fleet logistics and
concierge services for both consumers and businesses in
automotive-related industries. In 2015, we launched our cloud-based
Enterprise Vehicle Assistance and Logistics (“VAL”)
platform and mobile application (“App”) to assist
customer consumers and companies in reducing the costs, hassles and
inefficiencies of owning or servicing vehicles in urban centers.
Our VAL platform is a web-based interface facilitating our core
service by coordinating the movements and schedules of our trained
valets who pick up and drop off cars at dealerships, customer and
other locations. The App tracks progress and provides real-time
email and/or text notifications on status to customers, increasing
the quality of communication and customer satisfaction. To date, we
operate our business-to-consumer (“B2C”) services
within the greater New York City metropolitan area and operate our
business-to-business (“B2B”) services across the
greater New York City metropolitan area, New Jersey, Washington
D.C., Baltimore, Los Angeles and San Francisco. Expanding city
populations have created a growing dependence on cars for urban
mobility; however, the supply of vehicle services (i.e., garages,
service centers, etc.) has continued to decrease as rising costs
and other factors have made access to such services increasingly
limited. To solve for these systemic urban mobility challenges, our
technology captures and analyzes real-time data to dynamically
optimize a rapidly growing network of professional valets across a
suite of vehicle transport and high-touch support
services.





We believe that consumers value the flexibility and comfort of
having a personal vehicle but are restricted by dependence on the
location of garages, service centers, parking solutions and
maintenance. The continued population migration into cities and
corresponding general increase in real estate prices are
compounding this consumer burden. We seek to solve this problem by
freeing consumers from the reliance on the location of automotive
infrastructure generally necessary to own a vehicle in an urban
area.





2





For our consumer customers, we provide a balance of increased
consumer flexibility and lower cost by aggregating demand for
parking and other automotive services and facilitating their
fulfillment through our network of vendor partners in and around
urban areas providing access and convenience to areas not currently
being served. Beyond the immediate unit economic benefits of
securing discounts from vendor partners based on their excess
capacity, we believe there are significant opportunities for our
platform to expand throughout the vehicle lifecycle and supply
chain.





Our business customers, including, among others, original equipment
manufacturers (“OEMs”), dealers and other service
providers in automotive-related industries are increasingly
challenged with consumers who have limited time to bring their
vehicles for maintenance and service, making it difficult to retain
valuable post-sale service contracts or scheduled consumer
maintenance and service appointments with many urban customers.
Additionally, many of the vehicle support centers for automotive
providers (i.e., dealerships and bodywork and diagnostic shops)
have moved out of urban areas, making it more challenging for these
OEMs and dealers 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: transporting cars to and
from service bays, rebalancing vehicle availability to meet demand
and transporting vehicles from dealer lots to fleet
locations.





In response to this growing urban, automotive mobility challenge,
we work directly with our business customers operating in
automotive related industries to provide them with the option to
have our valets transport vehicles to and from their businesses or
their customer locations. Our business customers can leverage our
services to drive new revenue from new and existing customers,
including customers from within our consumer subscription
base.





We offer our business services at a fraction of the cost of many
alternatives, including other third party services and expensive
in-house resources, because our pricing model reduces and/or
eliminates 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 business customer’s real-time needs. We support
this model by maximizing the utilization of our employee-valet
workforce across a curated pipeline available to both our consumer
and business customer network.





While our current 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 future application in automotive-related industries where
vehicle ownership and utilization may become increasingly
car-shared or subscription-based with transportation services and
concierge service options customized to match a customers’
immediate needs. For example, certain car manufacturers are testing
new services in which customers pay the manufacturer a flat fee per
month to have access to a number of different vehicle models for a
specified 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 add value in this next generation of
automotive subscription services.





3





How
DropCar Works





Business-to-Consumer
(“B2C”)





Our customers use DropCar to reduce the cost and hassles of owning
a car. We have three core B2C services:





●
 Self-Park
Storage — When a B2C customer living within Manhattan or
Brooklyn needs to find a monthly parking spot near their residence
or other desired location, the B2C customer uses the DropCar App to
locate a nearby garage with available space and can sign up for
garage access on a monthly basis. This monthly self-park storage
subscription ranges in price from $249 to $600 per month based on
garage location, a discount to what we believe to be the typical
cost of garage parking in New York City.


●
 Hourly
Parking and Driver Services “WILL” Service — We
offer a separate service for B2C customer car owners who want to
avoid the hassle of finding a parking space in Manhattan, Brooklyn
and surrounding cities during short time windows (i.e., for a
meeting, dinner, sports game, etc.). Using the App, a B2C customer
can schedule a valet to meet at a specific location and time, and
the valet will remain with the vehicle until the owner returns, or
the valet can continue to drive with the owner to other locations,
as is common using the services provided by Uber or Lyft, except
under this service, the B2C customer is in their own personal
vehicle. This service turns B2C customers vehicles into a true
personal mobility solution.


●
 Maintenance
and Other Services (“DropCar 360”) — Our valets
can also provide for our B2C customers’ other vehicle
service-related needs, such as fueling, car washing, scheduled
maintenance, and detailing. We believe these services result in
higher customer satisfaction when compared to simple valet
services, as well as an increased average revenue per B2C customer
because of the incremental revenue generated on such services,
including revenue generated by the valets time, and any additional
a la carte service fees.





Business-to-Business (“B2B”)





Our
B2B customers rely on us to facilitate selling, leasing, renting
and sharing their vehicles at scale in urban centers. While the
types of businesses we work with are continuing to expand, our
current primary B2B customers include:





●
 OEMs,
Dealers, and Leasing Agents — Using our technology platform
and large network of readily available valets, we enable branded
automobile dealerships, leasing companies, peer to peer platforms
and OEMs to offer a unique level of convenience for their service
center operations and customers by providing efficient pick-up and
drop-off service. We also enable automotive-related companies to
track and digitize the lifecycle of their vehicle movements; many
of these companies have never had the technology or resources to
track such data prior to our engagement. The combination of easy to
access high-touch service fulfillment plus data maturation is
allowing our B2B customers the ability to more quickly launch new
service offerings without the need to incur the heavy up-front
investments or long-term commitments historically associated with
building and managing a dedicated in-house workforce. Dealers, peer
to peer market places and manufacturers can leverage our fully
hosted middleware and mobile App or can integrate our service into
their own consumer mobile apps (or directly into the
vehicle’s native software (e.g., OnStar®)) for seamless
scheduling, maintenance and delivery services. In addition, our B2B
customers can integrate our cost saving and convenient consumer
support services and subscriptions (i.e., parking, fueling and
washing, etc.) directly into their showroom sales and leasing
offerings to increase the likelihood of a sale.





4





●
 Fleets and Car
Sharing — Strong growth in “e-hailing” and shared
mobility/car sharing services, along with the burgeoning response
from the traditional rental car industry, has increased consumer
expectations for more flexibility and reliability from their
automotive and transportation service providers. At the same time,
consumers continue to increase their sensitivity to price. As a
result, businesses in these industries are moving quickly to
identify opportunities to protect their operating margin while
building competitive differentiation through the integration of
services attractive to consumer needs.





This
trend has created highly fertile ground for us to establish
ourselves as a backbone partner with companies and platforms
seeking to compete in this highly competitive sector by providing
the same set of logistical support services and consumer facing
add-on services that our service provides to OEMs, peer to peer
platforms, dealers and leasing agents. In 2018, we entered into
several service agreements to provide transport, prep, vehicle
registration, cleaning and maintenance services for a
customer’s fleet of vehicles in a metropolitan area to
support its on-demand car sharing service. These services will be
provided and coordinated through access to our VAL platform, which
enables the fleet managers to schedule and track movements and
services via a dedicated, secure portal.





●
 Real
Estate — We understand that parking spots in on-site garages
often decrease the overall value of property. Developers are often
able to add value by using the space that would otherwise be used
for parking spots for other alternatively valuable purposes. At the
same time, certain cities across the United States are placing caps
on the total number of parking spaces per unit for new
developments. While this may benefit developers, it may be negative
for prospective tenants who own cars.





We
believe that our vehicle storage and delivery service positions us
well within the new ecosystem — where our “virtual
garage” provides consumers greater flexibility with
transportation related solutions while helping reduce stress and
costs associated with existing garages and crowded street
parking.





DropCar Informatics





We
also enable automotive-related businesses to capture, analyze and
catalog critical data that is compiled into searchable databases
about their customers and operations, including real time vehicle
tracking, vehicle photos, vehicle inspection summaries as well as
consumer profiles and preferences.





We are
actively integrating new tools into our platform to help businesses
launch new products and services to deepen their customer
relationships beyond the point of sale, including consumer facing
scheduling websites and tools for marketing into our own consumer
subscriber base.





Vertical Integration and Future of Automotive Space





●
 Vertical
Integration — Today, we leverage our ability to aggregate
demand around our core services alongside our logistics and
fulfillment infrastructure to form margin attributive relationships
with third party vendors looking to grow their businesses. However,
as our databases expand and we increase the predictability of our
clients’ needs across these respective services, we may seek
to acquire assets and service businesses to further try and
increase margins and synergies while generating incremental
investment returns derived from these assets.





5





●
 Future
of Automotive Industry — Many automotive companies, rental
car companies and car sharing programs are developing subscription
models, peer to peer models and service portfolios to cater to
increasingly personalized customer preferences. These trends are
symptomatic of the broader market shift towards a car share and
subscription-based economy to accommodate the greater value
consumers are placing on the flexibility and option of paying for
products and services on demand as opposed to traditional
automobile ownership. We continue to offer our “micro
logistics support services” for the vehicle lifecycle which
may eventually go beyond our current mobile App, and into vehicles
directly.





Sales and Marketing





We
currently use select digital marketing efforts to drive awareness
of our B2C and B2B businesses. B2C business development has been
driven by these marketing efforts and word-of-mouth referrals. The
B2B business development has been achieved through the traditional
direct sales efforts by our executives to companies in the
automotive supply chain, rental car, fleet, shared and peer to peer
mobility industries.





Employees





As of March 11, 2019, our DropCar
business had 88 full time employees and 5 part time employees,
including 70 licensed drivers. We believe that our relations with
our employees are good.





Properties





For
our DropCar self-park business we have month to month agreements
with a number of garage companies strategically located throughout
Manhattan and Brooklyn, which among other items, permit our
customers parking access. Through our large inventory of monthly
subscriptions, we are able to favorably negotiate underutilized
parking spaces throughout our coverage areas and cost effectively
store vehicles for our B2C customers. We also have certain
arrangements from time to time with garage facilities for specific
event days and other parking needs where an event is seeking our
valet services.





Intellectual Property





Our
primary source of revenue is generated by our service offerings
through our proprietary mobile App, available for download on the
Apple iTunes App Store and the Google Play Store. We developed our
App using a dedicated third-party code development team. We own the
software code associated with our mobile App. The DropCar App
centralizes and automates the management of our reservations,
vehicle locations, customer service and payment to optimize
customer experience, minimize costs and leverage
efficiencies.





Our
reservation system is built on a mix of open source web
applications and in-house technology developed by our technology
team to enable existing users to reserve our services using mobile
applications on the iPhone or Android platforms. Through our
reservation system, customers have around-the-clock access to the
complete, real-time availability of our services and can manage all
necessary transactions electronically.





We use
third party software for our credit card payment processing which
has been integrated directly into our application platform. This
third-party payment processing software allows us to provide for
accurate billing and timely payment and gives us the flexibility to
scale the business.





6





We
designed and built our technology with the goal of providing the
most convenient, efficient and reliable service possible. Our
iPhone and Android applications are examples of how we continue to
seek ways to improve and simplify the customer experience. We
continue to invest in improving our technology platform to meet the
needs of our growing business.





In
addition, the DropCar name and design mark are federally registered
U.S. trademarks, with registrations effective until
November 30, 2022 and May 1, 2023, respectively, subject
to renewal.





Competition





With
respect our B2C services, our competitors include traditional
parking garages and service centers, emerging maintenance and
repair mobile application providers and alternatives to traditional
car ownership and leasing for personal mobility (i.e., e-hailing.
car sharing, renting, etc.).





While
these alternatives to traditional car ownership and leasing are
competitors to our B2C business, they are target clients for our
B2B business services and as such are not seen as true competitors.
There are, however, separate B2B focused automotive logistics and
support platforms that compete with our B2B business.





●
 Traditional
Parking Garages and Service Centers — Our B2C offering
competes directly with on-site parking garages. Our service
offering presumes that parking a car in an urban setting remains
challenging and expensive. We compete with traditional valet
parking facilities as well as on-site parking garages which may
offer more convenient options to consumers than our services. The
same competitive risks exist for local repair shops and service
centers.





We
believe, however, that consumers and businesses alike are
increasingly looking for vehicle support services to help clients
avoid sacrificing valuable time and convenience.





Historically,
companies such as Luxe, which closed operations in July 2017
and subsequently sold their technology to Volvo in
September 2017, and Valet Anywhere, which closed operations in
July 2016, have unsuccessfully tried to build similar
on-demand service models. We believe these companies failed due to
multiple factors, including the use of expensive in-city garages, a
parking-only focus and low valet utilization rates directed only to
servicing consumers (B2C). Unlike these historical competitors, we
attempt to solve for these issues by offering a self-service option
priced at a positive gross margins and billed in advance of the
month’s usage, and by seeking to more effectively optimize
valet utilization across both B2C and B2B clients. We believe that
this diversification of services and revenue streams is critical
for building a more compelling and scalable vehicle support
platform that is positioned to benefit from larger urban mobility
trends.





●
 Emerging
Maintenance and Repair Mobile Apps — Our B2C offering
competes directly with new mobile applications that seek to connect
local repair shops and mechanics with customers for on-site car
service fulfillment, including companies such as YourMechanic,
Wrench, SQKY, Filld and RepairPal. Our 360 Repair Services has been
de-emphasized for the consumer since the middle of 2018 and we are
assessing the future direction of this offering. We continue to
offer simple maintenance services.





Many
of these competitors do not include transportation of the vehicle
for servicing but bring the service to the vehicle. We believe this
limits the scope of services that can be provided and also poses
significant logistical challenges in busy urban environments that
is likely to limit the ability to grow such operations. Moreover,
our approach to consolidating such support services in parallel
with our short-term and long-term parking solutions creates a
simpler “one stop shop” experience which we believe is
attractive to time-pressed consumers and businesses.





7





●
 B2B
Automotive Logistics and Transport — Our B2B offering
competes directly with other automotive logistics and transport
companies such as RedCap, MyKarma and Stratim (formerly Zirx).
These companies, like us, seek to work with OEMs, dealers, car
sharing programs, and other automotive companies to assist in the
management of fleet transportation and servicing.





Many
of these B2B competitors, including Stratim and RedCap, rely on
third-party firms to provide independent contractors to ultimately
fulfill their vehicle transportation services. Unlike these
competitors, we are investing in our own employee-based workforce
which not only increases the speed at which we can respond to the
needs of our B2B clients, but we also believe that it is critically
important for attracting the best talent and ensuring the highest
levels of reliability. Moreover, our B2B clients enjoy the security
of a clear vendor relationship, which avoids the uncertainties
associated with independent contractor relationships. We believe
our unique B2C value proposition and services supports confidence
in our value as a logistics partner as well as provides additional
opportunities to partner with us as a lead generation partner for
new business.





Government Regulation





Other
than to maintain our corporate good standing in the jurisdictions
in which we operate and laws and regulations affecting employers
generally, we do not believe we are currently subject to any direct
material government regulations or oversight. We do not own the
vehicles that are used in DropCar’s business service (other
than the vehicles we own to deploy valets), nor do we currently own
any of the facilities used to store or service such vehicles.
Although various jurisdictions and government agencies are
considering implementing legislation in response to the rise of
other ride- and car-sharing enterprises, such as Uber Technologies
Inc., currently no such legislation exists that we believe has
jurisdiction over, or applicability to, our
operations.





ITEM 1A – RISK
FACTORS





Investing in our securities involves a high degree of risk. You
should carefully consider the risk factors set forth in our most
recent annual and quarterly filings with the SEC before purchasing
our securities. The risks and uncertainties we have described are
not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also
affect our operations. The occurrence of any of these risks might
cause you to lose all or part of your investment in the offered
securities.





Risks Related to Our DropCar Business





We have a history of losses and may be unable to achieve or sustain
profitability.





We
have incurred net losses in each year since our inception and as of
December 31, 2018, we had an accumulated deficit of $29.8 million.
Such losses are continuing to date. We do not know if our business
operations will become profitable or if we will continue to incur
net losses in the future. Our management expects to incur
significant expenses in the future in connection with the
development and expansion of our business, which will make it
difficult for us to achieve and maintain future profitability. We
may incur significant losses in the future for a number of reasons,
including the other risks described herein, and we may encounter
unforeseen expenses, difficulties, complications, delays and other
unknown events. Accordingly, there can be no certainty regarding if
or when we will achieve profitability, or if such profitability
will be sustained.





8





Historical losses and negative cash flows from operations raise
doubt about our ability to continue as a going
concern.





Historically,
we have suffered losses and have not generated positive cash flows
from operations. This raises substantial doubt about our ability to
continue as a going concern. The audit report of EisnerAmper LLP
for the year ended December 31, 2018 on our financial statements
contained an explanatory paragraph expressing doubt about our
ability to continue as a going concern.





We have a limited operating history which makes it difficult to
predict future growth and operating results.





We
have a relatively short operating history which makes it difficult
to reliably predict future growth and operating results. We face
all the risks commonly encountered by other businesses that lack an
established operating history, including, without limitation, the
need for additional capital and personnel and intense competition.
There is no relevant history upon which to base any assumption as
to the likelihood that our business will be
successful.





We will require substantial additional funding, which may not be
available on acceptable terms, or at all.





We
have historically used substantial funds to develop our VAL
platform and will require substantial additional funds to continue
to develop our VAL platform and expand into new markets. Our future
capital requirements and the period for which we expect our
existing resources to support our operations may vary significantly
from what we expect. Our monthly spending levels vary based on new
and ongoing technology developments and corporate activities. To
date, we have primarily financed our operations through sales of
our securities. We may intend to seek additional funding in the
future through equity or debt financings, credit or loan facilities
or a combination of one or more of these financing sources. Our
ability to raise additional funds will depend on financial,
economic and other factors, many of which are beyond our control.
Additional funds may not be available to us on acceptable terms or
at all.





If we
raise additional funds by issuing equity or convertible debt
securities, our stockholders will suffer dilution and the terms of
any financing may adversely affect the rights of our stockholders.
In addition, as a condition to providing additional funds to us,
future investors may demand, and may be granted, rights superior to
those of existing stockholders. Debt financing, if available, may
involve restrictive covenants limiting our flexibility in
conducting future business activities, and, in the event of
insolvency, debt holders would be repaid before holders of equity
securities received any distribution of corporate
assets.





If we
are unable to obtain funding on a timely basis or on acceptable
terms, or at all, we may have to delay our plans for expansion,
limit strategic opportunities or undergo reductions in our
workforce or other corporate restructuring activities.





Because our VAL platform operates in a relatively new market, we
must actively seek market acceptance of our services, which we
expect will occur gradually, if at all.





We
derive, and expect to continue to derive, a substantial portion of
our revenue from our VAL platform, which is part of a relatively
new and evolving market. Our services are substantially different
from existing valet, parking, maintenance and car storage services
and many potential clients may be reluctant to utilize our services
until they have been tested in more established commercial
operations over a significant period. As a result, we may have
difficulty achieving market acceptance for our platform. If the
market for our services fails to grow or grows more slowly than we
currently anticipate, our business would be negatively affected. To
date, we primarily operate in the New York City, New Jersey,
Washington D.C., Baltimore, Los Angeles and San Francisco
metropolitan areas. We have targeted expansion into markets we
believe are most likely to adopt our platform. However, our efforts
to expand within and beyond our current market may not achieve the
same success, or rate of adoption, that we have achieved to
date.





9





Future growth may place significant demands on our management and
infrastructure.





Our business is logistically and technologically complex. This
complexity has placed and may continue to place significant demands
on our management and our operational and financial infrastructure,
and it may be challenging to sustain in future growth periods. Many
of our systems and operational practices were implemented when we
were at a smaller scale of operations. In addition, as we grow, we
must implement new systems and software to help run our operations
and must hire additional personnel. As our operations grow in size,
scope and complexity, we will need to continue to improve and
upgrade our systems and infrastructure to offer an increasing
number of clients enhanced services, solutions and features. We may
choose to commit significant financial, operational and technical
resources in advance of an expected increase in the volume of our
business, with no assurance that the volume of business will
increase. Growth could also strain our ability to maintain reliable
service levels for existing and new clients, which could adversely
affect our reputation and business in the future. For example, in
the past, we have experienced, and may in the future experience,
situations where the demand for our services exceeded our estimates
and our employee base was, and may in the future be, insufficient
to support this higher demand. Our client experience and overall
reputation could be harmed if we are unable to grow our employee
base to support higher demand.





In
addition, the financial results for the fiscal year ended December
31, 2018, include the impact of reflecting the results of
operations, financial condition and cash flows of WPCS
International – Suisun City, Inc., as discontinued
operations. We completed the sale on December 24, 2018, and
accordingly, we reflected income from operations of discontinued
component of $315,119 and loss on sale of component of $4,169,718
for a total loss on discontinued operations of
$3,854,599.





Competition for staffing, shortages of qualified drivers and union
activity may increase our labor costs and reduce
profitability.





Our
operations are conducted primarily with employee drivers. Recently,
there has been intense competition for qualified drivers in the
transportation industry due to a shortage of drivers. The
availability of qualified drivers may be affected from time to time
by changing workforce demographics, competition from other
transportation companies and industries for employees, the
availability and affordability of driver training schools, changing
industry regulations, and the demand for drivers in the labor
market. If the industry-wide shortage of qualified drivers
continues, we will likely have difficulty attracting and retaining
enough qualified drivers to fully satisfy customer demands. Due to
the current highly-competitive labor market for drivers, we may be
required to increase driver compensation and benefits in the
future, or face difficulty meeting customer demands, all of which
could adversely affect our profitability.





If our
labor costs increase, we may not be able to raise rates to offset
these increased costs. Union activity is another factor that may
contribute to increased labor costs. We currently do not have any
union employees, and any increase in labor union activity could
have a significant impact on our labor costs. Our failure to
recruit and retain qualified drivers, or to control our labor
costs, could have a material adverse effect on our business,
financial position, results of operations, and cash
flows.





10





Deterioration in economic conditions in general could reduce the
demand for our services and damage our business and results of
operations.





Adverse
changes in global, national and local economic conditions could
negatively impact our business. Our business operations are
concentrated and will likely continue to be concentrated in large
urban areas, and business could be materially adversely affected to
the extent that weak economic conditions result in the elimination
of jobs and high unemployment in these large urban areas. If
deteriorating economic conditions reduce discretionary spending,
business travel or other economic activity that fuels demand for
our services, our earnings could be reduced. Adverse changes in
local and national economic conditions could also depress prices
for our services or cause individual and/or corporate clients to
cancel their agreements to purchase our services. Moreover,
mandated changes in local and/or national compensation as it
relates to minimum wage, overtime, and other compensation
regulations may have an adverse impact on our
profitability.





We expect to face intense competition in the market for innovative
logistics, valet and car storage services, and our business will
suffer if we fail to compete effectively.





While
we believe that our platform offers a number of advantages over
existing service providers, we expect that the competitive
environment for our logistics, valet and storage services will
become more intense as companies enter the market. In addition,
there are relatively low barriers to entry into our DropCar
business. Currently, our primary competitors are public
transportation, logistics, traditional valet and car storage
providers, car sharing services and traditional rental car
companies that have recently begun offering more innovative
services. Many of our competitors have greater name recognition
among our target clients and greater financial, technical and/or
marketing resources than we have. Our competitors have resources
that may enable them to respond more quickly to new or emerging
technologies and changes in client preferences. These competitors
could introduce new solutions with competitive prices or undertake
more aggressive marketing campaigns than us. Failure to compete
effectively could have a material adverse impact on our results of
operations.





Our long-term sustainability relies on our ability to anticipate or
keep pace with changes in the marketplace and the direction of
technological innovation and customer demands.





The
automotive industry, especially the vehicle support segment of the
automotive industry in which we operate, is subject to intense and
increasing competition and rapidly evolving technologies. We
believe that the automotive industry will experience significant
and continued change in the coming years. In addition to
traditional competitors, we must also be responsive to the entrance
of non-traditional participants in the automotive industry. These
non-traditional participants, such as ride-sharing companies and
autonomous vehicles, may seek to disrupt the historic business
model of the industry through the introduction of new technologies,
new products or services, new business models or new methods of
travel. To compete successfully, we will need to demonstrate the
advantages of our services over alternative solutions and services,
as well as newer technologies. Failure to adapt to innovations in
technology and service offerings in the automotive space could have
a material adverse impact on our ability to sustain our business
and remain competitive.





11





Our growth depends on our ability to gain sustained access to a
sufficient number of parking locations on commercially reasonable
terms that offer convenient access in reaching our
clients.





We currently operate Self-park in New York City and expect that our
future growth may focus on expansion into other large cities. We
must therefore compete for limited parking locations. Many cities
are densely populated and parking locations may not be available at
locations that provide convenient access to our clients or on terms
that are commercially reasonable. If we are unable to gain
sustained access to a sufficient number of parking locations that
are convenient to our clients, our ability to attract and retain
clients will suffer. This challenge of finding adequate parking
will grow if we are able to successfully grow our subscriber base.
If we are unable to gain sustained access to a sufficient number of
parking locations, or we are unable to gain such access on
commercially reasonable terms, this could have a material adverse
impact on our business, financial condition and results of
operations.





If we fail to successfully execute our growth strategy, our
business and prospects may be materially and adversely
affected.





To
date, we primarily operate in the New York metropolitan area. Our
growth strategy includes expanding our services to new geographic
locations, which may not succeed due to various factors, including
one or more of the following: competition, our inability to build
brand name recognition in these new markets, our inability to
effectively market our services in these new markets or our
inability to deliver high-quality services on a cost-effective and
continuous and consistent basis. In addition, we may be unable to
identify new cities with sufficient growth potential to expand our
network, and we may fail to attract quality drivers and other
employees and/or establish the necessary commercial relationships
with local vendors that are required in order to deliver our
services in these areas. If we fail to successfully execute our
growth strategy, we may be unable to maintain and grow our business
operation, and our business and prospects may be materially and
adversely affected.





We may experience difficulties demonstrating the value to customers
of newer, higher priced and higher margin services if they believe
existing services are adequate to meet end customer
expectations.





As we
develop and introduce new services, we face the risk that customers
may not value or be willing to purchase these higher priced and
higher margin services due to pricing constraints. Owing to the
extensive time and resources that we invest in developing new
services, if we are unable to sell customers new services, our
revenue could decline and our business, financial condition,
operating results and cash flows could be negatively
affected.





If efforts to build and maintain strong brand identity are not
successful, we may not be able to attract or retain clients, and
our business and operating results may be adversely
affected.





We
believe that building and maintaining our brand is critical to the
success of our business. Consumer client and automotive awareness
of the brand and its perceived value will depend largely on the
success of marketing efforts and the ability to provide a
consistent, high-quality client and business experience.
Conversely, any failure to maximize marketing opportunities or to
provide clients with high-quality valet, logistics, maintenance and
storage experiences for any reason could substantially harm our
reputation and adversely affect our efforts to develop as a trusted
brand. To promote our brand, we have made, and will continue to
make, substantial investments relating to advertising, marketing
and other efforts, but cannot be sure that such investment will be
successful.





12





Furthermore,
as the primary point of contact with clients, we rely on our
drivers to provide clients and business partners with a
high-quality client experience. The failure of our drivers to
provide clients and business partners with this trusted experience
could cause customers and business partners to turn to alternative
providers, including our competitors. Any incident that erodes
consumer affinity for our brand, including a negative experience
with one of our valets or damage to a customer’s car could
result in negative publicity, negative online reviews and damage
our business.





We rely on third-party service providers to provide parking garages
for our clients’ cars. If these service providers experience
operational difficulties or disruptions, our business could be
adversely affected.





We
depend on third-party service providers to provide parking garages
for our clients’ cars. In particular, we rely on local
parking garage vendors to provide adequate convenient parking
locations. We do not control the operation of these providers. If
these third-party service providers terminate their relationship
with us, decide to sell their facilities or do not provide
convenient access to our clients’ vehicles, it would be
disruptive to our business as we are dependent on suitable parking
locations within relative proximity of our clients’
residences and business locations. This disruption could harm our
reputation and brand and may cause us to lose clients.





If we are unsuccessful in establishing or maintaining our
business-to-business (B2B) model, our revenue growth could be
adversely affected.





We
currently depend on corporate clients and the B2B market for a
significant portion of our revenue. The success of this strategy
will depend on our ability to maintain existing B2B partners,
obtain new B2B partners, and generate a community of participating
corporate clients sufficiently large to support such a model. We
may not be successful in establishing such partnerships on terms
that are commercially favorable, if at all, and may encounter
financial and logistical difficulties associated with sustaining
such partnerships. If we are unsuccessful in establishing or
maintaining our B2B model, our revenue growth could be adversely
affected.





We face risks related to liabilities resulting from the use of
client vehicles by our employees.





Our
business can expose us to claims for property damage, personal
injury and death resulting from the operation and storage of client
cars by our drivers. While operating client cars, drivers could
become involved in motor vehicle accidents due to mechanical or
manufacturing defects, or user error by the DropCar-employed driver
or by a third-party driver that results in death or significant
property damage for which we may be liable.





In
addition, we depend on our drivers to inspect the vehicles prior to
driving in order to identify any potential damage or safety concern
with the vehicle. To the extent that we are found at fault or
otherwise responsible for an accident, our insurance coverage would
only cover losses up to a maximum of $5 million, in certain
instances, in the United States.





We may experience difficulty obtaining coverage for certain
insurable risks or obtaining such coverage at a reasonable
cost.





We
maintain insurance for workers’ compensation, general
liability, automobile liability, property damage and other
insurable risks. We are responsible for claims exceeding our
retained limits under our insurance policies, and while we endeavor
to purchase insurance coverage corresponding to our assessment of
risk, we cannot predict with certainty the frequency, nature or
magnitude of claims or direct or consequential damages, and may
become exposed to liability at levels in excess of our historical
levels resulting from unusually high losses or otherwise.
Additionally, consolidation of entities in the insurance industry
could impact our ability to obtain or renew policies at competitive
rates, which could have a material adverse impact on our business,
as would the incurrence of uninsured claims or the inability or
refusal of our insurance carriers to pay otherwise insured claims.
Any material changes in our insurance costs due to changes in
frequency of claims, the severity of claims, the costs of premiums
or for any other reason could have a material adverse effect on our
financial position, results of operations, or cash
flows.





13





Our success depends on the continued reliability of the internet
infrastructure.





Our
services are designed primarily to work over the internet, and the
success of our platform is largely dependent on the development and
maintenance of the internet infrastructure, along with our
clients’ access to low-cost, high-speed internet. The future
delivery of our services will depend on third-party internet
service providers to expand high-speed internet access, to maintain
a reliable network with the necessary speed, data capacity and
security, and to develop complementary products and services for
providing reliable and timely internet access. Any outages or
delays resulting from damage to the internet infrastructure,
including problems caused by viruses, malware and similar programs,
could reduce clients’ access to the internet and our services
and could adversely impact our business.





System interruptions that impair access to our website or mobile
application could substantially harm our business and operating
results.





The
satisfactory performance, reliability and availability of our
website and mobile application, which enable clients to access our
services, are critical to our business. Any systems interruption
that prevents clients and visitors from accessing our website and
mobile App could result in negative publicity, damage to our
reputation and brand and could cause our business and operating
results to suffer. We may experience system interruptions for a
variety of reasons, including network failures, power outages,
cyber-attacks, problems caused by viruses and similar programs,
software errors or an overwhelming number of clients or visitors
trying to reach our website during periods of strong demand.
Because we are dependent in part on third parties for the
implementation and maintenance of certain aspects of our systems
and because some of the causes of system interruptions may be
outside of our control, we may not be able to remedy such
interruptions in a timely manner, or at all. Any significant
disruption to our website, mobile application or internal computer
systems could result in a loss of clients and adversely affect our
business and results of operations.





If we are unable to protect confidential client information, our
reputation may be harmed and we may be exposed to liability and a
loss of clients.





Our
system stores, processes and transmits confidential client
information, including location information and other sensitive
data. We rely on encryption, authentication and other technologies
to keep this information secure. We may not have adequately
assessed the internal and external risks posed to the security of
our systems and may not have implemented adequate preventative
safeguards. In the event that the security of our system is
compromised in the future, we may not take adequate reactionary
measures. Any compromise of information security could expose our
confidential client information, damaging our reputation and
exposing us to costly litigation and liability that could harm our
business and operating results.





Security breaches, loss of data and other disruptions could
compromise sensitive information related to our business, prevent
us from accessing critical information or expose us to liability,
which could adversely affect our business and our
reputation.





We
utilize information technology systems and networks to process,
transmit and store electronic information in connection with our
business activities. As the use of digital technologies has
increased, cyber incidents, including deliberate attacks and
attempts to gain unauthorized access to computer systems and
networks, have increased in frequency and sophistication. These
threats pose a risk to the security of our systems and networks and
the confidentiality, availability and integrity of our data, all of
which are vital to our operations and business strategy. There can
be no assurance that we will be successful in preventing
cyber-attacks or successfully mitigating their
effects.





14





Despite
the implementation of security measures, our internal computer
systems and those of our contract research organizations and other
contractors and consultants are vulnerable to damage or disruption
from hacking, computer viruses, software bugs, unauthorized access
or disclosure, natural disasters, terrorism, war, and
telecommunication, equipment and electrical failures. In addition,
there can be no assurance that we will promptly detect any such
disruption or security breach, if at all.  Unauthorized
access, loss or dissemination could disrupt our operations,
including our ability to conduct research and development
activities, process and prepare company financial information, and
manage various general and administrative aspects of our business.
To the extent that any such disruption or security breach results
in a loss of or damage to our data or applications, or
inappropriate disclosure or theft of confidential, proprietary or
personal information, we could incur liability, suffer reputational
damage or poor financial performance or become the subject of
regulatory actions by state, federal or non-US authorities, any of
which could adversely affect our business.





We may not be able to adequately protect our intellectual property
rights or may be accused of infringing the intellectual property
rights of third parties.





Our
business depends substantially on our intellectual property rights,
the protection of which is crucial to our business success. To
protect our proprietary rights, we rely or may in the future rely
on a combination of trademark law and trade secret protection,
copyright law and patent law. We also utilize contractual
agreements, including, in certain circumstances, confidentiality
agreements between the company and our employees, independent
contractors and other advisors. These afford only limited
protection, and unauthorized parties may attempt to copy aspects of
our website and mobile application features, software and
functionality, or to obtain and use information that we consider
proprietary or confidential, such as the technology used to operate
our website, its content and company trademarks. We may also
encounter difficulties in connection with the acquisition and
maintenance of domain names, and regulations governing domain names
may not protect our trademarks and similar proprietary
rights.





In
addition, we may become subject to third-party claims that we
infringe the proprietary rights of others. Such claims, regardless
of their merits, may result in the expenditure of significant
financial and managerial resources, injunctions against us or the
payment of damages. We may need to obtain licenses from third
parties who allege that we have infringed their rights, but such
licenses may not be available on terms acceptable to us or at
all.





Future legislation or regulations may adversely affect our business
and results of operations.





Although
various jurisdictions and government agencies are considering
implementing legislation in response to the rise of other ride- and
car-sharing enterprises, such as Uber Technologies Inc., currently
no such legislation exists that we believe has jurisdiction over,
or applicability to, our operations. We do not believe we are
subject to any material government regulations or oversight, but
regulations impacting parking and traffic patterns in the areas of
our operations could impact the services we provide. We are also
subject to various U.S. federal, state and local laws and
regulations, including those related to environmental, health and
safety, financial, tax, customs and other matters. We cannot
predict the substance or impact of pending or future legislation or
regulations, or the application thereof. The introduction of new
laws or regulations or changes in existing laws or regulations, or
the interpretations thereof, could increase the costs of doing
business for us or our clients or otherwise restrict our actions
and adversely affect our financial condition, results of operations
and cash flows.





15





Seasonality may cause fluctuations in our financial
results.





We
generally experience some effects of seasonality due to increases
in travel during the summer months and holidays such as
Thanksgiving and Christmas. Accordingly, the use of our services
and associated revenue have generally increased at a higher rate
during such periods. Our revenue also fluctuates due to inclement
weather conditions, such as snow or rain storms. This seasonality
may cause fluctuations in our financial results.





We depend on key personnel to operate our business, and the loss of
one or more members of our management team, or our failure to
attract, integrate and retain other highly qualified personnel in
the future, could harm our business.





We
believe our future success will depend in large part upon our
ability to attract and retain highly skilled managerial, technical,
finance and sales and marketing personnel. We currently depend on
the continued services and performance of the key members of our
management team, including Spencer Richardson, our Co-Founder and
Chief Executive Officer, and David Newman, our Co-Founder and Chief
Business Development Officer. The loss of any key personnel could
disrupt our operations and have an adverse effect on our ability to
grow the business.





Prior
to the second quarter in 2018 we have relied on outside consultants
and other service providers for the majority of our accounting and
financial support. During 2018, we hired new members to our
management team. In February of 2019, we terminated our Chief
Financial Officer and on the same day engaged a consultant to serve
as our Chief Financial Officer going forward. We compete in the
market for personnel against numerous companies, including larger,
more established competitors who have significantly greater
financial resources and may be in a better financial position to
offer higher compensation packages to attract and retain human
capital. We cannot be certain that we will be successful in
attracting and retaining the skilled personnel necessary to operate
our business effectively in the future.





We may become engaged in legal proceedings that could result in
unforeseen expenses and could occupy a significant amount of
management’s time and attention.





From
time to time, we may become subject to litigation, claims or other
proceedings that could negatively affect our business operations
and financial position. Litigation disputes could cause us to incur
unforeseen expenses, could occupy a significant amount of
management’s time and attention and could negatively affect
our business operations and financial position. See “Business
— Legal Proceedings.”





Our business is subject to interruptions, delays and failures
resulting from natural or man-made disasters.





Our
services, systems and operations are vulnerable to damage or
interruption from earthquakes, volcanoes, fires, floods, power
losses, telecommunications failures, terrorist attacks, acts of
war, human errors, break-ins and similar events. A significant
natural disaster could have a material adverse impact on our
business, operating results and financial condition. We may not
have sufficient protection or recovery plans in certain
circumstances and our insurance coverage may be insufficient to
compensate for losses that may occur. As we rely heavily on our
servers, computer and communications systems and the internet to
conduct our business and provide a high-quality client experience,
such disruptions could negatively impact our ability to run the
business, which could have an adverse effect on our operating
results.





16





We have incurred significant increased costs as a result of
operating as a public company, and our management is required to
devote substantial time to public company compliance
requirements.





As a
public company, we face increased legal, accounting, administrative
and other costs and expenses that we did not incur as a private
company. The Sarbanes-Oxley Act of 2002, including the requirements
of Section 404, and rules and regulations subsequently implemented
by the SEC, the Public Company Accounting Oversight Board, and The
Nasdaq Capital Market require public companies to meet certain
corporate governance standards. A number of those requirements
require our management to carry out activities it has not done
previously. For example, we have adopted new internal controls and
disclosure controls and procedures. Our management and other
personnel will need to devote a substantial amount of time to these
requirements. Moreover, these rules and regulations have increased
our legal and financial compliance costs and will make some
activities more time-consuming and costlier. These increased costs
will require us to divert a significant amount of money that we
could otherwise use to expand our business and achieve our
strategic objectives.





Failure to establish and maintain effective internal controls in
accordance with Sections 302 and 404 of the Sarbanes-Oxley Act
could have an adverse effect on our business and stock
price.





We are
required to comply with the SEC’s rules implementing Sections
302 and 404 of the Sarbanes-Oxley Act, which require management to
certify financial and other information in our quarterly and annual
reports and provide an annual management report on the
effectiveness of controls over financial reporting. We are required
to disclose changes made in our internal controls and procedures on
a quarterly basis. We are required to make our annual assessment of
our internal controls over financial reporting pursuant to Section
404 as of December 31, 2018.





To
comply with the requirements of Sections 302 and 404, we have
undertaken or may in the future undertake various actions, such as
implementing new internal controls and procedures and hiring
additional accounting or internal audit staff. Testing and
maintaining internal controls can divert our management’s
attention from other matters that are important to the operation of
our business. In addition, when evaluating our internal controls
over financial reporting, we may identify material weaknesses that
we may not be able to remediate in time to meet the applicable
deadline imposed upon us for compliance with the requirements of
Sections 302 and 404. If we identify material weaknesses in our
internal controls over financial reporting or are unable to comply
with the requirements of Sections 302 and 404 in a timely manner or
assert that our internal controls over financial reporting are
effective, or if it becomes necessary for our independent
registered public accounting firm to express an opinion as to the
effectiveness of our internal controls over financial reporting and
is unable to do so, investors may lose confidence in the accuracy
and completeness of our financial reports and the market price of
our common stock could be negatively affected. In addition, we
could become subject to investigations by The Nasdaq Capital
Market, SEC or other regulatory authorities, which could require
additional financial and management resources.





A material weakness in our internal controls could have a material
adverse effect on us.





Effective internal
controls are necessary for us to provide reasonable assurance with
respect to our financial reports and to adequately mitigate risk of
fraud. If we cannot provide reasonable assurance with respect to
our financial reports and adequately mitigate risk of fraud, our
reputation and operating results could be harmed. Internal control
over financial reporting may not prevent or detect misstatements
because of its inherent limitations, including the possibility of
human error, the circumvention or overriding of controls, or fraud.
Therefore, even effective internal controls can provide only
reasonable assurance with respect to the preparation and fair
presentation of financial statements. In addition, projections of
any evaluation of effectiveness of internal control over financial
reporting to future periods are subject to the risk that the
control may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.





17





A
material weakness is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected
on a timely basis. A material weakness in our internal control over
financial reporting could adversely impact our ability to provide
timely and accurate financial information. If we are unable to
report financial information timely and accurately or to maintain
effective disclosure controls and procedures, we could be subject
to, among other things, regulatory or enforcement actions by the
SEC, any one of which could adversely affect our business
prospects.





Our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are not
effective due to the material weaknesses resulting from a limited
segregation of duties among our employees with respect to our
control activities and this deficiency is the result of our limited
number of employees. We also identified material weaknesses
surrounding the financial closing process and the recording of debt
and equity transactions that occurred in the quarters ended March
31, 2018, June 30, 2018, and September 30, 2018. These deficiencies
may affect management’s ability to determine if errors or
inappropriate actions have taken place.





Our ability to use net operating loss carryforwards may be
limited.





At December 31, 2018, we had approximately $3.3 million of
operating loss carryforwards for federal and $1.1 million New York
state tax purposes that may be applied against future taxable
income. The net operating loss carryforwards will begin to expire
in the year 2035 if not utilized prior to that date. To the extent
available, we intend to use these net operating loss carryforwards
to reduce the corporate income tax liability associated with our
operations. The ability to utilize this net operating loss
carryforwards may be limited under Section 382 of the Code, which
apply if an ownership change occurs. To the extent our use of net
operating loss carryforwards is significantly limited, our income
could be subject to corporate income tax earlier than it would if
we were able to use net operating loss carryforwards, which could
have a negative effect on our financial results.





The recently passed comprehensive federal tax reform bill could
adversely affect our business and financial condition.





On
December 22, 2017, President Trump signed into law the “Tax
Cuts and Jobs Act,” or TCJA, which significantly reforms the
Internal Revenue Code of 1986, as amended, or the Code. The TCJA,
among other things, includes changes to U.S. federal tax rates,
imposes significant additional limitations on the deductibility of
interest and net operating loss carryforwards, allows for the
expensing of capital expenditures, and puts into effect the
migration from a “worldwide” system of taxation to a
territorial system. Our net deferred tax assets and liabilities
were revalued at the newly enacted U.S. corporate rate, and the
estimated impact was recognized in our tax expense in 2017. We
continue to examine the impact this tax reform legislation may have
on our business. However, the effect of the TCJA on our business,
whether adverse or favorable, is uncertain, and may not become
evident for some period of time. We urge investors to consult with
their legal and tax advisers regarding the implications of the TCJA
on an investment in our common stock.





18





Our principal stockholders and management own a significant
percentage of our common stock and are able to exert significant
control over matters subject to stockholder approval.





Based
on the beneficial ownership of our common stock as of March 1,
2019, our officers and directors, together with holders of 5% or
more of our common stock outstanding and their respective
affiliates, beneficially own approximately 61.90% of our common
stock. Accordingly, these stockholders have significant influence
over the outcome of corporate actions requiring stockholder
approval, including the election of directors, consolidation or
sale of all or substantially all of our assets or any other
significant corporate transaction. The interests of these
stockholders may not be the same as or may even conflict with your
interests. For example, these stockholders could delay or prevent a
change of control of the company, even if such a change of control
would benefit the other stockholders, which could deprive such
other stockholders of an opportunity to receive a premium for their
common stock as part of a sale of the company or its assets and
might affect the prevailing market price of our common stock. The
significant concentration of stock ownership may adversely affect
the trading price of our common stock due to investors’
perception that conflicts of interest may exist or
arise.





The price of our common stock may be volatile and fluctuate
substantially, and you may not be able to resell your shares at or
above the price you paid for them.





The
trading price of our common stock is highly volatile and could be
subject to wide fluctuations in response to various factors, some
of which are beyond our control, such as reports by industry
analysts, investor perceptions or negative announcements by other
companies involving similar technologies. The stock market in
general and the market for smaller companies, like DropCar in
particular, have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies. As
a result of this volatility, our stockholders may not be able to
sell their common stock at or above the price they paid for it. The
following factors, in addition to other factors described in this
“Risk Factors” section of our most recent filings with
the SEC, may have a significant impact on the market price of our
common stock:





●
 issuances
of new equity securities pursuant to a future offering, including
issuances of preferred stock;


●
 the
success of competitive products, services or
technologies;


●
 regulatory
or legal developments in the United States and other
countries;


●
 adverse actions taken by regulatory agencies with respect to our
services we provide;


●
 developments
or disputes concerning patent applications, issued patents or other
proprietary rights;


●
 the
recruitment or departure of key personnel;


●
 actual
or anticipated changes in estimates as to financial results,
development timelines or recommendations by securities
analysts;


●
 variations
in our financial results or those of companies that are perceived
to be similar to us;


●
 variations in the costs of the services we provide;


●
 market
conditions in the market segments in which we operate;


●
 variations
in quarterly and annual operating results;


●
 announcements
of new products and/or services by us or its
competitors;


●
 the
gain or loss of significant customers;


●
 changes
in analysts’ earnings estimates;


●
 short
selling of shares of our common stock;


●
 litigation;


●
 changing
the exchange or quotation system on which shares of our common
stock are listed;


●
 trading volume of our common stock;


●
 sales of our common stock by us, our executive officers and
directors or our stockholders in the future;


●
 changes
in accounting principles; and


●
 general economic and market conditions and overall fluctuations in
the U.S. equity markets.





19





In addition, broad market and industry factors may negatively
affect the market price of our common stock, regardless of our
actual operating performance, and factors beyond our control may
cause our stock price to decline rapidly and
unexpectedly.





We may be subject to securities litigation, which is expensive and
could divert management attention.





Companies
that have experienced volatility in the market price of their stock
have frequently been the objects of securities class action
litigation. We may be the target of this type of litigation in the
future. Class action and derivative lawsuits could result in
substantial costs to us and cause a diversion of our
management’s attention and resources, which could materially
harm our financial condition and results of
operations.





Provisions in our Charter and Bylaws and under Delaware law could
make an acquisition of us, which may be beneficial to our
stockholders, more difficult and may prevent attempts by our
stockholders to replace or remove our current
management.





Provisions
in our certificate of incorporation, as amended, or Charter, and
amended and restated bylaws, or Bylaws, may discourage, delay or
prevent a merger, acquisition or other change in control of us that
stockholders may consider favorable, including transactions in
which you might otherwise receive a premium for your shares. These
provisions could also limit the price that investors might be
willing to pay in the future for shares of our common stock,
thereby depressing the market price of our common stock. In
addition, because our board of directors is responsible for
appointing the members of our management team, these provisions may
frustrate or prevent any attempts by our stockholders to replace or
remove our current management by making it more difficult for
stockholders to replace members of our board of directors. Among
other things, these provisions state that:





●
 the
authorized number of directors can be changed only by resolution of
our board of directors;


●
 our
Bylaws may be amended or repealed by our board of directors or by
our stockholders;


●
 stockholders
may not call special meetings of the stockholders or fill vacancies
on our board of directors;


●
 our
board of directors is authorized to issue, without stockholder
approval, preferred stock, the rights of which will be determined
at the discretion of the board of directors and that, if issued,
could operate as a “poison pill” to dilute the stock
ownership of a potential hostile acquirer to prevent an acquisition
that our board of directors does not approve;


●
 our
stockholders do not have cumulative voting rights, and therefore
stockholders holding a majority of the shares of our common stock
outstanding are able to elect all of its directors;
and


●
 our
stockholders must comply with advance notice provisions to bring
business before or nominate directors for election at a stockholder
meeting.





Moreover,
because we are incorporated in Delaware, we are governed by the
provisions of Section 203 of the DGCL, which prohibits a person who
owns in excess of 15% of our outstanding voting stock from merging
or combining with us for a period of three years after the date of
the transaction in which the person acquired in excess of 15% of
our outstanding voting stock, unless the merger or combination is
approved in a prescribed manner.





20





Our failure to meet the continued listing requirements of The
Nasdaq Capital Market could result in a delisting of our common
stock.





The
continued listing standards of Nasdaq provide, among other things,
that a company may be delisted if the bid price of its stock drops
below $1.00 for a period of 30 consecutive business days or if
stockholders’ equity is less than $2.5 million.On September 25, 2018,
we received a notification letter from The Nasdaq Stock Market
informing us that for the last 30 consecutive business days, the
bid price of our securities had closed below $1.00 per share, which
is the minimum required closing bid price for continued listing on
The Nasdaq Capital Market pursuant to Listing Rule 5550(a)(2). In
order to regain compliance, on March 8, 2019, we filed a
certificate of amendment to our amended and restated certificate of
incorporation with the Secretary of State of the State of Delaware
to effect a one-for-six reverse stock split of our outstanding
shares of common stock. On March 26, 2019, we received a
notification letter from The Nasdaq Stock Market informing us that
we had regained compliance with Listing Rule
5550(a)(2).





While
we have exercised diligent efforts to maintain the listing of our
common stock on Nasdaq, there can be no assurance that we will be
able to continue to meet the continuing listing requirements of The
Nasdaq Capital Market. If we are unable to meet the continuing
listing requirements, Nasdaq may take steps to delist our common
stock. Such a delisting would likely have a negative effect on the
price of our common stock and would impair your ability to sell or
purchase our common stock when you wish to do so. Further, if we
were to be delisted from The Nasdaq Capital Market, our common
stock would cease to be recognized as covered securities and we
would be subject to regulation in each state in which we offer our
securities.





Delisting
from Nasdaq could adversely affect our ability to raise additional
financing through the public or private sale of equity securities,
would significantly affect the ability of investors to trade our
securities and would negatively affect the value and liquidity of
our common stock. Delisting could also have other negative results,
including the potential loss of confidence by employees, the loss
of institutional investor interest and fewer business development
opportunities.





If our common stock becomes subject to the penny stock rules, it
may be more difficult to sell those shares.





The
SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in penny stocks. Penny stocks are
generally equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges
or authorized for quotation on certain automated quotation systems,
provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or
system). The inter-dealer quotation system maintained by OTC
Markets, Inc., including OTCQX, OTCQB and OTC Pink, do not meet
such requirements and if the price of our common stock remains less
than $5.00 and we are no longer listed on a national securities
exchange, our common stock may be deemed a penny stock. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from those rules, to deliver a
standardized risk disclosure document containing specified
information. In addition, the penny stock rules require that prior
to effecting any transaction in a penny stock not otherwise exempt
from those rules, a broker-dealer must make a special written
determination that the penny stock is a suitable investment for the
purchaser and receive: (i) the purchaser’s written
acknowledgment of the receipt of a risk disclosure statement; (ii)
a written agreement to transactions involving penny stocks; and
(iii) a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the
trading activity in the secondary market for our common stock, and
therefore stockholders may have difficulty selling their
shares.





21





An active trading market for our common stock may not
develop.





The listing of our common stock on The Nasdaq Capital Market does
not assure that a meaningful, consistent and liquid trading market
exists. Although our common stock is listed on The Nasdaq Capital
Market, trading volume in our common stock has been limited and an
active trading market for shares of our common stock may never
develop or be sustained. If an active market for our common stock
does not develop, it may be difficult for investors to sell their
shares without depressing the market price for the shares or at
all.





We have a substantial number of shares of authorized but unissued
capital stock, and if we issue additional shares of capital stock
in the future, existing shareholders will be diluted.





Our
Charter authorizes the issuance of up to 100,000,000 shares of
common stock and up to 5,000,000 shares of preferred stock with the
rights, preferences and privileges determined by our board of
directors from time to time. Based on our capitalization as of
March 27, 2019, (i) 3,400,258 shares of our common stock and 7,225
shares of our convertible preferred stock are issued and
outstanding and (ii) 79,557 shares of our common stock are reserved
for future issuance.





Thus, approximately 97 million shares of our common stock and 5
million shares of our preferred stock are available for future
issuance. Shares of our capital stock could be used for a variety
of purposes including raising capital to fund growth or operations,
for acquisitions, for strategic alliances, to attract and retain
key employees, for anti-takeover purposes or to delay or prevent
changes in control to our management or other transactions and
corporate purposes that our board of directors deems appropriate.
In most cases, our board of directors may have the authority to
authorize issuances of our capital stock without getting advance
approval from our stockholders. Any future issuances of shares of
our capital stock may not be made on favorable terms, may not
enhance stockholder value, may have rights, preferences and
privileges that are superior to those of our common stock and may
have an adverse impact on our business or the trading price of the
shares of our common stock. Additionally, any such issuances will
reduce the proportionate ownership and voting power of existing
stockholders.





Future sales of our common stock, or the perception that future
sales may occur, may cause the market price of our common stock to
decline, even if our business is doing well.





Sales
of substantial amounts of our common stock in the public market, or
the perception that these sales may occur, could materially and
adversely affect the price of our common stock and could impair our
ability to raise capital through the sale of additional equity
securities. We maintain several registration statements on Form S-3
with the SEC pursuant to which the holders of our Series H-1,
Series H-2, Series H-3 and Series H-4 convertible preferred stock
and the warrants issued in connection with those securities may
resell the shares of our common stock into which the preferred
stock is convertible and which is issuable upon the exercise of
those warrants.





Because we do not anticipate paying any cash dividends on our
capital stock in the foreseeable future, capital appreciation, if
any, will be your sole source of gain.





We do
not anticipate paying future dividends on our capital stock. We
currently intend to retain all of our future earnings, as
applicable, to finance the growth and development of our business.
In addition, the terms of any future debt agreements may preclude
us from paying dividends. As a result, capital appreciation, if
any, of our common stock will be the sole source of gain for the
foreseeable future.





22





ITEM 1B – UNRESOLVED STAFF
COMMENTS





None.





ITEM 2 – PROPERTIES





Our
principal executive office is located at 1412 Broadway, Floor 21,
New York City, New York 10018. We operate under a month to month
lease requiring 60 days’ notice. We believe our current
facility is suitable and adequate to meet our business
requirements. We intend to continue working from this or a nearby
facility in the same geographic location.





ITEM 3 – LEGAL
PROCEEDINGS





We are
subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business that it
believes are incidental to the operation of its business. While the
outcome of these claims cannot be predicted with certainty, other
than as set forth below, management does not believe that the
outcome of any of these legal matters will have a material adverse
effect on its results of operations, financial positions or cash
flows.





In
February 2018, DropCar was
served an Amended Summons and Complaint in the Supreme Court of the
City of New York, Bronx county originally served solely on an
individual, a former DropCar customer, for injuries sustained by
plaintiffs alleging such injuries were caused by either the
customer, a DropCar valet operating the customer’s vehicle or
an unknown driver operating customer’s vehicle. DropCar to
date has cooperated with the NYC Police Department and no charges
have been brought against any employee of DropCar. DropCar has
referred the matter to its insurance carrier.





On
February 9, 2016, a DropCar employee was transporting a
customer’s vehicle when the vehicle caught fire. On November
22, 2016, an insurance company (as subrogee of the vehicle’s
owner) filed for indemnification and subrogation against the
Company in the Supreme Court of the State of New York County of New
York. Management believes that it is not responsible for the damage
caused by the vehicle fire and that the fire was not due to any
negligence on the part of the DropCar. In 2018, the parties reached
a settlement the case was closed.





As of December 31, 2018, we had accrued approximately $232,000 for
the settlement of multiple employment disputes. As of December 31,
2018, approximately $70,000 of this amount was for settled matters.
From January 1, 2019 through March 15, 2019, we agreed to other
matters for an additional $207,000.





ITEM 4 – MINE SAFETY
DISCLOSURES





Not
applicable.





23





PART II





ITEM 5 – MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES





Price Range of Common Stock





Our
common stock is currently traded on The Nasdaq Capital Market under
the symbol “DCAR”.





As of
March 29, 2019 we had 32 holders of record of our common stock. As
of March 29, 2019 the closing bid price of our common stock was
$2.96 per share.





Dividend Policy





We have
never paid a cash dividend on our common stock and do not
anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings to fund
ongoing operations and future capital requirements of our business.
Any future determination to pay cash dividends will be at the
discretion of the Board, in compliance with Delaware corporate law
and will be dependent upon our financial conditions, results of
operations, capital requirements and such other factors as the
Board deems relevant. Our preferred stock has the right to
participate in any declared dividend on common shares to the same
extent as if such preferred holders had converted each preferred
share to common stock.





Recent Sales of Unregistered Securities





On
December 24, 2018 Regal Consulting, LLC entered into an agreement
to provide investor relation services for two months for $20,000 in
cash and 33,333 shares of common stock issuable at the conclusion
of the agreement.





On January 10, 2019 Lyons Capital LLC entered into an agreement to
provide investor relation services for 75,000 shares of common
stock for up to six months of services.





On
January 28, 2019 Bear Creek Capital, LLC entered into an agreement
to provide investor relation services for 8,333 shares of common
stock for up to six months of services.





Issuer Purchases of Equity Securities





None.





24





ITEM 6 - SELECTED FINANCIAL
DATA





We are
a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act, and are not required to provide the information
required under this item.





ITEM 7 – MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The following management’s discussion and analysis should be
read in conjunction with our historical financial statements and
the related notes thereto. This management’s discussion and
analysis contains forward-looking statements, such as statements of
our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking
statements. When used, the words “believe,”
“plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect”
and the like, and/or future tense or conditional constructions
(“will,” “may,” “could,”
“should,” etc.), or similar expressions, identify
certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties, including those
under “Risk Factors” in our filings with the Securities
and Exchange Commission that could cause actual results or events
to differ materially from those expressed or implied by the
forward-looking statements. Our actual results and the timing of
events could differ materially from those anticipated in these
forward-looking statements as a result of several
factors.





Overview





Strategy





Prior
to January 30, 2018, DropCar was a privately-held provider of
automotive vehicle support, fleet logistics and concierge services
for both consumers and the automotive industry. In 2015, we
launched our cloud-based Enterprise Vehicle Assistance and
Logistics (“VAL”) platform and mobile application
(“App”) to assist consumers and automotive-related
companies reduce the costs, hassles and inefficiencies of owning a
car, or fleet of cars, in urban centers. Our VAL platform is a
web-based interface to our core service that coordinates the
movements and schedules of trained valets who pickup and drop off
cars at dealerships and customer locations. The App tracks progress
and provides email and/or text notifications on status to
customers, increasing the quality of communication and subsequent
satisfaction with the service. To date, we operate primarily in the
New York metropolitan area and may expand our territory in the
future.





We
achieve this balance of increased consumer flexibility and lower
consumer cost by aggregating demand for parking and other
automotive services and redistributing their fulfillment to
partners in the city and on city outskirt areas that have not
traditionally had access to lucrative city business. Beyond the
immediate unit economic benefits of securing bulk discounts from
vendor partners, we believe there is significant opportunity to
further provide additional products and services to clients across
the vehicle lifecycle.





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





25





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.





Our Ability to Continue as a Going Concern





Our
financial statements as of December 31, 2018 were prepared under
the assumption that we will continue as a going concern. The
independent registered public accounting firm that audited our 2018
financial statements, in their report, included an explanatory
paragraph referring to our recurring losses since inception and
expressing substantial doubt in our ability to continue as a going
concern. Our financial statements do not include any adjustments
that might result from the outcome of this uncertainty. Our ability
to continue as a going concern depends on our ability to obtain
additional equity or debt financing, attain further operating
efficiencies, reduce expenditures, and, ultimately, to generate
additional revenue. We cannot assure you, however, that we will be
able to achieve any of the foregoing.





Merger with WPCS





On
January 30, 2018, we completed our business combination with
DropCar, Inc. (“Private DropCar”) in accordance with
the terms of the Agreement and Plan of Merger and Reorganization,
dated as of September 6, 2017, as subsequently amended, by and
among us, DC Acquisition Corporation (“Merger Sub”),
and Private DropCar (as amended, the “Merger
Agreement”), pursuant to which Merger Sub merged with and
into Private DropCar, with Private DropCar surviving as our wholly
owned subsidiary (the “Merger”). On January 30, 2018,
in connection with, and prior to the completion of, the Merger, we
effected a 1:4 reverse stock split of our common stock (the
“Reverse Stock Split”), and on January 30, 2018,
immediately after completion of the Merger, we changed our name to
“DropCar, Inc.”





Under
the terms of the Merger Agreement, we issued shares of our common
stock to Private DropCar’s stockholders, at an exchange ratio
of 0.3273 shares of our common stock, after taking into account the
Reverse Stock Split, for each share of (i) Private DropCar common
stock and preferred stock and (ii) Private DropCar warrants, in
each case, outstanding immediately prior to the Merger. The
exchange ratio was determined through arms’-length
negotiations between us and Private DropCar.





In
connection with the Merger, Private DropCar was deemed to be the
accounting acquirer because the stockholders of Private DropCar
effectively control the combined company following the Merger. The
Merger was treated as a reverse acquisition.





26





Consumer Services Product Offering Change





In
July 2018, we began assessing demand for a Self-Park Spaces monthly
parking plan whereby consumers could designate specific garages for
their vehicles to be stored at a base monthly rate, with personal
24/7 access for picking up and returning their vehicle directly,
and the option at certain times of the day 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 we have structured the enterprise B2B side
of our business, where an interaction with a vehicle on behalf of
its drivers typically generates net new revenue. Our consumer
Self-Park Spaces plan combined with our 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, we are scaling back our 360 Services for the Consumer
portion of the market. As a result of this shift, in August 2018,
we began to significantly streamline its field teams, operations
and back office support tied to our pre-September 1, 2018 consumer
subscription plans.





Divestiture of Suisun City Operations, a wholly owned subsidiary of
Dropcar, Inc.





On December 24, 2018, we completed the sale of 100% of the
corporate capital of WPCS International - Suisun City, Inc. (the
“Suisun City Operations”), our wholly owned subsidiary.
In accordance with accounting guidance, a business segment that is
disposed of meets the criteria to be classified as a discontinued
operation. As all of the required criteria for the discontinued
operation classification were met, the revenue and expenses for
this operation were included in the income from operations of
discontinued component, on the Consolidated Statement of
Operations. All discontinued operations relate to the disposition
of Suisun City Operations. The net sales of this business in 2018
prior to the divestiture were approximately $13.7 million. The sale
price was $3.5 million paid in cash and resulted in a loss on the
sale in the amount of $4.2 million. This loss is presented as part
of discontinued operations, separate from continuing operations, on
the Consolidated Statement of Operations, resulting in an increase
in loss per share of approximately $2.85 for the year ended
December 31, 2018.





Recent Developments





Intention to Explore Strategic Opportunities





On March 8, 2019, we announced we had initiated a process to evaluate
strategic opportunities to maximize shareholder value. While
management continues to focus on the Company’s business
activities and operations, this process will consider a range of
potential strategic opportunities including, but not limited to,
business combinations.





Sale of Suisun City Operations





On December 24, 2018, we completed the previously announced sale of
WPCS International – Suisun City, Inc., a California
corporation (the “Suisun City Operations”), our
wholly-owned subsidiary, pursuant to the terms of a stock purchase
agreement, dated December 10, 2018 (the “Purchase
Agreement”) by and between us and World Professional Cabling
Systems, LLC, a California limited liability company (the
“Purchaser”). Upon the closing of the sale, the
Purchaser acquired all of the issued and outstanding shares of
common stock, no par value per share, of Suisun City Operations,
for an aggregate purchase price of $3,500,000.





27





Departure and Appointment of Officer





On
February 14, 2019, our Board approved (1) the termination of Paul
Commons as Chief Financial Officer and any other positions on which
he served with respect to us and our subsidiaries and
affiliates, and (2) the appointment of Mark Corrao as our new Chief
Financial Officer, in each case effective as of February 28,
2019.





Reverse Stock Split





On March 8, 2019, we filed a certificate of amendment to our
amended and restated certificate of incorporation with the
Secretary of State of the State of Delaware to effect a one-for-six
reverse stock split of our outstanding shares of common stock. Such
amendment and ratio were previously approved by our stockholders
and board of directors, respectively. As a result of the reverse
stock split, every six shares of our outstanding pre-reverse split
common stock were combined and reclassified into one share of
common stock. Proportionate voting rights and other rights of
common stock holders were not affected by the reverse stock split.
Stockholders who would otherwise have held a fractional share of
common stock received payment in cash in lieu of any such resulting
fractional shares of common stock, as the post-reverse split
amounts of common stock were rounded down to the nearest full
share. Unless otherwise noted, all share and per share data
included in these financial statements retroactively reflect the
1-for-6 reverse stock split.





Securities Offerings





Private Placement





On March 8, 2018, we entered into a Securities Purchase Agreement
(the “Securities Purchase Agreement”) with certain
institutional and accredited investors (collectively, the
“Investors”), pursuant to which we issued to the
Investors an aggregate of 26,843 shares of our newly designated
Series H-4 Convertible Preferred Stock, par value $0.0001 per share
(the “Series H-4 Shares”), and warrants to purchase
447,383 shares of our common stock, with an exercise price of
$15.60 per share, subject to adjustments (the
“Warrants”). The purchase price per Series H-4 Share
was $235.50, equal to (i) the closing price of the common stock on
the Nasdaq Capital Market on March 7, 2018, plus $0.125 multiplied
by (ii) 100. The aggregate purchase price for the Series H-4 Shares
and Warrants was approximately $6.0 million. Subject to certain
ownership limitations, the Warrants are immediately exercisable
will be exercisable for a period of five years from the issuance
date. The Series H-4 Shares are convertible into 447,383 shares of
common stock.





On March 8, 2018, we filed the Certificate of Designations,
Preferences and Rights of the Series H-4 Convertible Preferred
Stock (the “Certificate of Designation”) with the
Secretary of State of the State of Delaware, establishing and
designating the rights, powers and preferences of the Series H-4
Convertible Preferred Stock (the “Series H-4 Stock”).
We designated up to 30,000 shares of Series H-4 Stock and each
share has a stated value of $235.50 (the “Stated
Value”). Each share of Series H-4 Stock is convertible at any
time at the option of the holder thereof, into a number of shares
of common stock determined by dividing the Stated Value by the
initial conversion price of $2.355 per share, subject to a 9.99%
blocker provision. The Series H-4 Stock has the same dividend
rights as the common stock, and no voting rights except as provided
for in the Certificate of Designation or as otherwise required by
law. In the event of any liquidation or dissolution of the Company,
the Series H-4 Stock ranks senior to the common stock in the
distribution of assets, to the extent legally available for
distribution.





28





Warrants





On April 19, 2018, we entered into separate Warrant Exchange
Agreements (the “Exchange Agreements”) with the holders
(the “Merger Warrant Holders”) of existing merger
warrants (the “Merger Warrants”) to purchase shares
of common
stock, pursuant to which, on
the closing date, the Merger Warrant Holders exchanged each Merger
Warrant for 1/18 of a share of common stock
and 1/12 of a warrant to purchase a
share of common stock
(collectively, the “Series I
Warrants”). The Series I Warrants have an exercise price of
$13.80 per share. In connection with the Exchange Agreements, we
issued an aggregate of (i) 48,786 new shares of common stock and
(ii) Series I Warrants to purchase an aggregate of 73,178 shares of
common stock.





On August 31, 2018, we offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of our
outstanding Series H-4 Warrants to purchase common stock issued on
March 8, 2018 (the “Series H-4 Warrants”) the
opportunity to exercise such Series H-4 Warrants for cash at a
reduced exercise price of $3.60 per share (the “Reduced
Exercise Price”) provided such Series H-4 Warrants were
exercised for cash on or before September 4, 2018 (the “End
Date”). In addition, we issued a “reload” warrant
(the “Series J Warrants”) to each Holder who exercised
their Series H-4 Warrants prior to the End Date, covering one share
for each Series H-4 Warrant exercised during that period. The terms
of the Series J Warrants are substantially identical to the terms
of the Series H-4 Warrants except that (i) the exercise price is
equal to $6.00, (ii) the Series J Warrants may be exercised at all
times beginning on the 6-month anniversary of the issuance date on
a cash basis and also on a cashless basis, (iii) the Series J
Warrants do not contain any provisions for anti-dilution adjustment
and (iv) we have the right to require the Holders to exercise all
or any portion of the Series J Warrants still unexercised for a
cash exercise if the volume-weighted average (as defined in the
Series J Warrant) for our common stock equals or exceeds $9.00 for
not less than ten consecutive trading days.





On September 4, 2018, we received executed Repricing Offer Letters
from a majority of the Holders, which resulted in the issuance of
260,116 shares of our common stock and Series J Warrants to
purchase up to 260,116 shares of our common stock. We received
gross proceeds of approximately $936,000 from the exercise of the
Series H-4 Warrants pursuant to the terms of the Repricing Offer
Letter.





On September 5, 2018, we received a request from Nasdaq to amend
our Series H-4 Warrants to provide that the Series H-4 Warrants may
not be exercised until we have obtained stockholder approval of the
issuance of Common Stock underlying the Series H-4 Warrants
pursuant to the applicable rules and regulations of Nasdaq. In
response to the request, on September 10, 2018, we entered into an
amendment (the “Warrant Amendment”) with the holders of
the Series H-4 Stock to provide for stockholder approval as
described above prior to the exercise of the Series H-4 Warrants.
We received stockholder approval of the issuance of common stock
underlying the Series H-4 Shares on November 15, 2018.





On November 14, 2018, we entered into a Securities Purchase
Agreement with an existing investor, pursuant to which we issued,
in a registered direct offering, Pre-Funded Series K Warrants (the
“Series K Warrants”) to purchase 277,778 shares of
common stock, in lieu of shares of common stock because the
purchase of common stock would have caused the beneficial ownership
of the purchaser, together with its affiliates and certain related
parties, to exceed 9.99% of our outstanding common stock.
  The price to the purchaser for each Series K Warrant
was $3.54 and the Series K Warrants are immediately exercisable at
a price of $0.06 per share of common stock.  The Series K
Warrants and shares of common stock for which they may be exercised
were offered pursuant to a registration statement on Form S-3 (File
No. 333-227858).





29





Consulting Agreement, Related Party





On July 11, 2018, we entered into a consulting agreement (the
“Consulting Agreement”) with Ascentaur, LLC
(“Ascentaur”). Sebastian Giordano is the Chief
Executive Officer of Ascentaur, LLC. Mr. Giordano has served on our
board of directors since February 2013 and served as our Interim
Chief Executive Officer from August 2013 through April 2016 and as
our Chief Executive Officer from April 2016 through January
2018.





Pursuant
to the terms of the Consulting Agreement, Ascentaur has agreed to
provide advisory services with respect to our strategic development
and growth, including advising us on market strategy and overall
strategy, advising us on the sale of our WPCS International
business segment, providing assistance to us in identifying and
recruiting prospective employees, customers, business partners,
investors and advisors that offer desirable administrative,
financing, investment, technical, marketing and/or strategic
expertise, and performing such other services pertaining to our
business as we and Ascentaur may from time to time mutually agree.
As consideration for its services under the Consulting Agreement,
Ascentaur is entitled to receive (i) a fee of $10,000 per month for
a period of nine months from the effective date of the Consulting
Agreement, (ii) a lump sum fee of $90,000 upon the closing of the
sale of our WPCS International business segment and (iii)
reimbursement for reasonable and customary business expenses
incurred in connection with Ascentaur’s performance under the
Consulting Agreement. The term of the Consulting Agreement
commenced on July 11, 2018 and will continue until April 9, 2019 or
until terminated in accordance with the terms of the Consulting
Agreement. Through December 31, 2018, Ascentaur has been paid
$50,929.





Results of Operations





We
have never been profitable and have incurred significant operating
losses in each year since inception.


Overall
loss for the years ended December 31, 2018 and 2017, were as
follows:





2018
2017In millionsContinuing
operations
$
$Revenues
6.1
4.3Cost of
revenues
7.9
4.6Gross
loss
(1.8)
(0.3)Operating
expenses
12.0
6.0Interest
expense
1.1
1.3Loss from
continuing operations
(14.9)
(7.6)Income from
operations of discontinued component
0.3
-Loss on sale of
component
(4.2)
-Consolidated net
loss
(18.8)
(7.6)Deemed dividend on
exchange of warrants
(1.4)
-Consolidated net
loss attributable to common stockholders
$(20.2)
$(7.6)





Substantially
all of our operating losses from continuing operations resulted
from expenses incurred in connection with our valet workforce,
parking and technology development programs and from general and
administrative costs associated with our continuing operations. As
of December 31, 2018, we had a net working capital of approximately
$2.3 million. We expect to continue to incur significant expenses
and increasing operating losses from continuing operations for at
least the next several years as we continue the development of
our comprehensive Vehicle Assistance & Logistics
(“VAL”) across business-to-consumer (“B2C”)
and business-to-business (“B2B”) clientele.
Accordingly, we will continue to require substantial additional
capital to continue our commercialization activities. The amount
and timing of our future funding requirements will depend on many
factors, including the timing and results of our commercialization
efforts.





30





Components of Statements of Operations





Net Services Revenue





We
generate substantially all of our revenue from on-demand vehicle
pick-up, parking and delivery services, providing automobile
maintenance, care and refueling services and through our B2B fleet
management services. The majority of our consumer contracts are
month-to-month subscription contracts with fixed monthly or
contract term fees.





Cost of Services





Cost
of services consists of the aggregate costs incurred in delivering
the services for our customers, including, expenses for personnel
costs, parking lot costs, technology hosting and third-party
licensing costs, vehicle repair and damage costs, insurance,
merchant processor fees, uniforms, customer and transportation
expenses associated with providing a service.





Selling, General and Administrative Expenses





Selling,
general and administrative expenses consist primarily of
technology, sales and marketing and general and administrative
expenses.





Technology. Technology expenses consist primarily of
labor-related costs incurred in coding, testing, maintaining and
modifying our technology platform. We have focused our technology
development efforts on both improving ease of use and functionality
of our reservation, back-end system and mobile (i.e., iOS, Android)
applications. We expect technology to increasingly become a key
part of our overall value proposition to B2C and B2B
clients.





Sales and Marketing.   Sales and marketing
expenses consist primarily of labor-related costs, online search
and advertising, trade shows, marketing agency fees, and other
promotional expenses. Online search and advertising costs, which
are expensed as incurred, include online advertising media such as
banner ads and pay-per-click payments to search engines. We expect
to continue to invest in sales and marketing activities to increase
our membership base and brand awareness. We expect that sales and
marketing expenses will continue to increase in the future but
decrease as a percentage of revenue as certain fixed costs are
leveraged over a larger revenue base.





General and Administrative.   General and
administrative expenses consist primarily of labor-related expenses
for administrative, human resources, internal information
technology support, legal, finance and accounting personnel,
professional fees, training costs, insurance and other corporate
expenses. We expect that general and administrative expenses will
increase as we continue to add personnel to support the growth of
our business. In addition, we anticipate that we will incur
additional personnel expenses, professional service fees, including
audit and legal, investor relations, costs of compliance with
securities laws and regulations, and higher director and officer
insurance costs related to operating as a public company. As a
result, we expect that our general and administrative expenses will
continue to increase in the future but decrease as
a percentage of revenue over time as our membership base and
related revenue increases.





31





Discontinued Operations. On
December 10, 2018, we signed a definitive agreement with a private
corporation and completed the sale on December 24, 2018 of 100% of
the Suisun City Operations, our wholly owned subsidiary, for a
total cash consideration of $3.5 million. We recognized the
following loss on sale of component on the date of
sale:





Sales
price
$3,500,000Commissions
and various transaction costs
(332,220)Net
sales proceeds
3,167,780Carrying
amounts of assets, net of liabilities*
7.337,498Loss
on sale of Suisun City Operations
$(4,169,718)





* The carrying amounts of assets
included cash of $1,504,366; accounts receivable and contract asset
of $4,177,568; prepaid expenses and other current assets of
$57,486; property and equipment of $295,206; intangibles and
goodwill of $5,048,247; carrying amounts of liabilities included
accounts payable and accrued liabilities of $3,688,831and loans of
$56,544.





The
operations and cash flows of the Suisun City Operations were
eliminated from ongoing operations following its sale. The
operating results of the Suisun City Operations for
the consolidated period between January 30, 2018 and
December 24, 2018 were as follows:





Revenues
$13,730,252Cost
of revenues
10,836,754Gross
profit
2,893,498Selling,
general and administrative expenses
2,285,661Depreciation
and amortization
287,830Total
Operating Expenses
2,573,491Interest
expense, net
4,888Net
income from operations of discontinued component
$315,119





Critical Accounting Policies and Estimates





Our
financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation
of our financial statements and related disclosures requires us to
make estimates, assumptions and judgments that affect the reported
amount of assets, liabilities, revenue, costs and expenses and
related disclosures. We believe that the estimates, assumptions and
judgments involved in the accounting policies described below have
the greatest potential impact on our financial statements and,
therefore, we consider these to be our critical accounting
policies. Accordingly, we evaluate our estimates and assumptions on
an ongoing basis. Our actual results may differ from these
estimates under different assumptions and conditions. See Note 2 to
our audited financial statements for the years ended December 31,
2018 and 2017 for information about these critical accounting
policies, as well as a description of our other significant
accounting policies.





32





Accounts receivable





Accounts
receivable are carried at original invoice amount less an estimate
made for holdbacks and doubtful receivables based on a review of
all outstanding amounts. We determine the allowance for doubtful
accounts by regularly evaluating individual customer receivables
and considering a customer’s financial condition, credit
history and current economic conditions and set up an allowance for
doubtful accounts when collection is uncertain. Customers’
accounts are written off when all attempts to collect have been
exhausted. Recoveries of accounts receivable previously written off
are recorded as income when received. At December 31, 2018 and
2017, the accounts receivable reserve was approximately $2,000 and
$40,000, respectively.





Capitalized software





Costs
related to website and internal-use software development are
accounted for in accordance with Accounting Standards Codification
(“ASC”) Topic
350-50 — Intangibles — Website
Development Costs. Such software is primarily related to our
websites and mobile apps, including support systems. We begin to
capitalize our costs to develop software when preliminary
development efforts are successfully completed, management has
authorized and committed project funding, and it is probable that
the project will be completed, and the software will be used as
intended. Costs incurred prior to meeting these criteria are
expensed as incurred and recorded within general and administrative
expenses within the accompanying statements of operations. Costs
incurred for enhancements that are expected to result in additional
features or functionality are capitalized. Capitalized costs are
amortized over the estimated useful life of the enhancements,
generally between two and three years.





We
evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset group to future undiscounted net cash flows expected to be
generated by the asset group. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value
of the assets.





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. We
adopted ASC 606 effective January 1, 2018, using modified
retrospective basis and the cumulative effect was immaterial to the
financial statements.





Under
the previous revenue recognition methodology, revenue was
recognized when all of the following criteria were met:
(1) persuasive evidence that an arrangement existed;
(2) delivery had occurred or services had been rendered;
(3) the seller’s price to the buyer was fixed and
determinable; and (4) collectability was reasonably
assured.





Revenue
from contracts with customers is recognized when, or as, we satisfy
our 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 our 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 we determine the customer obtains control over the
promised good or service. The amount of revenue recognized reflects
the consideration we expect to be entitled to in exchange for those
promised goods or services (i.e., the “transaction
price”). In determining the transaction price, we consider
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, we consider 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 our influence, such as
the judgment and actions of third parties.





33





Our
contracts are generally designed to provide cash fees to us on a
monthly basis or an agreed upfront rate based upon demand services.
Our performance obligation is satisfied over time as the service is
provided continuously throughout the service period. We recognize
revenue evenly over the service period using a time-based measure
because we are 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. We use an expected value method to estimate variable
consideration for minimum performance guarantees and price
concessions.





Monthly Subscriptions





We offer a selection of subscriptions and on-demand services which
include parking, valet, and access to other services. The contract
terms are on a month-to-month subscription contract with fixed
monthly or contract term fees. These subscription services include
a fixed number of round-trip deliveries of the customer’s
vehicle to a designated location. We allocate the purchase price
among the performance obligations which results in deferring
revenue until the service is utilized or the service period has
expired. In July 2018, we began assessing demand for a Self-Park
Spaces monthly parking plan whereby consumers could designate
specific garages for their vehicles to be stored at a base monthly
rate, with personal 24/7 access for picking up and returning their
vehicle directly, and the option to pay a la carte on a per hour
basis for a driver to perform functions such as picking up and
returning their vehicle to their front door. This model aligns more
directly with how we have structured the enterprise B2B side of its
business, where an interaction with a vehicle on behalf of its
drivers typically generates net new revenue. The total revenue
amount of $6,077,667 recognized for the period ended December 31,
2018 is comprised of $4,409,037 from subscription service and
$1,668,630 from on-demand service.





Sales and marketing





Sales
and marketing costs are expensed as incurred.





Stock-based compensation





We
account for all stock options using a fair value-based method. The
fair value of each stock option granted to employees is estimated
on the date of the grant using the Black-Scholes option-pricing
model and the related stock-based compensation expense is
recognized over the vesting period during which an employee is
required to provide service in exchange for the award. The fair
value of the options granted to non-employees is measured and
expensed as the options vest.





Comparison of Years Ended December 31, 2018 and 2017–
Continuing Operations





Net Services Revenues





Net services revenues during the year ended December 31, 2018
totaled $6.1 million, an increase of $1.8 million, compared to $4.3
million recorded for the year ended December 31, 2017. The increase
was primarily due to our continued efforts to increase monthly
consumer subscriptions and B2B markets expansion.





34





Cost of Services





Cost
of services during the year ended December 31, 2018 totaled $7.9
million, an increase of $3.3 million, compared to $4.5 million
recorded for the year ended December 31, 2017. This increase was
primarily due to increased investment in our valet workforce and
the renting of additional parking spaces based on increased demand
in valet services and was primarily attributable to increases of
$2.2 million in wages and related, $0.5 million in parking garage
fees, $0.2 million in repairs and damages, $0.1 million in
insurance, $0.1 million in travel, $0.1 million in cost of gas and
other services sold, and $0.1 million in other costs.





Research and Development





Research
and development expenses for the year ended December 31, 2018
totaled $0.3 million, an increase of $0.2 million, compared to $0.1
million recorded for the year ended December 31, 2017. This was
primarily attributable to an increase of $0.1 million in
professional and consulting fees and $0.1 million in other
costs.





Sales and Marketing





Sales
and marketing expenses for the year ended December 31, 2018 totaled
$4.5 million, an increase of $3.3 million, compared to $1.3 million
recorded for the year ended December 31, 2017. This was primarily
attributable to an increase of $1.0 million in wages and related
expenses, $1.6 million in stock-based compensation and $0.6 million
in marketing and training.





General and Administrative





General and administrative expenses for the year ended December 31,
2018 totaled $6.8 million, an increase of $2.4 million, compared to
$4.5 million recorded for the year ended December 31, 2017. This
was primarily attributable to an increase of $2.2 million in
stock-based comp, $0.6 million in investor relations, $0.3 million
in insurance, and $0.3 million in other costs, partially offset by
a decrease of $0.7 million in professional services and $0.3
million in wages and related costs.





Depreciation and Amortization





Depreciation
and amortization during the year ended December 31, 2018 totaled
$0.4 million, an increase of $0.1 million, compared to $0.2 million
recorded for the year ended December 31, 2017. This increase was
primarily attributable to our increased capitalization of software
costs related to our software platform.





Interest expense, net





Interest
expense, net during the year ended December 31, 2018 totaled $1.1
million, a decrease of $0.2 million, compared to $1.3 million
recorded for the year ended December 31, 2017. Interest expense,
net decreased by $0.9 million in relation to the conversion of
outstanding convertible notes into equity upon the Merger, offset
by an increase of $0.7 million in relation to the lock-up
agreements. There were no outstanding convertible notes as of
December 31, 2018.





35





Liquidity and Capital Resources





Since the inception of Private DropCar in September 12, 2014,
we have incurred significant net losses and negative cash flows
from operations. Further, our sales and income potential of our
business and market remain unproven. For the years ended
December 31, 2018 and 2017, we had net losses from continuing
operations of approximately $14.9 million and $7.6 million,
respectively. At December 31, 2018, we had an accumulated deficit
of $29.8 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 December 31, 2018, we had cash
and cash equivalents of $4.3 million. At these capital
levels, we believe we do not have sufficient funds to continue to
operate through March 2020, 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 for the twelve months following the
date of the filing of this Form 10-K.





Our plans include raising funds from outside investors. However,
there is no assurance that outside funding will be available to us,
outside funding will be obtained on favorable terms or will provide
us with sufficient capital to meet our objectives. These financial
statements do not include any adjustments relating to the
recoverability and classification of assets, carrying amounts or
the amount and classification of liabilities that may be required
should the Company be unable to continue as a going concern. As
such, the consolidated financial statements have been prepared
under the assumption the Company will continue as a Going
Concern.





On January 18, 2018, we sold 10,057 shares of common stock for
proceeds of $300,000 to an individual investor.





On March 8, 2018, we entered into the Securities Purchase Agreement
with the Investors, pursuant to which we issued to the Investors an
aggregate of 26,843 shares of our newly designated Series H-4
Convertible Preferred Stock and warrants to purchase 447,383 shares
of our common stock (the “Private Placement”). We
received proceeds of approximately $6.0 million in connection with
the Private Placement.





On September 4, 2018, we issued 260,116 shares of common stock upon
the exercise of 260,116 Series H-4 Warrants for proceeds of
approximately $936,000.





On November 14, 2018, we sold 277,778 Series K Warrants to purchase
shares of common stock, at an offering price of $3.54 per share for
gross proceeds of $983,333.





Our
independent registered public accounting firm included an
explanatory paragraph about the existence of substantial doubt
concerning our ability to continue as a going concern in its report
on our financial statements as of and for the year ended
December 31, 2018. Note 2 to our financial statements includes
management’s discussion on the continuation of our activities
and our ability to fulfill our obligations as dependent upon our
ability to raise additional financing and/or increase sales volume
that will generate sufficient operating profit and cash flows to
fund operations.





Our
future capital requirements and the period for which we expect our
existing resources to support our operations may vary significantly
from what we currently expect. Our monthly spending levels vary
based on new and ongoing technology developments and corporate
activities.





36





We
have historically financed our activities through the sale of our
equity securities (including convertible preferred stock) and the
issuance of convertible notes. We will need to raise significant
additional capital and we plan to continue to fund our current
operations, and the associated losses from continuing operations,
through future issuances of debt and/or equity securities and
potential collaborations or strategic partnerships with other
entities. The capital raises from issuances of convertible debt and
equity securities could result in additional dilution to our
stockholders. In addition, to the extent we determine to incur
additional indebtedness, our incurrence of additional debt could
result in debt service obligations and operating and financing
covenants that would restrict our operations. We can provide no
assurance that financing will be available in the amounts we need
or on terms acceptable to us, if at all. If we are not able to
secure adequate additional working capital when it becomes needed,
we may be required to make reductions in spending, extend payment
terms with suppliers, liquidate assets where possible and/or
suspend or curtail operations. Any of these actions could
materially harm our business.





Cash Flows





Operating Activities – Continuing Operations





We
have historically experienced negative cash outflows as we have
developed and expanded our business. Our primary source of cash
flow from operating activities is recurring subscription receipts
from customers and, to a lesser extent, monthly invoice payments
from business-to-business customers. Our primary uses of cash from
operating activities are the recruiting, training, equipping and
growing our workforce to meet market demand, securing
infrastructure for operating activities such as garage parking
spaces, technology investment to grow our platform, as well as to
support other operational expenses while we aggressively
expand.





Net cash used in operating activities for the year ended December
31, 2018 was approximately $9.7 million, which includes a net loss
from continuing operations of approximately $14.9 million, offset
by non-cash expenses of approximately $5.0 million principally
related to $0.5 million related of depreciation and
amortization,$3.8 million of stock-based compensation expense, and
$0.7 of non-cash interest expense, and approximately $0.2 million
of cash provided from a change in net working capital items
principally related to $0.5 million related to the increase in
accounts payable, deferred revenue and accrued expenses, partially
offset by $0.3 million of cash used from a change in net working
capital items principally related to the increase in accounts
receivable and prepaid expenses and other assets.





Net
cash used in operating activities for the year ended December 31,
2017 was approximately $4.2 million, which includes a net loss of
approximately $7.6 million, offset by non-cash expenses of
approximately $2.2 million principally related to depreciation and
amortization of $0.2 million amortization of debt discount of $1.2
million and stock-based compensation expense of $0.7 million, and
approximately $1.5 million of cash provided from a change in net
working capital items principally related to the increase in
accounts payable, deferred revenue and accrued expenses, and
approximately $0.2 million of cash used from a change in net
working capital items principally related to the increase in
accounts receivable and prepaid expenses.





37





Investing Activities – Continuing Operations





Cash
used in investing activities for the year ended December 31, 2018
of approximately $6.5 primarily resulted from capitalization of
software costs and cash received from the acquisition of $5.0
million, proceeds from sale of the business net of cash
relinquished of $2.0 million, and investment into software
development and equipment of $0.5 million.





Cash
used in investing activities during the year ended December 31,
2017 of approximately $0.3 million primarily resulted from
capitalization of software costs.





Financing Activities – Continuing Operations





Cash
provided by financing activities for the year ended December 31,
2018 totaled approximately $8.1 million, primarily resulting from
proceeds of $6.0 million from the sale of the Series H-4 Shares and
warrants, $0.9 million from the issuance of common stock in
connection with exercise of Series H-4 Warrants, $0.3 million from
the sale of common stock and$1.0 million for the sale of Series
K Warrants, offset by financing costs related to the Series H-4
Shares and warrants of approximately $0.1 million.





Cash provided by financing activities for the year ended December
31, 2017 totaled approximately $4.8 million. In January and
February of 2017, we sold 225,636 shares of our Series A Preferred
Stock in a private placement which resulted in net proceeds to us
totaling approximately $0.2 million. During 2017, we issued
convertible notes and warrants to acquire 111,805 shares of common
stock at an exercise price $77.28 per share which resulted in net
proceeds to us totaling approximately $4.6 million. These notes
were converted into 136,785 shares of common stock in connection
with the Merger.





Off-Balance Sheet Arrangements





We did
not engage in any “off-balance sheet arrangements” (as
that term is defined in Item 303(a)(4)(ii) of Regulation S-K) and
do not have any holdings in variable interest entities as of
December 31, 2018.





ITEM 7A – QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are
a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act, and are not required to provide the information
required under this item.





ITEM 8 – FINANCIAL
STATEMENTS





Our
audited consolidated financial statements as of, and for the years
ended December 31, 2018, and December 31, 2017 are included
beginning on Page F-1 immediately following the signature page to
this report. See Item 15 for a list of the financial statements
included herein.





38





ITEM 9 – CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





None.





ITEM 9A – CONTROLS AND
PROCEDURES





(a) Evaluation of disclosure controls and procedures.





The
Company maintains disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that are designed to ensure
that information required to be disclosed in our reports filed
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms
and that such information is accumulated and communicated to our
management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), as appropriate, to allow timely
decisions regarding required disclosure.





Our
management, including the CEO and CFO, evaluated the design and
operation of our disclosure controls and procedures pursuant to
Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December
31, 2018. Based on such evaluation, our CEO and CFO concluded the
disclosure controls and procedures were not effective due to the
material weaknesses in internal control over financial reporting
described below.





(b)
Management’s report on internal control over financial
reporting.





Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal
control over financial reporting is a process designed under the
supervision of our Chief Executive Officer and Chief Financial
Officer to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles
generally accepted in the United States of America
("GAAP").





Management’s
internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company (ii)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements on a timely
basis. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of
compliance with policies and procedures may
deteriorate.





39





A
material weakness is a
deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable
possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or
detected on a timely basis. Management conducted an evaluation of
the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2018 based on the criteria
set forth in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). Based on management’s assessment, the
Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2018 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;





40





●
 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.





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.


This
annual report does not include an attestation report by EisnerAmper
LLP, our independent registered public accounting firm, regarding
internal control over financial reporting. As a smaller reporting
company, our management's report was not subject to attestation by
our independent registered public accounting firm pursuant to rules
of the SEC that permit us to provide only management's report in
this annual report.





(c) Changes in internal control over financial
reporting.





Our
remediation efforts were ongoing during the fiscal quarter ended
December 31, 2018. Other than the remediation steps described
above, there were no other material changes in our internal control
over financial reporting identified in management’s
evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the
Exchange Act during the quarter ended December 31, 2018 that
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.





ITEM 9B – OTHER
INFORMATION





Not
applicable.











41





PART III





ITEM 10 – DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The Board of Directors





On
November 15, 2018, at our annual meeting our shareholders approved
Spencer Richardson, David Newman, Sebastian Giordano, Brian
Harrington, Zvi Joseph, Solomon Mayer, Joshua Silverman and Greg
Schiffman to a term of one year to serve until the 2019 annual
meeting of stockholders, and until their respective successors have
been elected and qualified. Officers are elected annually and serve
at the discretion of the Board. Mr. Harrington subsequently
resigned on February 6, 2019.





Set
forth below are the names of the directors, their ages, their
offices in the Company:





Name


Age


Position(s)
​Employee DirectorsSpencer
Richardson


34


Chief
Executive Officer; Director
​David
Newman


58


Chief
Business Development Officer; Director
​Mark
Corrao


64


Chief
Financial OfficerLeandro
Larroulet


36


Chief
Information Officer





Non-Employee DirectorsJoshua
Silverman


48


Director;
Chairman of the Board of Directors
​Sebastian
Giordano


61


DirectorZvi
Joseph


52


Director
​Solomon
Mayer


65


Director
​Greg
Schiffman


61


Director
​





On January 30, 2018, the Company completed its business combination
with DropCar, Inc. (“Private DropCar”) in accordance
with the terms of the Agreement and Plan of Merger and
Reorganization, dated as of September 6, 2017, as subsequently
amended, by and among the Company, DC Acquisition Corporation
(“Merger Sub”), and Private DropCar (as amended, the
“Merger Agreement”), pursuant to which Merger Sub
merged with and into Private DropCar, with Private DropCar
surviving as a wholly owned subsidiary of the Company (the
“Merger”). The information below includes information
regarding each director’s service on the boards of directors
of WPCS, Private DropCar and the Company.





Employee Directors





Spencer Richardson





Mr.
Richardson has served as our Chief Executive Officer and a member
of the Board of Directors since the closing of the Merger, and
prior to that time, served as a member of the board of directors of
Private DropCar since September 2014. Mr. Richardson served as
Co-Founder and Chief Executive Officer of Private DropCar since its
inception in September 2014 through the closing of the Merger. Mr.
Richardson also served as the Chairman of our Board of Directors
from January 2018 to May 2018. Prior to his service with DropCar,
from March 2009 through February 2016, Mr. Richardson served as
Co-Founder and Chief Executive Officer of FanBridge, Inc., a
platform that enables clients, such as musicians, comedians,
influencers, and anyone with a fan base, to manage fan acquisition,
retention, and engagement. In 2012, Forbes Magazine selected Mr.
Richardson as a “30 Under 30” innovator. Mr. Richardson
currently serves on the boards of directors of numerous private
companies. Mr. Richardson holds a B.S. in Finance and Marketing
from New York University Stern School of Business.





42





David Newman





Mr. Newman has served as our Chief Business Development Officer and
a member of the Board of Directors since the closing of the Merger,
and prior to that time, served as a member of the board of
directors of Private DropCar since its inception in September 2014.
Mr. Newman served as Co-Founder and Secretary of Private DropCar
since its inception and as Chief Business Development Officer since
April 2017. Mr. Newman also served as Treasurer and Chairman of the
Board of Directors of Private DropCar from its inception until
January 2018. Mr. Newman has served as President of David B. Newman
Consultants, Inc., a New York-based consulting corporation, as
President of Rockland Westchester Legal Services, PC, a New
York-based legal services company, and as a Senior Managing
Director of Brock Securities LLC, a broker-dealer that provides
investment banking and advisory services, in each instance since
February 2014. He previously served as a director of United Realty
Trust Inc., a public real estate investment trust, from August 2012
through September 2015. Mr. Newman holds a B.B.A. in Business
Management from Hofstra University and a J.D. from Fordham
University School of Law.





Non-Employee Directors





Sebastian Giordano





Mr.
Giordano currently serves as a consultant to the Company and has
served as a member of the Board of Directors since the closing of
the Merger, and prior to that time, served as a director of WPCS
since February 2013. Mr. Giordano served as the Interim Chief
Executive Officer of WPCS from August 2013 until April 25, 2016,
when the interim label was removed from his title. He served as the
Chief Executive Officer of WPCS since such time through the closing
of the Merger. Since 2002, Mr. Giordano has been Chief Executive
Officer of Ascentaur, LLC, a business consulting firm providing
comprehensive strategic, financial and business development
services to start-up, turnaround and emerging growth companies.
From 1998 to 2002, Mr. Giordano was Chief Executive Officer of
Drive One, Inc., a safety training and education business. From
1992 to 1998, Mr. Giordano was Chief Financial Officer of Sterling
Vision, Inc., a retail optical chain. Mr. Giordano received B.B.A.
and M.B.A. degrees from Iona College.





Mr.
Giordano’s qualifications to sit on the Board of Directors
include his broad management experience, including having served as
Chief Executive Officer of WPCS.





Greg Schiffman





Mr.
Schiffman has served as a member of the Board of Directors since
the closing of the Merger. Mr. Schiffman served as the Chief
Financial Officer of Vineti, Inc. from October 2017 through April
2018. He previously served as the Chief Financial Officer of each
of Iovance Biotherapeutics (formerly Lion Biotechnologies), from
October 2016 through June 2017, Stem Cells, Inc., from January 2014
through September 2016, and Dendreon Corporation, from December
2006 through December 2013. He currently serves on the boards of
directors of several private companies. Mr. Schiffman holds a B.S.
in Accounting from DePaul University and an MM (MBA) from
Northwestern University Kellogg Graduate School of
Management.





Mr.
Schiffman’s qualifications to sit on the Board of Directors
include his financial background, business experience and
education.





43





Zvi Joseph





Mr.
Joseph has served as a member of the Board of Directors since the
closing of the Merger. He has served as Deputy General Counsel of
Amdocs Limited, a publicly traded corporation that provides
software and services to communications and media companies, since
October 2005. He received his A.A.S. in Business Administration
from Rockland Community College, his B.A. in Literature from New
York University and his J.D. from Fordham University School of Law.
He also holds a Certificate in Business Excellence from Columbia
University School of Business.





Mr.
Joseph’s qualifications to sit on the Board of Directors
include his legal experience and education.





Solomon Mayer





Mr.
Mayer has served as a member of the Board of Directors since the
closing of the Merger and, prior to that time, served as a member
of the Board of Directors of Private DropCar. He has served as
President and Chief Executive Officer of Mooney Aviation Company, a
private company that manufactures four-place, single-engine and
piston-powered aircraft, since 1999. Prior to that time, he held
the position of Chief Executive Officer of, and consultant to,
Overseas Trading, a department store wholesaler. Mr. Mayer serves
as a director of Laniado Hospital, a voluntary, not-for-profit
hospital in Kiryat Sanz, Netanya, Israel, as well as a director of
several private companies. He previously served as a consultant to
and director of each of Innovative Food Holdings, a provider of
sourcing, preparation and delivery of specialty/fresh food for both
professional chefs and consumers, and BlastGard International Inc.,
which manufactures and markets proprietary blast mitigation
materials, in each case, from 2002 until 2016.





Mr.
Mayer’s qualifications to sit on the Board of Directors
include his and extensive management experience as an executive and
director of a variety of companies.





Joshua Silverman


Mr.
Silverman has served as a member of the Board of Directors since
the closing of the Merger, and prior to that time, served as a
director of WPCS since August 2016. Mr. Silverman currently serves
as the Managing Member of Parkfield Funding LLC. Mr. Silverman was
the co-founder, and a Principal and Managing Partner of Iroquois
Capital Management, LLC, an investment advisory firm. Since its
inception in 2003 until July 2016, Mr. Silverman served as Co-Chief
Investment Officer of Iroquois. While at Iroquois, he designed and
executed complex transactions, structuring and negotiating
investments in both public and private companies and has often been
called upon by the companies solve inefficiencies as they relate to
corporate structure, cash flow, and management. From 2000 to 2003,
Mr. Silverman served as Co-Chief Investment Officer of Vertical
Ventures, LLC, a merchant bank. Prior to forming Iroquois, Mr.
Silverman was a Director of Joele Frank, a boutique consulting firm
specializing in mergers and acquisitions. Previously, Mr. Silverman
served as Assistant Press Secretary to The President of the United
States. Mr. Silverman currently serves as a director of WPCS,
Protagenic Therapeutics, Neurotrope, Inc., and TapImmune Inc., all
of which are public companies. He previously served as a Director
of National Holdings Corporation from July 2014 through August
2016, MGT Capital Investments, Inc. from December 2014 to May 2016,
and Alanco Technologies Inc. from March 2016 through August 2016.
Mr. Silverman received his B.A. from Lehigh University in
1992.


Mr.
Silverman’s qualifications to sit on the Board of Directors
include his experience as an investment banker, management
consultant and as a director of numerous public
companies.


44


Officers





Mark Corrao





Mr. Corrao
has served as our Chief Financial Officer since February 28, 2019.
He has served as Chief Financial Officer of KannaLife Sciences,
Inc. since 2012. Prior to that time, Mr. Corrao served as Chief
Financial Officer of each of Business Efficiency Experts, Inc.,
from 2010 through 2012, StrikeForce Technologies, Inc., from 2001
through 2010, and Advanced Communication Sciences, Inc. from 1997
through 2000. Mr. Corrao also has experience in accounting, having
previously served as a partner at Frank T. LaFauci, CPAs, as
controller at Design Production Management, Inc., as assistant
controller at Greenfield Arbitrage Partners, as internal auditor at
Spear, Leeds & Kellogg and as an accountant at A.L. Wellen
& Co., CPAs. He holds a B.S. in Public Accounting from the City
University of New York – Brooklyn College.





Leandro Larroulet





Mr.
Larroulet joined Private DropCar in July 2017 as its Chief
Information Officer. Prior to joining Private DropCar, Mr.
Larroulet served as Chief Operating Officer (COO) for the Argentina
based global technology development and consulting firm FDV
Solutions from September 2016 to June 2017. Previously Mr.
Larroulet held roles at FDV including Senior Project Manager,
Software Developer and Network Operator, dating back to September
2007. Mr. Larroulet graduated from FIUBA (Engineering University of
Buenos Aires), and also currently serves as both a member of their
curricular commission for Information Systems as well as an
auxiliary teacher for their Information Analysis
program.





Director Independence





Our
Board of Directors has reviewed the materiality of any relationship
that each of our directors has with DropCar, Inc.either directly or indirectly.
Based upon this review, our Board of Directors has determined that
the following members of the Board of Directors are
“independent directors” as defined by The Nasdaq Stock
Market: Zvi Joseph, Solomon Mayer, Joshua Silverman and Greg
Schiffman.





Meetings and Committees of the Board of Directors





During
the fiscal year ended December 31, 2018, the Board held 13 meetings
and approved certain actions by unanimous written consent. We
expect our directors to attend all board and committee meetings and
to spend the time needed and meet as frequently as necessary to
properly discharge their responsibilities. Each director attended,
either in person or telephonically, at least 75% of the aggregate
Board meetings and meetings of committees on which he served during
his tenure as a director or committee member, except Mr. Harrington
attended 58% of the board meetings and Mr. Mayer attended 60% of
the audit committee meetings.





Audit Committee





During
the fiscal year ended December 31, 2018, the Audit Committee held 5
meetings. The Audit Committee of the Board (the “Audit
Committee”) consists of Greg Schiffman, Zvi Joseph and
Solomon Mayer, with Mr. Schiffman appointed as Chairman of the
Committee. The Board has determined that all of the members are
“independent” as that term is defined under applicable
SEC rules and under the current listing standards of The Nasdaq
Stock Market and that Mr. Schiffman qualifies as an “audit
committee financial expert” pursuant to Item 407(d)(5) of
Regulation S-K.





45





The
Audit Committee is responsible for overseeing the Company’s
corporate accounting, financial reporting practices, audits of
financial statements, and the quality and integrity of the
Company’s financial statements and reports. In addition, the
Audit Committee oversees the qualifications, independence and
performance of the Company’s independent auditors. In
furtherance of these responsibilities, the Audit Committee’s
duties include the following: evaluating the performance and
assessing the qualifications of the independent auditors;
determining and approving the engagement of the independent
auditors to perform audit, reviewing and attesting to services and
performing any proposed permissible non-audit services; evaluating
employment by the Company of individuals formerly employed by the
independent auditors and engaged on the Company’s account and
any conflicts or disagreements between the independent auditors and
management regarding financial reporting, accounting practices or
policies; discussing with management and the independent auditors
the results of the annual audit; reviewing the financial statements
proposed to be included in the Company’s annual or transition
report on Form 10-K; discussing with management and the independent
auditors the results of the auditors’ review of the
Company’s quarterly financial statements; conferring with
management and the independent auditors regarding the scope,
adequacy and effectiveness of internal auditing and financial
reporting controls and procedures; and establishing procedures for
the receipt, retention and treatment of complaints regarding
accounting, internal accounting control and auditing matters and
the confidential and anonymous submission by employees of concerns
regarding questionable accounting or auditing matters. The Audit
Committee is governed by a written charter approved by the Board,
which complies with the applicable provisions of the Sarbanes-Oxley
Act and related rules of the SEC and the Nasdaq Stock
Market.





Executive Committee





During the fiscal year ended December 31, 2018, the Executive
Committee of the Board (the “Executive Committee”) held
3 meetings. The Executive Committee consists of Zvi Joseph and
Solomon Mayer with Mr. Joseph appointed as Chairman of the
Committee. The Board has determined that all of the members are
“independent” as that term is defined under applicable
SEC rules and under the current listing standards of The Nasdaq
Stock Market. The Board has adopted a written charter setting forth
the authority and responsibilities of the Executive
Committee.





The Executive Committee has responsibility for assisting the Board
in, among other things, evaluating and making recommendations
regarding the compensation of our executive officers and directors,
assuring that the executive officers are compensated effectively in
a manner consistent with our stated compensation strategy,
producing an annual report on executive compensation in accordance
with the rules and regulations promulgated by the SEC, periodically
evaluating the terms and administration of our incentive plans and
benefit programs and monitoring of compliance with the legal
prohibition on loans to our directors and executive officers. The
Executive Committee is governed by a written charter approved by
the Board.





Nominating Committee





During the fiscal year ended December 31, 2018, the Nominating
Committee of the Board (“Nominating Committee”) held 2
meetings. The Nominating Committee consists of Zvi Joseph and
Solomon Mayer with Mr. Mayer appointed as Chairman of the
Committee. The Board has determined that all of the members are
“independent” as that term is defined under applicable
SEC rules and under the current listing standards of The Nasdaq
Stock Market.





46





The
Nominating Committee is responsible for assisting the Board in
identifying individuals qualified to become members of the Board
and executive officers of the Company; selecting, or recommending
that the Board select, director nominees for election as directors
by the stockholders of the Company; developing and recommending to
the Board a set of effective governance policies and procedures
applicable to the company; leading the Board in its annual review
of the Board’s performance; recommending to the Board
director nominees for each committee; making recommendations
regarding committee purpose, structure and operations; and
overseeing and approving a managing continuity planning process.
During the fiscal year ended December 31, 2018, there were no
changes to the procedures by which holders of our common stock may
recommend nominees to the Board. The Nominating Committee is
governed by a written charter approved by the Board.





Section 16(a) Beneficial Ownership Reporting Compliance, and Code
of Conduct and Ethics





Section
16(a) of the Exchange Act requires the Company’s officers and
directors, and persons who own more than ten percent of a
registered class of the Company’s equity securities, to file
reports of securities ownership and changes in such ownership with
the SEC.





Officers,
directors and greater than ten percent stockholders also are
required by SEC rules to furnish the Company with copies of all
Section 16(a) forms they file.





Based
solely upon a review of the copies of such forms furnished to the
Company, and on written representations from the reporting persons,
the Company believes that all Section 16(a) filing requirements
applicable to the Company’s directors and officers were
timely met during the fiscal year ended December 31, 2018, except
that one Form 4 for each of the following directors was not timely
filed, in each case with respect to a single transaction: Spencer
Richardson, David Newman, Gregory Schiffman, Sebastian Giordano,
Zvi Joseph, Solomon Mayer and Joshua Silverman.





Code of Ethics





The
Company adopted a Code of Ethics that applies to all employees,
including the Company’s principal executive officer,
principal financial officer, and principal accounting officer, as
well as to the Board. A copy of the Code of Ethics is posted on the
Company’s website.





47





ITEM 11 – EXECUTIVE
COMPENSATION





Summary Compensation Table





The
following table sets forth all compensation earned, in all
capacities, during the fiscal years ended December 31, 2018 and
2017 by the Company’s (i) Chief Executive Officers and (ii)
two most highly compensated executive officers other than the Chief
Executive Officer who was serving as an executive officer at the
end of the 2018 fiscal year and whose salary as determined by
Regulation S-K, Item 402, exceeded $100,000 (the individuals
falling within categories (i) and (ii) are collectively referred to
as the “named executive officers”).





Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock Awards
($)
Option Awards
($) (1))
All Other
Compensation
($)
Total
($)Spencer
Richardson
2018
273,471
387,500
1,621,983
100,000
26,957
2,409,911Chief Executive Officer
(2)
2017
17,308
250,000
273,050
-
176,365
716,723Sebastian
Giordano
2018
-
-
-
-
-
-former Chief Executive Officer
(3)
2017
180,000
-
-
104,000
-
284,000Paul
Commons
2018
208,152
15,000
-
234,139
-
457,291former Chief Financial Officer
(5)
2017
-
-
-
-
-
-David
Allen
2018
-
-
-
-
-
-former Chief Financial Officer
(3)
2017
140,000
-
-
78,000
-
218,000Robert Roller
2018
-
-
-
-
-
-President of WPCS Suisun City
International Inc. (6)
2017
170,000
100,000
-
78,000
-
348,000David Newman
2018
273,471
395,972
1,621,983
100,000
27,233
2,418,659Chief Business Development Officer
(4)
2017
17,308
250,000
273,050
-
156,615
696,973





(1)
 The
dollar amounts in this column represents the aggregate grant date
fair value computed in accordance with FASB ASC Topic 718. The
assumptions underlying the determination of fair value of the
awards are set forth in Note 8 the financial statements included in
this Annual Report on Form 10-K.


(2)
 Mr. Richardson was
CEO of Private DropCar until taking over as CEO of the Company upon
the Merger.


(3)
 Mr. Giordano was
CEO of WPCS International Inc. until the Merger.


(4)
 Mr. Newman was CBDO
of Private DropCar until taking over as CBDO of the Company upon
the Merger.


(5)
 Mr. Commons was CFO
from January 22, 2018 of Private DropCar until taking over as CFO
of the Company upon the Merger, until the February 28,
2019.







48





Employment Contracts and Termination of Employment and
Change-In-Control Arrangements





Employment Agreement with Spencer Richardson





In
connection with the Merger, the Company entered into an employment
agreement with Mr. Richardson pursuant to which he serves as the
Company’s Chief Executive Officer. The employment agreement
provides for an initial term of three (3) years with automatic one
(1) year renewals. The employment agreement provides for the
following cash-based compensation: (a) an annual base salary equal
to $275,000, subject to a 10% increase per year; (b) a bonus
payment of $250,000 in connection with the closing of the
Merger; (c) quarterly bonuses of at least $12,500; (d) milestone
bonus payments based on the Company’s achievement of certain
specified milestones; and (e) allowances for automobile, medical
and dental.





Mr.
Richardson is also entitled to annual option grants equivalent to
1% of the outstanding shares of the Company. Subject to continued
employment through each vesting date, these annual grants will vest
and become exercisable with respect to 1/8th of the shares on each
90th day following the date of grant; provided that all options
will vest on a change of control of the Company. In addition to
annual option grants, Mr. Richardson is eligible to receive
additional option grants based on the Company’s achievement
of certain specified milestones.





In the
event that Mr. Richardson’s employment with the Company is
terminated (a) by the Company without “cause”
(including as a result of death or disability) following the end of
the initial term, (b) by Mr. Richardson for “good
reason”, or (c) due to non-renewal of the initial term by the
Company, then the Company shall pay or provide (x) 24 months’
of salary continuation, (y) $100,000 (such amount representing the
guaranteed quarterly bonus for 24 months), and (z) to the extent
unvested, full acceleration of the vesting of any outstanding
options.





In
addition, Richardson has entered into a non-solicitation and
non-competition agreement that applies during the term of
employment and for 12 months thereafter.





Employment Agreement with David Newman





In
connection with the Merger, the Company entered into an employment
agreement with Mr. Newman pursuant to which he serves as the
Company’s Chief Business Development Officer. The employment
agreement provides for an initial term of three (3) years with
automatic one (1) year renewals. The employment agreement provides
for the following cash-based compensation: (a) an annual base
salary equal to $275,000, subject to a 10% increase per year; (b) a
bonus payment of $250,000 in connection with the closing of
the Merger; (c) quarterly bonuses of at least $12,500; (d)
milestone bonus payments based on the Company’s achievement
of certain specified milestones; and (e) allowances for automobile,
medical and dental.





Mr.
Newman is also entitled to annual option grants equivalent to 1% of
the outstanding shares of the Company. Subject to continued
employment through each vesting date, these annual grants will vest
and become exercisable with respect to 1/8th of the shares on each
90th day following the date of grant; provided that all options
will vest on a change of control of the Company. In addition to
annual option grants, Mr. Newman is eligible to receive additional
option grants based on the Company’s achievement of certain
specified milestones.





49





In
the event that Mr. Newman’s employment with the Company is
terminated (a) by the Company without “cause”
(including as a result of death or disability) following the end of
the initial term, (b) by Mr. Newman for “good reason”,
or (c) due to non-renewal of the initial term by the Company, then
the Company shall pay or provide (x) 24 months’ of salary
continuation, (y) $100,000 (such amount representing the guaranteed
quarterly bonus for 24 months), and (z) to the extent unvested,
full acceleration of the vesting of any outstanding
options.





In
addition, Newman has entered into a non-solicitation and
non-competition agreement that applies during the term of
employment and for 12 months thereafter.





Employment Agreement with Paul Commons





On
January 22, 2018, the Company entered into an employment agreement
with Mr. Commons pursuant to which Mr. Commons agreed to serve as
the Company’s Chief Financial Officer. The employment
agreement provided for an initial term of three (3) years with
automatic one (1) year renewals. The employment agreement for Mr.
Commons provided for an annual base salary equal to $220,000 and
quarterly bonuses equal to $5,000. Mr. Commons was also entitled to
annual option grants equivalent to 1% of the outstanding shares of
the Company. Subject to continued employment through each vesting
date, these annual grants would vest and become exercisable with
respect to 1/3 of the shares on the first anniversary of the
effective date of the employment agreement, with the remaining 2/3
vesting in equal installments on a quarterly basis beginning on the
last day of the next calendar quarter after the date on which the
initial 1/3 of the shares vested.





In the
event that Mr. Commons’s employment with the Company was
terminated (a) by the Company without “cause” or (b) by
Mr. Commons for “good reason” at any time during the 90
days following the effective date of the employment agreement, then
for the nine month period following the termination date, the
Company agreed to continue to pay to Mr. Commons (i) one-twelfth of
his annual base salary each month and (ii) his quarterly bonus
payments.





In
addition, Mr. Commons entered into a non-solicitation and
non-competition agreement that applies during the term of
employment and for 12 months thereafter.





Mr.
Commons’s employment as the Company’s Chief Financial
Officer terminated on February 14, 2019.





Employment of Mark Corrao





On
February 14, 2019, the Board approved (1) the termination of Paul
Commons as Chief Financial Officer of the Company and any other
positions on which he serves with respect to
the Company and its subsidiaries and affiliates, and (2)
the appointment of Mark Corrao as the Company’s new Chief
Financial Officer, in each case effective as of February 28,
2019.





Mr. Corrao is
employed in at-will capacity and does not have an employment
agreement with the Company. As consideration for his services
to the Company, Mr. Corrao will receive compensation in the amount
of $1,500 per month.





50





Employment Agreement with Sebastian Giordano





The compensation arrangement of Sebastian Giordano, Chief Executive
Officer of the Company, is set forth in a letter agreement, dated
July 29, 2013, as amended on February 3, 2015. Pursuant to that
agreement, Mr. Giordano is entitled to a base salary of $180,000
per year (effective as of January 1, 2015) and was granted options
to purchase 2,273 shares of
common stock, which were subject to vesting upon the Company
meeting certain performance goals. As of April 30, 2017, the 2,273
options have expired. Future option grants are at the discretion of
the Board. In addition, on January 31, 2017, the Executive
Committee approved a bonus plan which allows Mr. Giordano to earn a
yearly bonus of 50% of base salary of which 50% of the bonus is
based upon achievement of the approved budget, 25% of the bonus is
based upon certain performance targets and 25% of the bonus is
based upon the discretion of the Board.





Change in Control Agreements with Sebastian Giordano and David
Allen





The
company entered into change in control agreements on September 29,
2015 with both Mr. Giordano and Allen. Pursuant to the terms of the
agreements, both Mr. Giordano and Allen are entitled to payments of
$350,000 and $150,000 respectfully, upon a change in control (as
defined in their respective agreements) of the company. All
payments under this agreement are contingent upon the respective
officers’ execution and non-revocation of a general release
of claims against the company.





As of
January 30, 2018, immediately following the merger with Dropcar,
Inc. both Mr. Giordano and Allen resigned from their respective
positions and ceased serving as an employee of the company. In
conjunction with their resignations and pursuant to the terms their
change in control agreements, both Mr. Giordano and Allen were
entitled to severance payment of $350,000 and $150,000,
respectively.





Change in Control Agreement with Robert Roller





On
October 21, 2015, the company’s subsidiary, Suisun City
Operations, entered into a change in control agreement with Robert
Roller, president of the Suisun City Operations. His agreement has
an initial term of two years and automatically extends for
additional one-year periods at the expiration of the initial term
and on each anniversary thereafter unless either party notifies the
other party of non-renewal no later than 30 days prior to such
anniversary. Upon a change in control of the company or the Suisun
City Operations, the agreement will continue for a term of two
years and then terminate. This agreement entitles Mr. Roller to a
severance payment of $150,000 and any unpaid compensation and
benefits.





As of
December 24, 2018, immediately following the divesture of Suisun
City Operations to its management team, Mr. Robert Roller had
voluntarily agreed to forfeit and released all claims against the
company in connection with his change in control
agreement.





51





OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END





The
following table includes certain information with respect to all
unexercised stock options and unvested shares of common stock
outstanding owned by the named executive officers as of December
31, 2018.





Name
Number
of Securities
underlying
Unexercised
Options
(#) Exercisable
Number
of Securities
underlying
Unexercised
Options
(#) Unexercisable
Option
Exercise Price ($/Share)
Option
Expiration Date
Number
of Shares or Units of
Stock
that have not vested (#)
Market
Value of Shares or units
of Stock
that have not vested ($)Spencer
Richardson
11,057
-
$9.72
December
23, 2028
20,387
154,125David
Newman
11,057
-
$9.72
December
23, 2028
20,387
154,125Paul
Commons
-
3,236
$79.56
February
28, 2018
-
-Leandro Larroulet
-
626
$79.56
February
28, 2018
-
-








Director Compensation





The
following table sets forth summary information concerning the total
compensation earned by the non-employee directors during the year
ended December 31, 2018 for services to the Company.





Name
Fees Earned or
Paid in Cash ($)
Option Awards
($) (1)
Non-equity
incentive plan Compensation ($)
Nonqualified
deferred compensation ($)
All other
compensation
Total
($)Brian
Harrington
25,588
20,042
-
-
-
45,630Greg
Schiffman
25,588
20,042
-
-
-
45,630Joshua
Silverman
81,838
30,046
-
-
-
111,884Sebastian
Giordano
56,667
20,042
-
-
91,087(2)
167,796Solomon
Mayer
25,588
20,042
-
-
-
45,630Zvi
Joseph
25,588
20,042
-
-
-
45,630





(1)
The dollar amounts in this column represents the aggregate grant
date fair value computed in accordance with FASB ASC Topic 718. The
assumptions underlying the determination of fair value of the
awards are set forth in Note 3 the financial statements included in
this Annual Report on Form 10-K.





(2)
Mr. Giordano earned $147,754 through the consulting agreement
between the Company and Ascentaur, LLC. $90,000 of these earnings
was tied to the successful sale of WPCS Suisun City International
Inc. in December 2018.





52





From January 31, 2018 through May 14, 2018 the Board earned cash
compensation at the rate of $2,000 per month. Effective on May 15,
2018, the Company’s directors’ receive annual
compensation of $30,000 and the Chairperson receives annual
compensation of $120,000 per year for their service on the Board,
with the exception that Mr. Giordano’s compensation was
addressed through the consulting arrangement between Ascentaur LLC
and the Company through March 10, 2019. Additionally, in May of
2018, option grants were awarded based upon the value of $30,000
for the Chairperson and $20,000 for the other non-employee
directors.





ITEM 12 – SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





Information
relating to this item will be included in an amendment to this
Annual Report on Form 10-K and is incorporated by reference in this
report.





ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Our
Board of Directors must approve in advance of all future
transactions between us and any director, executive officer, holder
of 5% or more of any class of our capital stock or any member of
the immediate family of, or entities affiliated with, any of them,
or any other related persons, as defined in Item 404 of Regulation
S-K, or their affiliates, in which the amount involved is equal to
or greater than $120,000. Any request for such a transaction must
first be presented to our Board of Directors for review,
consideration and approval. In approving or rejecting any such
proposal, our Board of Directors is to consider all available
information deemed relevant by the Board of Directors, including,
but not limited to, the extent of the related person’s
interest in the transaction, and whether the transaction is on
terms no less favorable to us than terms we could have generally
obtained from an unaffiliated third party under the same or similar
circumstances.





Indemnification Agreements





We have
entered into indemnification agreements with each of our directors
and executive officers. These agreements, among other things,
require us to indemnify each director and executive officer to the
fullest extent permitted by Delaware law, including indemnification
of expenses such as attorneys’ fees, judgments, penalties
fines and settlement amounts incurred by the director or executive
officer in any action or proceeding, including any action or
proceeding by or in right of the Company, arising out of the
person’s services as a director or executive
officer.





Ascentaur LLC Agreement





On
July 11, 2018, we entered into a consulting agreement (the
“Consulting Agreement”) with Ascentaur, LLC
(“Ascentaur”). Sebastian Giordano is the Chief
Executive Officer of Ascentaur, LLC. 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 WPCS International business segment, 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. As
consideration for its services under the Consulting Agreement,
Ascentaur shall be entitled to receive (i) a fee of $10,000 per
month for a period of nine months from the effective date of the
Consulting Agreement, (ii) a lump sum fee of $90,000 upon the
closing of the sale of the Company’s WPCS International
business segment and (iii) reimbursement for reasonable and
customary business expenses incurred in connection with
Ascentaur’s performance under the Consulting
Agreement.





53





ITEM 14 – PRINCIPAL
ACCOUNTING FEES AND SERVICES





The
Audit Committee has a policy concerning the approval of audit and
non-audit services to be provided by our independent registered
public accounting firm. The policy requires that the Audit
Committee pre-approve all audit services and all permitted
non-audit services (including fees and terms thereof), except as
otherwise prohibited pursuant to the Securities Exchange Act of
1934, as amended. These services may include audit services,
audit-related services, tax services and other services. For each
proposed service, the Audit Committee reviews a description of the
service and sufficient information to confirm the determination
that the provision of such service will not impair the independent
registered public accounting firm’s independence. The
Chairman of the Audit Committee is authorized to grant such
pre-approvals in the event there is a need for such approvals prior
to the next full Audit Committee meeting, provided all such
pre-approvals are then reported to the full Audit Committee at its
next scheduled meeting.





The
following table presents fees for professional audit services
rendered by EisnerAmper LLP for the audit of the Company’s
annual financial statements for the years ended December 31, 2018
and December 31, 2017 and fees billed for other services rendered
by EisnerAmper LLP and other professional accounting firms during
those periods.





2018
2017Audit
Fees:(1)
$421,373
$307,654Audit-Related
Fees:(2)
59,986
—Tax
Fees:(3)
—
—All
Other Fees:(4)
—
—Total
$481,359
$307,654





(1)
Audit Fees include fees for
services rendered for the audit of our annual financial statements,
the review of financial statements included in our quarterly
reports on Form 10-Q, assistance with and review of documents filed
with the SEC and consents and other services normally provided in
connection with regulatory filings. In 2018, $399,299 was billed
for audit fees, of which $46,200 was billed by Marcum LLP in
connection with regulatory filings.





(2)
Audit-Related Fees
principally include fees incurred for due diligence in connection
with potential transactions and accounting
consultations.





(3)
Tax Fees would include fees
for services rendered for tax compliance, tax advice, and tax
planning. There were no tax fees incurred with EisnerAmper LLP in
2018 and 2017.





(4)
All Other Fees would
include fees that do not constitute Audit Fees, Audit-Related Fees,
or Tax Fees.





54





PART IV





ITEM 15 – EXHIBITS,
FINANCIAL STATEMENT SCHEDULES





(a).
The following documents are filed as part of this annual report on
Form 10-K:





(a)(1)
and (2). See “Index to Consolidated Financial Statements and
Financial Statement Schedules” at Item 8 to this Annual
Report on Form 10-K. Other financial statement schedules have not
been included because they are not applicable, or the information
is included in the financial statements or notes
thereto.





(a)(3)
Exhibits





The
following is a list of exhibits filed as part of this Annual Report
on Form 10-K.





ExhibitNumber

Description2.1

Agreement
and Plan of Merger and Reorganization, dated September 6, 2017, by
and among WSP International Incorporated, DC Acquisition
Corporation, and the Company (incorporated by reference from Exhibit 2.1 to
the Company’s Current Report on Form 8-K filed with the SEC
on September 6, 2017).2.2

Amendment
No. 3 to Agreement and Plan of Merger, dated December 4, 2017, by
and among WSP International Incorporated, DC Acquisition
Corporation, and the Company (incorporated by reference from Exhibit 2.1
to the Company’s Current Report on Form 8-K filed with the
SEC on December 6, 2017).2.3

Form of
Support Agreement, dated as of September 6, 2017, by and between
the Company and certain stockholders named therein (incorporated by reference from Exhibit 2.2 to
the Company’s Current Report on Form 8-K filed with the SEC
on December 6, 2017).2.4

Form of
Support Agreement, dated as of September 6, 2017, by and between
the Company and certain stockholders named therein (incorporated by reference from Exhibit 2.3 to
the Company’s Current Report on Form 8-K filed with the SEC
on December 6, 2017).2.5

Form of
Support Agreement, dated as of September 6, 2017, by and between
the Company and certain stockholders named therein (incorporated by reference from Exhibit 2.4 to
the Company’s Current Report on Form 8-K filed with the SEC
on December 6, 2017).





55





3.1*

Amended
and Restated Certificate of Incorporation of the Company, as
amended, dated March 8, 2019.3.2

Amended
and Restated Bylaws of the Registrant, as amended on July 26,
2018 (incorporated by
reference from Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed with the SEC on August 1, 2018).4.1

Form of
Series K Common Stock Purchase Warrant (incorporated by reference from Exhibit 4.4 to
the Company’s Quarterly Report on Form 10-Q filed with the
SEC on November 14, 2018).4.2

Form of
Warrant to Purchase Common Stock (incorporated by reference from Exhibit 4.1 to
the Company’s Current Report on Form 8-K/A filed with the SEC
on September 10, 2018).4.3

Form of
Warrant Amendment to Series H-4 Warrant (incorporated by reference from Exhibit 4.2
to the Company’s Current Report on Form 8-K/A filed with the
SEC on September 10, 2018).4.4

Form of
Series I Warrant to Purchase Common Stock (incorporated by reference from Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed with the SEC
on April 20, 2018).4.5

Form of
Warrant to Purchase Common Stock of WPCS International Incorporated
(incorporated by reference from
Exhibit 10.2 of the Company’s Current Report on Form 8-K
filed December 22, 2016).4.6

Form of
Warrant to Purchase Common Stock (incorporated by reference from Exhibit 10.2
of the Company’s Current Report on Form 8-K filed April 4,
2017).10.1

Stock
Purchase Agreement, dated as of December 10, 2018, between DropCar,
Inc. and World Professional Cabling Systems, LLC (incorporated by reference from Exhibit 10.1
of the Company’s Current Report on Form 8-K filed December
14, 2018).10.2

Form of
Securities Purchase Agreement, dated as of November 14, 2018,
between DropCar, Inc. and Alpha Capital Anstalt (incorporated by reference from Exhibit 10.2
of the Company’s Quarterly Report on Form 10-Q filed November
14, 2018).





56





10.3

Securities
Purchase Agreement, dated December 21, 2016, between WPCS
International Incorporated and each purchaser identified therein
(incorporated by reference from
Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed December 22, 2016).10.4

Registration
Rights Agreement, dated December 21, 2016, by and among WPCS
International Incorporated and the investors listed therein
(incorporated by reference from
Exhibit 10.3 of the Company’s Current Report on Form 8-K
filed December 22, 2016).10.5

Securities
Purchase Agreement, dated March 30, 2017 (incorporated by reference from Exhibit 10.1
of the Company’s Current Report on Form 8-K filed April 4,
2017).10.6

Registration
Rights Agreement, dated March 30, 2017, by and among WPCS
International Incorporated and the purchasers listed therein
(incorporated by reference from
Exhibit 10.3 of the Company’s Current Report on Form 8-K
filed April 4, 2017).10.7

Final
form of the Repricing Offer Letter, dated December 4, 2017, from
WPCS International Incorporated to each of Iroquois Master Fund,
Iroquois Capital Investment Group, LLC and American Capital
Management, LLC (incorporated by
reference from Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed December 6, 2017).10.8†

Form of
Indemnification Agreement, by and between the Company and each of
its directors and officers (incorporated by reference from Exhibit 10.1
of the Company’s Current Report on Form 8-K filed February 5,
2018.).10.9†

Separation
Agreement, dated January 30, 2018, by and between the Company and
Sebastian Giordano (incorporated
by reference from Exhibit 10.2 of the Company’s Current
Report on Form 8-K filed February 5, 2018).10.10†

Separation
Agreement, dated January 30, 2018, by and between the Company and
David Allen (incorporated by
reference from Exhibit 10.3 of Company’s Current Report on
Form 8-K filed February 5, 2018).10.11†

Employment
Agreement, by and between the Company and Spencer Richardson, dated
as of September 6, 2017 (incorporated by reference from Exhibit 10.4
of the Company’s Current Report on Form 8-K filed February 5,
2018).SPLIT





57





10.12†

Employment
Agreement, by and between the Company and David Newman, dated as of
September 6, 2017 (incorporated
by reference from Exhibit 10.5 of the Company’s Current
Report on Form 8-K filed February 5, 2018).10.13†

Employment
Agreement, by and between the Company and Paul Commons, dated as of
January 22, 2018 (incorporated by
reference to Exhibit 10.6 of Company’s Current Report on Form
8-K filed February 5, 2018).10.14

Securities
Purchase Agreement, dated March 8, 2018, between the Company and
the purchasers named therein (incorporated by reference from Exhibit 10.1
of the Company’s Current Report on Form 8-K filed March 9,
2018).10.15

Registration
Rights Agreement, dated March 8, 2018, by and among the Company and
the purchasers named therein (incorporated by reference from Exhibit 10.2
of the Company’s Current Report on Form 8-K filed March 9,
2018).10.16

Form of
Warrant Exchange Agreement (incorporated by reference from Exhibit 10.1
of Company’s Current Report on Form 8-K filed April 20,
2018).10.17†

Consulting
Agreement, dated as of July 11, 2018, by and between the Company
and Ascentaur, LLC (incorporated
by reference from Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed July 13, 2018).23.1*

Consent
of EisnerAmper LLP31.1*

Rule
13(a)-14(a)/15(d)-14(a) Certification of Principal Executive
Officer31.2*

Rule
13(a)-14(a)/15(d)-14(a) Certification of Principal Financial And
Accounting Officer32.1*

Section
1350 Certification of Principal Executive Officer and Principal
Financial Officer (This certification is being furnished and shall
not be deemed “filed” with the SEC for purposes of
Section 18 of the Exchange Act, or otherwise subject to the
liability of that section, and shall not be deemed to be
incorporated by reference into any filing under the Securities Act
or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference).


* Filed
herewith.


†
Management contract or compensatory plan or
arrangement.








ITEM 16 – SUMMARY





None.











58





SIGNATURES





Pursuant to the
requirements of Section 13 or 15(d) 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: April 2,
2019
By:
/s/ Spencer
RichardsonSpencer
Richardson(Principal
Executive Officer)


Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below and on the dates
indicated.





Signature

Title

Date/s/
Spencer
Richardson

Chief
Executive Officer

April 2, 2019Spencer
Richardson

(Principal
Executive Officer)/s/
Mark
Corrao

Chief
Financial Officer

April 2, 2019Mark
Corrao

(Principal
Financial Officer)/s/
Joshua
Silverman

Chairman
of the Board of Directors

April 2, 2019Joshua
Silverman/s/
Sebastian
GiordanoSebastian
Giordano

Director

April
2, 2019/s/
David
NewmanDavid
Newman

Director,
Chief Business Development Officer

April 2, 2019/s/
Zvi
JosephZvi
Joseph

Director

April
2, 2019/s/
Solomon
MayerSolomon
Mayer

Director

April 2,
2019/s/
Greg
SchiffmanGreg
Schiffman

Director

April
2, 2019








59





INDEX TO


CONSOLIDATED FINANCIAL STATEMENTS





Contents





PageReport of Independent Registered Public Accounting
Firm

F-1Consolidated Financial Statements:Consolidated
Balance Sheets as of December 31, 2018 and 2017

F-3Consolidated
Statements of Operations for the years ended December 31, 2018 and
2017

F-4Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) for
the years ended December 31, 2018 and 2017

F-5Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and
2017

F-6Notes
to consolidated financial statements

F-7














REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM








To the
Board of Directors and Stockholders of


DropCar,
Inc





Opinion on the Financial Statements





We have audited the accompanying consolidated balance sheets of
DropCar, Inc. and Subsidiaries (the "Company") as of December 31,
2018 and 2017, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each
of the years then ended, and the related notes (collectively
referred to as the "financial statements"). In our opinion, the
financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31,
2018 and 2017, and the consolidated results of their operations and
their cash flows for each of the years then ended, in conformity
with accounting principles generally accepted in the United States
of America.





Going Concern





The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has an
accumulated deficit of approximately $29.8 million and negative
cash flow from operations of approximately $10.6 million and
anticipates additional losses in fiscal year 2019, that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.





Adoption of ASU No. 2014-09





As discussed in Note 2 to the consolidated financial statements,
the Company has changed its method of for recognizing revenue in
the accompanying consolidated financial statements for the years
ended December 31, 2018 and 2017 due to the adoption of Accounting
Standard Update No. 2014-09, Revenue from Contracts with
Customers(Topic 606), as amended.





Basis for Opinion





These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.





We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.





F-1





Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements.


Our
audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.











/s/
EisnerAmper LLP





We have
served as the Company's auditor since 2017.





EISNERAMPER
LLP


New
York, New York


April
1, 2019





F-2





DropCar, Inc., and Subsidiaries


Consolidated Balance Sheets





December 31,2018
2017ASSETSCURRENT ASSETS:Cash
$4,303,480
$372,011Accounts receivable, net
295,626
187,659Prepaid expenses and other current assets
328,612
51,532Total
current assets
4,927,718
611,202Property and equipment, net
39,821
5,981Capitalized software costs, net
659,092
589,584Other assets
3,525
3,000TOTAL ASSETS
$5,630,156
$1,209,767LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable and accrued expenses
$2,338,560
$1,820,731Deferred revenue
253,200
236,433Accrued interest
-
135,715Total
current liabilities
2,591,760
2,192,879Convertible note payable, net of debt discount
-
3,506,502TOTAL LIABILITIES
2,591,760
5,699,381COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS' EQUITY (DEFICIT):Preferred
stock, $0.0001 par value, 5,000,000 shares authorizedSeries seed
preferred stock, 275,691 shares authorized, zero and 275,691 issued
and outstanding as of December 31, 2018 and 2017,
respectively
-
27Series A preferred
stock, 642,728 shares authorized, zero and 611,944 issued and
outstanding as of December 31, 2018 and 2017,
respectively
-
61Convertible Series
H, 8,500 shares designated, 8 and zero shares issued and
outstanding as of December 31, 2018 and 2017,
respectively
-
-Convertible Series
H-1, 9,488 shares designated zero shares issued and outstanding as
of December 31, 2018 and 2017, respectively
-
-Convertible Series
H-2, 3,500 shares designated zero shares issued and outstanding as
of December 31, 2018 and 2017, respectively
-
-Convertible Series
H-3, 8,461 shares designated 2,189 and zero shares issued and
outstanding as of December 31, 2018 and 2017,
respectively
-
-Convertible Series
H-4, 30,000 shares designated 26,619 and zero shares issued and
outstanding as of December 31, 2018 and 2017,
respectively
3
-Common stock,
$0.0001 par value; 100,000,000 shares authorized, 1,633,394 and
374,285 issued and outstanding as of December 31, 2018 and 2017,
respectively
163
37Additional
paid in capital
32,791,951
5,115,158Accumulated
deficit
(29,753,721)
(9,604,897)TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
3,038,396
(4,489,614)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
$5,630,156
$1,209,767





The
accompanying notes are an integral part of these consolidated
financial statements.
 
 F-3





DropCar, Inc., and SubsidiariesConsolidated Statements of OperationsYears
Ended December 312018
2017NET REVENUES
$6,077,667
$4,285,514COST OF REVENUES
7,863,673
4,543,456GROSS LOSS
(1,786,006)
(257,942)OPERATING EXPENSESResearch and development
322,269
90,075Selling, general and administrative expenses
11,350,406
5,747,969Depreciation and amortization
354,657
218,660TOTAL OPERATING
EXPENSES
12,027,332
6,056,704OPERATING LOSS
(13,813,338)
(6,314,646)Interest
expense, net
(1,081,226)
(1,326,160)LOSS FROM CONTINUING
OPERATIONS
(14,894,564)
(7,640,806)DISCONTINUED OPERATIONSIncome from operations of discontinued component
315,119
-Loss on sale of component
(4,169,718)
-LOSS ON DISCONTINUED
OPERATIONS
(3,854,599)
-NET LOSS
(18,749,163)
(7,640,806)Deemed
dividend on exchange of warrants
(1,399,661)
-NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
$(20,148,824)
$(7,640,806)AMOUNTS ATTRIBUTABLE TO COMMON STOCKHOLDERSLoss from continuing operations
$(16,294,225)
$(7,640,806)Loss from discontinued operations
(3,854,599)
-NET LOSS
$(20,148,824)
$(7,640,806)NET LOSS PER COMMON SHARE, BASIC AND DILUTEDContinuing operations
$(12.04)
$(23.61)Discontinued operations
(2.85)
-NET
LOSS PER COMMON SHARE, BASIC AND DILUTED
$(14.89)
$(23.61)WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED
1,352,826
1,352,826
323,633





The
accompanying notes are an integral part of these consolidated
financial statements.
 
 F-4





DropCar, Inc., and SubsidiariesConsolidated Statement of Changes in Stockholders’ Equity
(Deficit)AdditionalSeries
Seed Preferred Stock
Series
A Preferred Stock
Series
H Preferred Stock
Series
H-3 Preferred Stock
Series
H-4 Preferred Stock
Common
Stock
Subscription
Paid-in
AccumulatedShares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Receivable
Capital
Deficit
TotalBalances,
January 1, 2017
275,691
$27
530,065
$53
-
$-
-
$-
-
$-
272,720
$27
$(69,960)
$2,117,237
$(1,964,091)
$83,293Issuance
of Series A Preferred stock
-
-
73,845
7
-
-
-
-
-
-
-
-
69,960
150,001
-
219,968Issuance
of Series A Preferred stock for services
-
-
8,034
1
-
-
-
-
-
-
-
-
-
24,999
-
25,000Fair
value of warrants issued with convertible notes
-
-
-
-
-
-
-
-
-
-
-
-
-
2,138,931
-
2,138,931Issuance
of common stock to offficers
-
-
-
-
-
-
-
-
-
-
101,565
10
-
546,090
-
546,100Stock
based compensation
-
-
-
-
-
-
-
-
-
-
-
-
-
137,900
-
137,900Net
loss
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(7,640,806)
(7,640,806)Balance,
December 31, 2017
275,691
27
611,944
61
-
-
-
-
-
-
374,285
37
-
5,115,158
(9,604,897)
(4,489,614)Issuance
of common stock for cash
-
-
-
-
-
-
-
-
-
-
10,057
1
-
299,999
-
300,000Conversion
of debt into common stock
-
-
-
-
-
-
-
-
-
-
136,785
14
-
3,682,488
-
3,682,502Conversion
of accrued interest into common stock
-
-
-
-
-
-
-
-
-
-
4,518
-
-
159,584
-
159,584Interest
on lock-up shares in relation to convertible debt
-
-
-
-
-
-
-
-
-
-
85,571
9
-
672,135
-
672,144Exchange
of shares in connection with Merger
-
-
-
-
-
-
-
-
-
-
490,422
49
-
9,792,139
-
9,792,188Conversion
of outstanding Preferred Stock in connection with
Merger
(275,691)
(27)
(611,944)
(61)
-
-
-
-
-
-
147,939
15
-
73
-
-Issuance
of Series H preferred stock in connection with Merger
-
-
-
-
8
-
-
-
-
-
-
-
-
-
-
-Issuance
of Series H-3 preferred stock in connection with
Merger
-
-
-
-
-
-
2,189
-
-
-
-
-
-
-
-
-Issuance
of Series H-4 preferred stock and warrants in private placement net
of costs of $101,661
-
-
-
-
-
-
-
-
26,843
3
-
-
-
5,898,336
-
5,898,339Issuance
of common shares in connection with exercise of H-4
warrants
-
-
-
-
-
-
-
-
-
-
260,116
26
-
936,397
-
936,423Issuance
of Pre-Funded Series K Warrants net of costs of
$15,000
-
-
-
-
-
-
-
-
-
-
-
-
-
968,329
-
968,329Stock
based compensation for options issued to employees
-
-
-
-
-
-
-
-
-
-
-
-
-
434,555
-
434,555Stock
based compensation for restricted stock units issued to
employees
-
-
-
-
-
-
-
-
-
-
-
-
-
2,954,124
-
2,954,124Stock
based compensation for common stock issued to service
providers
-
-
-
-
-
-
-
-
-
-
60,262
6
-
478,979
-
478,985Deemed
dividend on exchange of Merger Warrants to Series I Warrants and
common stock
-
-
-
-
-
-
-
-
-
-
48,786
5
-
316,856
(316,861)
-Deemed
dividend on modification of H-4 Warrants and issuance of Series J
Warrants
-
-
-
-
-
-
-
-
-
-
-
-
-
1,019,040
(1,019,040)
-Deemed
dividend on modification of H-4 Warrants
-
-
-
-
-
-
-
-
-
-
-
-
-
63,760
(63,760)
-Conversion
of Series H-4 Preferred Stock into common stock
-
-
-
-
-
-
-
-
(224)
-
14,653
1
-
(1)
-
-Net
loss
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(18,749,163)
(18,749,163)Balance
Decembe 31, 2018
-
$-
-
$-
8
$-
2,189
$-
26,619
$3
1,633,394
$163
$-
$32,791,951
$(29,753,721)
$3,038,396





The
accompanying notes are an integral part of these consolidated
financial statements.
 
 F-5





DropCar, Inc., and SubsidiariesConsolidated Statements of Cash FlowsYear
Ended December 31,2018
2017CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
$(18,749,163)
$(7,640,806)Loss from discontinued operations and disposal
3,854,599
-Loss from continuing operations
(14,894,564)
(7,640,806)Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
359,654
218,660Bad debt provision
-
42,057Amortization of debt discount
176,000
1,190,633Stock based compensation
3,793,520
709,000Non-cash interest expense
696,013
-Changes in operating assets and liabilities:Accounts receivable
(107,967)
(168,006)Prepaid expenses and other assets
(208,349)
(32,915)Accounts payable and accrued
expenses
460,829
1,172,306Accrued interest
-
135,715Deferred revenue
16,767
155,157NET CASH USED IN OPERATING ACTIVITIES - CONTINUING
OPERATIONS
(9,708,097)
(4,218,199)NET CASH USED IN OPERATING ACTIVITIES - DISCONTINUED
OPERATIONS
(858,821)
-NET CASH USED IN OPERATING ACTIVITIES
(10,566,918)
(4,218,199)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
(43,109)
(6,600)Capitalization of software costs
(419,892)
(251,324)Cash received upon acquisition
4,947,023
-Proceeds from sale of component, net of cash
relinquished
1,995,634
-Increase in other assets
(525)
-NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - CONTINUING
OPERATIONS
6,479,131
(257,924)NET CASH USED IN INVESTING ACTIVITIES - DISCONTINUED
OPERATIONS
(33,576)
-NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
6,445,555
(257,924)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from the sale of common stock
300,000
-Proceeds from the sale of Series H-4 preferred stock
6,000,000
-Financing costs from the sale of Series H-4 preferred stock and
warrants
(101,661)
-Proceeds from issuance of common stock in connection with exercise
of H-4 warrants
936,423
-Proceeds from the sale of Series K Warrants
983,333Financing costs from the sale of Series K warrants
(15,000)Proceeds from issuance of Series A Preferred Stock and subscription
receivable
-
219,968Proceeds from issuance of convertible notes and
warrants
-
4,840,000Offering costs - Convertible Notes
-
(263,200)NET CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING
OPERATIONS
8,103,095
4,796,768NET CASH USED IN FINANCING ACTIVITIES - DISCONTINUED
OPERATIONS
(50,263)
-NET CASH PROVIDED BY FINANCING ACTIVITIES
8,052,832
4,796,768Net
increase in cash
3,931,469
320,645Cash, beginning of period
372,011
51,366Cash, end of period
$4,303,480
$372,011SUPPLEMENTAL CASH FLOW INFORMATION:NON-CASH FINANCING ACTIVITIES:Fair
value of stock warrants issued with convertible notes
$-
$2,138,931Fair
value of common stock sold to founders
$-
$684,000Accrued
offering costs
$-
$122,000Accrued
capitalized software costs
$-
$108,979Stock
issued to WPCS Shareholder in the merger, net of cash received of
4,947,023
$4,845,200
$-Series
H-4 offering cost paid in H-4 shares and warrants
$568,468
$-Stock
issued for convertible note payable
$3,682,502
$-Stock
issued for accrued interest on convertible note
payable
$159,584
$-Deemed
dividends on warrant issuances and modification
$1,399,656
$-





The
accompanying notes are an integral part of these consolidated
financial statements.
 
 F-6
  DropCar, Inc., and
Subsidiaries
 Notes
to Consolidated Financial Statements





1.  The
Company





Merger and Exchange Ratio





On
January 30, 2018, DC Acquisition Corporation (“Merger
Sub”), a wholly-owned subsidiary of WPCS International
Incorporated (“WPCS”), completed its merger with and
into DropCar, Inc. (“Private DropCar”), with Private
DropCar surviving as a wholly owned subsidiary of WPCS. This
transaction is referred to as the “Merger.” The Merger
was effected pursuant to an Agreement and Plan of Merger and
Reorganization (the “Merger Agreement”), dated
September 6, 2017, by and among WPCS, Private DropCar and Merger
Sub.





As a
result of the Merger, each outstanding share of Private DropCar
share capital (including shares of Private DropCar share capital
issued upon the conversion of outstanding convertible debt)
automatically converted into the right to receive approximately
0.3273 shares of WPCS’s common stock, par value $0.0001 per
share (the “Exchange Ratio”). Following the closing of
the Merger, holders of WPCS’s common stock immediately prior
to the Merger owned approximately 22.9% on a fully diluted basis,
and holders of Private DropCar common stock immediately prior to
the Merger owned approximately 77.1% on a fully diluted basis, of
WPCS’s common stock.





The
Merger has been accounted for as a reverse acquisition under the
acquisition method of accounting where Private DropCar is
considered the accounting acquirer and WPCS is the acquired company
for financial reporting purposes. Private DropCar was determined to
be the accounting acquirer based on the terms of the Merger
Agreement and other factors, such as relative voting rights and the
composition of the combined company’s board of directors and
senior management, which was deemed to have control. The
pre-acquisition financial statements of Private DropCar became the
historical financial statements of WPCS following the Merger. The
historical financial statements, outstanding shares and all
other historical share information have been adjusted by
multiplying the respective share amount by the Exchange Ratio as if
the Exchange Ratio had been in effect for all periods
presented.





Immediately
following the Merger, the combined company changed its name from
WPCS International Incorporation to DropCar, Inc. The combined
company following the Merger may be referred to herein as
“the combined company,” “DropCar,” or the
“Company.”





Discontinued Operations





On December 10, 2018, the Company signed a definitive agreement
with a private corporation and completed the sale on December 24,
2018 of 100% of the Suisun City Operations, its wholly owned
subsidiary, for a total cash consideration of $3.5 million. The
sale of Suisun City Operations represented a strategic shift that
has had a major effect on the Company’s operations, and
therefore, was presented as discontinued operations in the
consolidated statement of operations.





Trading of Company’s stock





The Company’s shares of common stock listed on The Nasdaq
Capital Market, previously trading through the close of business on
January 30, 2018 under the ticker symbol “WPCS,”
commenced trading on The Nasdaq Capital Market, on a post-Reverse
Stock Split adjusted basis, under the ticker symbol
“DCAR” on January 31, 2018.





On
September 25, 2018, the Company received a notification letter from
The Nasdaq Stock Market ("Nasdaq") informing the Company that for
the last 30 consecutive business days, the bid price of the
Company’s securities had closed below $1.00 per share, which
is the minimum required closing bid price for continued listing on
The Nasdaq Capital Market pursuant to Listing Rule 5550(a)(2). In
order to regain compliance, on March 8, 2019, the Company filed a
certificate of amendment to its amended and restated certificate of
incorporation with the Secretary of State of the State of Delaware
to effect a one-for-six reverse stock split of its outstanding
shares of common stock. On March 26, 2019, the Company received a
notification letter from The Nasdaq Stock Market informing it that
it had regained compliance with Listing Rule
5550(a)(2).





F-7
  DropCar, Inc., and
Subsidiaries
 Notes
to Consolidated Financial Statements





Basis of Presentation and Principles of Consolidation





These
consolidated financial statements of Dropcar, Inc., a Delaware
corporation, are prepared in accordance with U.S. generally
accepted accounting principles (“US GAAP”) and include
the accounts of its wholly-owned subsidiaries. All significant
intercompany transactions and amounts have been eliminated. The
results of businesses acquired and disposed of are included in the
consolidated financial statements from the date of the acquisition
or up to the date of disposal, respectively. During the year, the
Company completed a reverse merger with WPCS International
Incorporated, the parent company of WPCS International –
Suisun City, Inc. (the “Suisun City Operations”), a
wholly-owned subsidiary. Subsequently, the Company completed the
sale of the wholly-owned Suisun City Operationsand is reported in
discontinued operations. See Note 3 to the financial statements for
further details.





Acquisition Accounting





The
fair value of WPCS assets acquired and liabilities assumed was
based upon management’s estimates assisted by an independent
third-party valuation firm. As of December 31, 2018, the
acquisition accounting was completed and there were no further
adjustments to the assumptions. Critical estimates in valuing
certain intangible assets include, but are not limited to, future
expected cash flows from customer relationships and the trade name,
present value and discount rates. Management’s estimates of
fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates.





The
purchase price allocation of $9.8 million was as
follows:





Fair
value of equity consideration, 506,423 WPCS common
shares
$9,792,000Liability assumed:
notes payable
158,000Total purchase
price consideration
$9,950,000Tangible
assetsNet working capital
(1)
$6,664,000Deferred
revenue
(2,300,000)Property and
equipment
376,000Intangible assets
(2)Customer
contracts
1,200,000Trade
name
600,000Goodwill
3,410,000Total allocation of
purchase price consideration
$9,950,000





(1) Net
working capital consisted of cash of $4,947,000; accounts
receivable and contract assets of $3,934,000; other assets of
$317,000; accounts payable and accrued liabilities of
$2,534,000.





(2)
The useful
lives related to the acquiredcustomer relationships
and trade name were expected to be
approximately 10 years.





F-8
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





DropCar Operating





DropCar
Operating is a provider of automotive vehicle support, fleet
logistics, and concierge services for both consumers and the
automotive industry. Its cloud-based Enterprise Vehicle Assistance
and Logistics (“VAL”) platform and mobile application
(“app”) assists consumers and automotive-related
companies to reduce the costs, hassles and inefficiencies of owning
a car, or fleet of cars, in urban centers. In July 2018, DropCar
Operating launched its Mobility Cloud platform which provides
automotive-related businesses with a 100% self-serve SaaS version
of its VAL platform to manage their own operations and drivers, as
well as customer relationship management (“CRM”) tools
that enable their clients to schedule and track their vehicles for
service pickup and delivery. DropCar Operating’s Mobility
Cloud also provides access to private application programming
interfaces (“APIs”) which automotive-businesses can use
to integrate DropCar Operating’s logistics and field support
directly into their own applications and processes natively, to
create more seamless client experiences. The Company has not earned
any revenues from Mobility Cloud in 2018.





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





In
July 2018, DropCar Operating began assessing demand for a Self-Park
Spaces monthly parking plan whereby consumers could designate
specific garages for their vehicles to be stored at a base monthly
rate, with personal 24/7 access for picking up and returning their
vehicle directly, and the option to pay a la carte on a per hour
basis for a driver to perform functions such as picking up and
returning their vehicle to their front door. This model aligns more
directly with how the Company has structured the enterprise B2B
side of its business, where an interaction with a vehicle on behalf
of its drivers typically generates net new revenue. The DropCar
Operating 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 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.





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





F-9
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Concentrations





Accounts Receivable





The
Company’s concentration of accounts receivable are
as follows:





As of December
31,2018
2017Customer
A
58%
21%Customer
B
23%
15%





2.
 Liquidity and Going Concern





The
Company has a limited operating history and the sales and income
potential of its business and market are unproven. As of December
31, 2018, the Company has an accumulated deficit of $29.8 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 March 2020. These factors raise substantial
doubt about the Company’s ability to continue as a going
concern for the twelve months following the date of the filing of
this Form 10-K.





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





3.
 Summary of Significant Accounting Policies





Use of Estimates





The
preparation of consolidated financial statements in conformity with
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
intangibles, property and equipment, deferred tax asset valuation
allowances, and operating expense accruals. Actual results could
differ from those estimates.





Accounts receivable





Accounts
receivable are carried at original invoice amount less an estimate
made for holdbacks and doubtful receivables based on a review of
all outstanding amounts. The Company determines the allowance for
doubtful accounts by regularly evaluating individual customer
receivables and considering a customer’s financial condition,
credit history and current economic conditions and set up an
allowance for doubtful accounts when collection is uncertain.
Customers’ accounts are written off when all attempts to
collect have been exhausted. Recoveries of accounts receivable
previously written off are recorded as income when received. At
December 31, 2018 and 2017, the accounts receivable reserve was
approximately $2,000 and $40,000, respectively.





F-10
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





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. The
Company adopted ASC 606 effective January 1, 2018, using modified
retrospective basis and the cumulative effect was immaterial to the
financial statements.





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
Operating 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.





Monthly Subscriptions





DropCar
Operating offers a selection of subscriptions and on-demand
services which include parking, valet, and access to other
services. The contract terms are on a month-to-month subscription
contract with fixed monthly or contract term fees. These
subscription services include a fixed number of round-trip
deliveries of the customer’s vehicle to a designated
location. The Company allocates the purchase price among the
performance obligations which results in deferring revenue until
the service is utilized or the service period has
expired.





On Demand Valet and Parking Services





DropCar
Operating offers to consumers certain on demand services through
its mobile application. The customer is billed at an hourly rate
upon completion of the services. Revenue is recognized when the
Company had satisfied all performance obligations which is upon
completion of the service.





F-11
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





DropCar 360 Services





DropCar
Operating offers to consumers certain services upon request
including vehicle inspection, maintenance, car washes or to fill up
with gas. The customers are charged a fee in addition to the cost
of the third-party services provided. Revenue is recognized when
the Company had satisfied all performance obligations which is upon
completion of the service.





On Demand Business-To-Business





DropCar
Operating also has contracts with car dealerships, car share
programs and others in the automotive industry transporting
vehicles. Revenue is recognized at the point in time all
performance obligations are satisfied which is when the Company
provide the delivery service of the vehicles.





Disaggregated Revenues





The
following table presents our revenues from contracts with customers
disaggregated by revenue source.





Years ended December
31,2018
2017DropCar Operating
Subscription Services
$4,409,037
$3,446,651DropCar Operating
Services On-Demand
1,668,630
838,863Total
Revenue(1)(2)
$6,077,667
$4,285,514





(1)
 Represents
revenues recognized by type of services.


(2)
 All revenues are
generated in the United States.





The
following presents our revenues from B2C and B2B
customers.





Years ended December 31,2018
2017DropCar
Operating B2C
$5,019,002
$3,829,423DropCar
Operating B2B
1,058,665
456,091DropCar
Operating Revenue
$6,077,667
$4,285,514





Employee Stock-Based Compensation





The
Company recognizes all employee share-based compensation as an
expense in the financial statements. Equity-classified awards
principally related to stock options, restricted stock units
(“RSUs”) and equity-based compensation, are measured at
the grant date fair value of the award. The Company determines
grant date fair value of stock option awards using the
Black-Scholes option-pricing model. The fair value of RSUs are
determined using the closing price of the Company’s common
stock on the grant date. For service-based vesting grants, expense
is recognized ratably over the requisite service period based on
the number of options or shares. Stock-based compensation is
reversed for forfeitures in the period of forfeiture.





F-12
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Property and Equipment





The
Company accounts for property and equipment at cost less
accumulated depreciation. The Company computes depreciation using
the straight-line method over the estimated useful lives of the
assets. The Company generally depreciates property and equipment
over a period of three to seven years. Depreciation for property
and equipment commences once they are ready for its intended
use.





Capitalized Software





Costs
related to website and internal-use software development are
accounted for in accordance with Accounting Standards Codification
(“ASC”) Topic
350-50 — Intangibles — Website
Development Costs. Such software is primarily related to our
websites and mobile apps, including support systems. We begin to
capitalize our costs to develop software when preliminary
development efforts are successfully completed, management has
authorized and committed project funding, it is probable that the
project will be completed, and the software will be used as
intended. Costs incurred prior to meeting these criteria are
expensed as incurred and recorded within General and administrative
expenses within the accompanying consolidated statements of
operations. Costs incurred for enhancements that are expected to
result in additional features or functionality are capitalized.
Capitalized costs are amortized over the estimated useful life of
the enhancements, generally between two and
three years.





Impairment of Long-Lived Assets





Long-lived
assets are primarily comprised of intangible assets, property and
equipment, and capitalized software costs. The Company evaluates
its Long-Lived Assets for impairment whenever events or changes in
circumstances indicate the carrying value of an asset or group of
assets may not be recoverable. If these circumstances exist,
recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset group to future
undiscounted net cash flows expected to be generated by the asset
group. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. There
were no impairments to long-lived assets for the years ended
December 31, 2018 and 2017.





Income Taxes





The
Company provides for income taxes using the asset and liability
approach. Deferred tax assets and liabilities are recorded based on
the differences between the financial statement and tax bases of
assets and liabilities and the tax rates in effect when these
differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized. As of December 31,
2018 and 2017, the Company had a full valuation allowance against
deferred tax assets.





The
Tax Cuts and Jobs Act (the “Tax Act”), enacted on
December 22, 2017, among other things, permanently lowered the
statutory federal corporate tax rate from 35% to 21%, effective for
tax years including or beginning January 1, 2018. Under the
guidance of ASC 740, “Income Taxes” (“ASC
740”), the Company revalued its net deferred tax assets on
the date of enactment based on the reduction in the overall future
tax benefit expected to be realized at the lower tax rate
implemented by the new legislation. Although in the normal course
of business the Company is required to make estimates and
assumptions for certain tax items which cannot be fully determined
at period end, the Company did not identify items for which the
income tax effects of the Tax Act have not been completed as of
December 31, 2018 and, therefore, considers its accounting for the
tax effects of the Tax Act on its deferred tax assets and
liabilities to be complete as of December 31, 2018.





F-13
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Fair Value Measurement





The
Company accounts for financial instruments in accordance with ASC
820, “Fair Value Measurements and Disclosures”
(“ASC 820”). ASC 820 establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure
fair value.  The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).  The three
levels of the fair value hierarchy under ASC 820 are described
below:





Level
1 – Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted
assets or liabilities;





Level
2 – Quoted prices in markets that are not active or financial
instruments for which all significant inputs are observable, either
directly or indirectly; and





Level
3 – Prices or valuations that require inputs that are both
significant to the fair value measurement and
unobservable.





Financial
instruments with carrying values approximating fair value include
cash, accounts receivable, other assets, convertible notes and
accounts payable due to their short-term nature.





Loss Per Share





Basic
loss per share is computed by dividing net loss attributable to
common shareholders (the numerator) by the weighted-average number
of common shares outstanding (the denominator) for the period.
Diluted loss per share are computed by assuming that any dilutive
convertible securities outstanding were converted, with related
preferred stock dividend requirements and outstanding common shares
adjusted accordingly. It also assumes that outstanding common
shares were increased by shares issuable upon exercise of those
stock options for which market price exceeds the exercise price,
less shares which could have been purchased by the Company with the
related proceeds. In periods of losses, diluted loss per share is
computed on the same basis as basic loss per share as the inclusion
of any other potential shares outstanding would be
anti-dilutive.





The
following securities were excluded from weighted average diluted
common shares outstanding because their inclusion would have been
antidilutive.





As of December 31,2018
2017Common
stock equivalents:Common
stock options
302,773
-Series A, H-1, H-3, H-4, I, J, K and Merger common stock purchase
warrants
863,084
-Series
H, H-3, and H-4 Convertible Preferred Stock
10,502,883
-Restricted
shares (unvested)
244,643Convertible
notes
-
136,789Series
seed preferred stock
-
275,694Series
A preferred stock
-
611,946Totals
11,913,383
1,024,429











F-14
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Research and development costs, net





Costs are incurred in connection with research and development
programs that are expected to contribute to future earnings. Such
costs include labor, stock-based compensation, training, software
subscriptions, and consulting. These amounts are charged to the
consolidated statement of operations as incurred. Total research
and development expenses were approximately $0.3 million and $0.1
million for the years ended December 31, 2018 and 2017,
respectively.





Adoption of New Accounting Standards





In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers. Under the new standard, revenue is recognized at the
time a good or service is transferred to a customer for the amount
of consideration for which the entity expects to be entitled for
that specific good or service. Entities may use a full
retrospective approach or on a prospective basis and report the
cumulative effect as of the date of adoption. The Company adopted
the new standard on January 1, 2018, using prospective basis and
the cumulative effect was immaterial to the financial statements.
The new standard also requires enhanced disclosures about the
nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts.





In
July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share
(Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for
Certain Financial Instruments with Down Round Features. These
amendments simplify the accounting for certain financial
instruments with down round features. The amendments require
companies to disregard the down round feature when assessing
whether the instrument is indexed to its own stock, for purposes of
determining liability or equity classification. The adoption of
this standard on January 1, 2018, did not have a material effect on
the Company’s financial statements.





In
January 2017, the FASB issued ASU 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business.
The new guidance dictates that, when substantially all of the fair
value of the gross assets acquired (or disposed of) is concentrated
in a single identifiable asset or a group of similar identifiable
assets, it should be treated as an acquisition or disposal of an
asset. The guidance was adopted as of January 1, 2018, and did not
have a material effect on the Company’s financial
statements.





Recently Issued Accounting Standards





From
time to time, new accounting pronouncements are issued by the FASB
or other standard setting bodies. Unless otherwise discussed, the
Company believes that the impact of recently issued standards that
are not yet effective will not have a material impact on its
consolidated financial position or results of operations upon
adoption.





In February 2016, the Financial Accounting Standards Board (FASB)
established Accounting Standards Codification (ASC) Topic 842,
Leases, as subsequently amended, by issuing Accounting Standards
Update (ASU) No. 2016-02, which requires lessees to now recognize
operating leases on the balance sheet and disclose key information
about leasing arrangements. The new standard establishes a
right-of-use (ROU) model that requires a lessee to recognize a ROU
asset and lease liability on the balance sheet for all leases with
a term longer than 12 months. Leases will be classified as either
finance or operating, with classification affecting the pattern and
classification of expense recognition in the income
statement.





F-15
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements








The new standard is effective for the Company on January 1, 2019,
with early adoption permitted. The Company expects to adopt the new
standard on its effective date. A modified retrospective transition
approach is required, applying the new standard to all leases
existing at the date of initial application. An entity may choose
to use either: (1) its effective date or (2) the beginning of the
earliest comparative period presented in the financial statements
as its date of initial application. The Company expects to adopt
the new standard on January 1, 2019 and use the effective date as
the date of initial application. Consequently, financial
information will not be updated and the disclosures required under
the new standard will not be provided for dates and periods before
January 1, 2019.





The new standard provides a number of optional practical expedients
in transition. The Company expects to elect the ‘package of
practical expedients’, which permits the Company not to
reassess under the new standard its prior conclusions about lease
identification, lease classification and initial direct costs. The
Company does not expect to elect the use-of- hindsight or the
practical expedient pertaining to land easements; the latter not
being applicable to the Company.





The Company expects that this standard will have an immaterial
effect on its financial statements. While the Company continues to
assess all of the effects of adoption, it currently believes the
most significant effects relate to: (1) the recognition of new ROU
assets and lease liabilities on its balance sheet for its operating
leases; (2) providing significant new disclosures about its leasing
activities. The Company does not expect a significant change in its
leasing activities between now and adoption.





On adoption, the Company currently expects to recognize additional
lease liabilities and corresponding ROU assets of less than $15,000
each based on the present value of the remaining minimum rental
payments under current leasing standards for existing operating
leases.





The new standard also provides practical expedients for an
entity’s ongoing accounting. The Company currently expect to
elect the short-term lease recognition exemption for its corporate
office leases and garage leases. This means, for those leases that
qualify, the Company will not recognize ROU assets or lease
liabilities, and this includes not recognizing ROU assets or lease
liabilities for existing short-term leases of those assets in
transition.





The Company also currently expects to elect the practical expedient
to not separate lease and non-lease components for all of its
leases.





In June 2018, the FASB issued ASU 2018-07, Compensation-Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies the accounting for nonemployee
share-based payment transactions. The amendments specify that Topic
718 applies to all share-based payment transactions in which a
grantor acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment
awards. The Company will adopt ASU 2018-07 effective January 1,
2019, and the adoption of this ASU will not have a material effect
on its consolidated financial statements.





In August 2018, the FASB issued ASU 2018-13, Changes to
Disclosure Requirements for Fair Value Measurements, which will
improve the effectiveness of disclosure requirements for recurring
and nonrecurring fair value measurements. The standard removes,
modifies, and adds certain disclosure requirements, and is
effective for the Company beginning January 1, 2020. The Company is
currently evaluating the impact this standard will have on the
Company’s consolidated financial statements.





4.
 Discontinued Operations and Disposition of Operating
Segment





On
December 10, 2018, the Company signed a definitive agreement with a
private corporation and completed the sale on December 24, 2018, of
100% of the corporate capital of Suisun City Operations, a wholly
owned subsidiary of Dropcar, Inc, for a total cash consideration of
$3.5 million. The Company recognized the following loss on sale of
component on the date of sale:





Sales
price
$3,500,000Commissions and
various transaction costs
(332,220)Net sales
proceeds
3,167,780Carrying amounts of
assets, net of liabilities
7,337,498*Loss on sale of
Suisun City Operations
$(4,169,718)





* The carrying amounts of assets
included cash of $1,504,366; accounts receivable and contract asset
of $4,177,568; prepaid expenses and other current assets of
$57,486; property and equipment of $295,206; intangibles and
goodwill of $5,048,247; carrying amounts of liabilities included
accounts payable and accrued liabilities of $3,688,831 and loans of
$56,544.





F-16
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





The
operations and cash flows of the Suisun City Operations were
eliminated from ongoing operations following its sale. The
operating results of the Suisun City Operations for the year
ended December 31, 2018 were as
follows:





Revenues
$13,730,252Cost of
revenues
10,836,754Gross
profit
2,893,498Selling, general
and administrative expenses
2,285,661Depreciation and
amortization
287,830Total Operating
Expenses
2,573,491Interest expense,
net
4,888Net income from
discontinued operations
$315,119











5.
 Capitalized Software





Capitalized
software costs consists of the following as of December 31, 2018
and 2017:





As
of December 31,2018
2017Software
$1,324,275
$904,383Accumulated
amortization
(665,183)
(314,799)Total
$659,092
$589,584





Amortization
expense for the years ended December 31, 2018 and 2017, was
$350,385 and $218,660, respectively.








6.  Convertible
Notes Payable





During the year ended December 31, 2017, the Company issued
convertible notes totaling $4,840,000 and warrants to acquire
146,358 shares of common stock at an exercise price of $59.04 per
share in connection with the convertible notes (the
“Notes”). The Notes all had a maturity date of one year
from the date of issuance, and accrued interest at a rate of 6% per
annum, compounded annually. The Notes were convertible at $35.40
per share and, including accrued interest, were converted into
141,303 shares of common stock in connection with the
Merger.





In connection with the Merger, the holders of the Notes entered
into lock-up agreements pursuant to which they have agreed not to
sell the 85,573 shares of common stock received in the Merger. The
length of the lock-up period is up to 120 days. For the year ended
December 31, 2018, the Company recorded $672,144 as interest
expense in relation to the lock-up agreements in the accompanying
consolidated statement of operations.





At
December 31, 2018 and December 31, 2017, the aggregate
carrying value of the Notes was $0 and $3,506,502,
respectively.





F-17
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





7.  Commitments
and Contingencies








Lease Agreements





The
Company leases office space in New York City on a month-to-month
basis, with a condition of a 60 day notice to terminate. For the
years ended December 31, 2018 and 2017, rent expense for the
Company’s New York City office was $158,000 and $53,000,
respectively.





Litigation





The
Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of
business that it believes are incidental to the operation of its
business. While the outcome of these claims cannot be predicted
with certainty, management does not believe that the outcome of any
of these legal matters will have a material adverse effect on its
results of operations, financial positions or cash
flows.





In
February 2018, DropCar was served an Amended Summons and Complaint
in the Supreme Court of the City of New York, Bronx county
originally served solely on an individual, a former DropCar
customer, for injuries sustained by plaintiffs alleging such
injuries were caused by either the customer, a DropCar valet
operating the customer’s vehicle or an unknown driver
operating customer’s vehicle. DropCar to date has cooperated
with the NYC Police Department and no charges have been brought
against any employee of DropCar. DropCar has referred the matter to
its insurance carrier.





On
February 9, 2016, a DropCar employee was transporting a
customer’s vehicle when the vehicle caught fire. On November
22, 2016, an insurance company (as subrogee of the vehicle’s
owner) filed for indemnification and subrogation against the
Company in the Supreme Court of the State of New York County of New
York. Management believes that it is not responsible for the damage
caused by the vehicle fire and that the fire was not due to any
negligence on the part of the DropCar. In 2018, the parties reached
a settlement the case was closed.





Other





As of January 1, 2017, the Company had accrued approximately
$160,000 for the potential settlement of multiple employment
disputes. During the year ended December 31, 2017, approximately
$137,000 of this amount was settled upon payment. An additional
$73,000 was expensed and accrued for potential settlements during
the year ended December 31, 2017. As of December 31, 2017, the
Company had accrued approximately $96,000 for the settlement of
multiple employment disputes. During the year ended December 31,
2018, approximately $70,000 of this amount was settled upon
payment. An additional $207,000 was expensed and accrued for
settlements during the year ended December 31, 2018. As of December
31, 2018, approximately $232,000 remains accrued for the settlement
of employment disputes. As of December 31, 2018, the Company has
entered into multiple settlement agreements with former employees
for which it has agreed to make monthly settlement payments which
will extend through the year ended December 31,
2019.





On March 23, 2018, DropCar was made aware of an audit being
conducted by the New York State Department of Labor
(“DOL”) regarding a claim filed by an employee. The DOL
is investigating whether DropCar properly paid overtime for which
DropCar has raised several defenses. In addition, the DOL is
conducting its audit to determine whether the Company owes spread
of hours pay (an hour’s pay for each day an employee worked
or was scheduled for a period over ten hours in a day). If the DOL
determines that monies are owed, the DOL will seek a backpay order,
which management believes will not, either individually or in the
aggregate, have a material adverse effect on DropCar’s
business, consolidated financial position, results of operations or
cash flows. As of December 31, 2018, the Company has accrued
approximately $200,000 in relation to these
matters.





F-18
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





8.
 Income Taxes





The
Company files corporate income tax returns in the United States
(federal) and in New York. The Company is subject to federal, state
and local income tax examinations by tax authorities from
inception.





At December 31, 2018, the Company has approximately $15,554,000 of
operating loss carryforwards for both federal and New York state
tax purposes that may be applied against future taxable income. The
Company also has approximately $14,591,000 of unused operating loss
carryforwards for New York City purposes. The net operating loss
carryforwards will begin to expire in the year 2036 if not utilized
prior to that date. There is no provision for income taxes because
the Company has historically incurred operating losses and
maintains a full valuation allowance against its net deferred tax
assets. The valuation allowance increased by approximately
$3,639,000 and $2,173,000 during the years 2018 and 2017,
respectively, and was approximately $6,699,000 and $3,060,000 at
December 31, 2018 and 2017, respectively.





A
reconciliation of the statutory U.S. Federal rate to the Company's
effective tax rate is as follows:





December 31,2018
2017Federal
income tax benefit at statutory rate
21.00%
34.00%State
income tax, net of federal benefits
7.80%
11.35%Permanent
items
(9.88)%
(4.09)%Impact
of tax law change
-%
(12.46)%Other
0.49%
(0.36)%Change
in valuation allowance
(19.41)%
(28.44)%Provision
for income taxes
-
-





The
tax effect of temporary differences that gave rise to significant
portion of the deferred tax assets were as follows:





December 31,2018
2017Net
operating loss carryforwards - Federal
$3,266,000
$1,968,000Net
operating loss carryforwards - State
2,142,000
1,273,000Stock
based compensation
1,335,000
-Capitalized
Software
(182,000)
(204,000)Settlement
reserve
122,000
8,000Fixed
Asset Depreciation
1,000
-Allowance
for doubtful accounts
15,000
15,000Valuation
allowance
(6,699,000)
(3,060,000)Net
deferred tax assets
$-
$-





On December 22, 2017, the Tax Cuts and Jobs Act (“The
Act”), was signed into law by President Trump. The Act
includes a number of provisions, including the lowering of the U.S.
corporate tax rate from 35 percent to 21 percent, effective January
1, 2018 and the establishment of a territorial-style system for
taxing foreign-source income of domestic multinational
corporations. In December 2017, the SEC issued Staff Accounting
Bulletin No. 118, Income Tax Accounting Implications of the Act
(“SAB118”), which allows us to record provisional
amounts during a measurement period not to extend beyond one year
of the enactment. The Company remeasured its deferred tax assets
and liabilities as of December 31, 2017, applying the reduced
corporate income tax rate and recorded a provisional decrease to
the deferred tax assets of $1,228,000, with a corresponding
adjustment to the valuation allowance. In the fourth quarter of
2018, we completed our analysis to determine the effect of the Tax
Act and there were no material adjustments as of December 31,
2018.





The federal and state net operating loss may be subject to the
limitations provided in the Internal Revenue Code
(“IRC”) Sections 382 and 383. The net operating loss
and tax credit carryforwards are subject to review by the Internal
Revenue Service in accordance with the provisions of Section 382 of
the Internal Revenue Code. Under this Internal Revenue Code
section, substantial changes in the Company’s ownership may
limit the amount of net operating loss carryforwards that could be
utilized annually in the future to offset the Company’s
taxable income. Specifically, this limitation may arise in the
event of a cumulative change in ownership of the Company of more
than 50% within a three-year period. Any such annual limitation may
significantly reduce the utilization of the Company’s net
operating loss carryforwards before they expire. The closing of the
Company’s merger alone or together with transactions that
have occurred or that may occur in the future, may trigger an
ownership change pursuant to Section 382, which could limit the
amount of net operating loss carryforwards that could be utilized
annually in the future to offset the Company’s taxable
income, if any. Any such limitation as the result of the
Company’s additional sales of common stock by the Company
could have a material adverse effect on the Company’s results
of operations in future years.





There are no liabilities from unrecognized tax benefits included in
the Company's consolidated balance sheets as of December 31, 2018
and 2017, and therefore the Company has not incurred any penalties
or interest.





F-19
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





9.
 Stockholders’ Equity (Deficit)





Common Stock





On January 18, 2018, the Company sold 10,057 shares of common stock
for proceeds of $300,000.





On January 30, 2018, the Company converted $3,682,502, the net
carrying value of the principal balance of $4,840,000 convertible
notes payable, into 136,785 shares of common stock just prior to
the Merger.





On April 19, 2018, the Company entered into separate Warrant
Exchange Agreements with the holders of existing warrants issued in
the Merger to purchase shares of common stock, pursuant to which,
on the closing date, the Merger Warrant Holders exchanged each
Merger Warrant for 1/18 of a share of common stock and 1/12 of
a warrant to purchase a share of common stock. In connection with
the Exchange Agreements, the Company issued an aggregate of (i)
48,786 new shares of common stock and (ii) Series I Warrants to
purchase an aggregate of 73,178 shares of common stock. The Company
valued (a) the stock and warrants issued in the amount of $972,368,
(b) the warrants retired in the amount of $655,507, and (c)
recorded the difference as deemed dividend in the amount of
$316,861. See below under “Warrants” for further
details.





During the year ended December 31, 2018, the Company converted
$159,584 of accrued interest related to the convertible notes into
4,518 shares of common stock.





During the year ended December 31, 2018, the Company granted 3,333
shares of common stock to a service provider and recorded $31,800
as general and administrative expense in the Company’s
consolidated statements of operations.





On September 4, 2018, the Company issued 260,116 shares of common
stock from the exercise of Series H-4 Warrants.





On December 17, 2018, the Company issued 14,653 shares of common
stock from the conversion of 224 shares of Series H-4 Convertible
Preferred Stock.





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 Seed





On January 30, 2018, the Company converted 275,691 shares of Series
Seed Preferred Stock into 45,949 shares of common stock in
connection with the Merger.





Series A





On January 30, 2018, the Company converted 611,944 shares of Series
A Preferred Stock into 101,991shares of common stock in connection
with the Merger.





F-20
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Rights and Privileges of Preferred Stock





Voting
Privileges and Protective Features of Preferred Stock





Each
holder of outstanding shares of Preferred Stock are entitled to
cast the number of votes equal to the number of whole shares of
Common Stock into which the shares of such Preferred Stock held by
such holder are convertible as of the record date for determining
stockholders entitled to vote on such matter. The holders of record
of a majority of outstanding Preferred Stock shall be entitled to
elect the majority of the directors of the Company. In liquidation,
the Preferred Stockholders receive their original purchase price
plus any dividends if declared.





The
outstanding shares of Preferred Stock are convertible at the option
of the holder into common shares on a one to one ratio and the
conversion ratio is subject to certain anti-dilution
provision.





For so
long as any shares of Preferred Stock remain outstanding, the vote
or written consent of the holders of the majority of the
outstanding shares of Preferred Stock is necessary for the Company
to conduct certain corporate actions, including but not limited to
liquidation, windup or dissolution of the Company; certain
amendments to the certificate of incorporation or bylaws of the
Company; authorization or issuance of shares of any additional
class or series of capital stock unless the same ranks junior to
the Preferred Stock with respect to liquidation preference, the
payment of dividends and rights of redemption or increase in the
authorized number of shares of any series of capital stock;
authorize the creation of, or issue, or authorize the issuance of
any debt security unless such indebtedness was approved by the
Board of Directors, and increase or decrease the authorized number
of directors constituting the Board of Directors.





Series H Convertible





On January 30, 2018, in accordance with the Merger the Company
issued 8 shares of Series H Convertible Preferred
Stock.





Under the terms of the Series H Certificate of Designation, each
share of Series H Preferred Stock has a stated value of $616 and is
convertible into shares of the Company’s common stock
(“common stock”), equal to the stated value divided by
the conversion price of $36.96 per share (subject to adjustment in
the event of stock splits or dividends). The Company is prohibited
from effecting the conversion of the Series H Preferred Stock to
the extent that, as a result of such conversion, the holder would
beneficially own more than 9.99%, in the aggregate, of the issued
and outstanding shares of the Company’s common stock
calculated immediately after giving effect to the issuance of
shares of common stock upon such conversion.





Series H-1 and H-2 Convertible





The Company has designated 9,488 Series H-1 Preferred Stock and
designated 3,500 Series H-2 Preferred Stock, none of which are
outstanding.





F-21
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Series
H-3 Convertible





On January 30, 2018, in accordance with the Merger the Company
issued 2,189 shares of Series H-3 Convertible Preferred
Stock.





Pursuant to the Series H-3 Securities Purchase Agreement, the
Company agreed to not issue further common stock or securities
convertible into or exercisable or exchangeable for common stock,
except upon a change in control of the Company, which occurred upon
the Merger. The Company also agreed to cause certain of its
officers and directors to agree not to exercise their Company stock
options except in connection with a change in control of the
Company.





Also, pursuant to the Series H-3 Certificate of Designation (as
defined below), the holders of the Series H-3 Shares are entitled
to elect up to two members of a seven member Board, subject to
certain step downs; pursuant to the Series H-3 Securities Purchase
Agreement, the Company agreed to effectuate the appointment of the
designees specified by the Series H-3 Investors as directors of the
Company.





On March 30, 2017, the Company filed with the Secretary of State of
the State of Delaware a Certificate of Designations, Preferences
and Rights with respect to the Series H-3 Shares (the “Series
H-3 Certificate of Designation”).





Under the terms of the Series H-3 Certificate of Designation, each
share of the Series H-3 Shares has a stated value of $552 and is
convertible into shares of common stock, equal to the stated value
divided by the conversion price of $33.12 per share (subject to
adjustment in the event of stock splits and dividends). The Company
is prohibited from effecting the conversion of the Series H-3
Shares to the extent that, as a result of such conversion, the
holder or any of its affiliates would beneficially own more than
9.99%, in the aggregate, of the issued and outstanding shares of
common stock calculated immediately after giving effect to the
issuance of shares of common stock upon the conversion of the
Series H-3 Shares.





Series H-4 Convertible





On March 8, 2018, the Company entered into a Securities Purchase
Agreement (the “Securities Purchase Agreement”) with
investors pursuant to which the Company issued to the investors an
aggregate of 25,472 shares of the Company’s newly designated
Series H-4 Convertible Preferred Stock, par value $0.0001 per share
(the “Series H-4 Shares”) convertible into 424,533
shares of common stock of the Company, and warrants to purchase
424,533 shares of common stock of the Company, with an exercise
price of $15.60 per share, subject to adjustments (the
“Warrants”). The purchase price per Series H-4 Share
and warrant was $235.50, equal to (i) the closing price of the
common stock on the Nasdaq Capital Market on March 7, 2018, plus
$0.125 multiplied by (ii) 100. The aggregate purchase price for the
Series H-4 Shares and Warrants was approximately $6.0 million.
Subject to certain ownership limitations, the Warrants are
immediately exercisable from the issuance date and are exercisable
for a period of five years from the issuance
date.





F-22
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements








On March 8, 2018, the Company filed the Certificate of
Designations, Preferences and Rights of the Series H-4 Convertible
Preferred Stock (the “Certificate of Designation”) with
the Secretary of State of the State of Delaware, establishing and
designating the rights, powers and preferences of the Series H-4
Convertible Preferred Stock (the “Series H-4 Stock”).
The Company designated up to 30,000 shares of Series H-4 Stock and
each share has a stated value of $235.50 (the “Stated
Value”). Each share of Series H-4 Stock is convertible at any
time at the option of the holder thereof, into a number of shares
of Common Stock determined by dividing the Stated Value by the
initial conversion price of $14.15 per share, subject to a 9.99%
blocker provision. The Series H-4 Stock has the same dividend
rights as the Common Stock, and no voting rights except as provided
for in the Certificate of Designation or as otherwise required by
law. In the event of any liquidation or dissolution of the Company,
the Series H-4 Stock ranks senior to the Common Stock in the
distribution of assets, to the extent legally available for
distribution.





On November 15, 2018, the initial conversion price of Series H-4
Shares was adjusted upon obtaining stockholder approval in
accordance with Nasdaq rules and regulations which resulted in the
25,475 Series H-4 Shares being convertible into 10,535,880 shares
of common stock of the Company.





On December 17, 2018, an investor converted 224 shares of Series
H-4 into 14,653 shares of Common Stock.





Stock Based Compensation





Amended and Restated 2014 Equity Incentive Plan





The Company has one equity incentive plan, the 2014 Equity
Incentive Plan (the “Plan”), with 706,629 shares
of common stock reserved for issuance. As of December 31, 2018,
there were 159,213 shares available for grant under the
Company’s equity plan. The Plan was amended in 2018 to
increase the number of shares of common stock available for
issuance thereunder by 285,417, which amendment was approved by the
Company’s stockholders on November 15, 2018.





Service Based Restricted Stock Units





On February 28, 2018, the Company issued 244,643 restricted stock
units (“RSUs”) to two members of management. The RSUs
revised vesting date was extended to May 17, 2019 (see Note 11).
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 is being amortized over the vesting
period.





At December 31, 2018, unamortized stock compensation for the RSUs
was $289,842, which will be recognized over the next three
months.





Service Based Common Stock





On January 30, 2018 the Company issued 213,707 and 35,558 and
shares of common stock to Alpha Capital Anstalt and Palladium
Capital Advisors, respectively, in connection with the Merger. For
the Alpha Capital Anstalt issuance, the Company recorded 90% of the
issuance or 192,336 common shares as cost of capital raise and 10%
of the issuance or 21,371 common shares as advisory services. The
merger costs in the amount of $1,510,722 was recorded as a
reduction to additional paid in capital and the advisory service
costs in the amount of $167,858 was recorded as general and
administrative expense in the consolidated statement of operations.
For the Palladium Capital Advisors issuance, the Company recorded
$279,327 as general and administrative expense in the consolidated
statement of operations.





F-23
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Service Based Warrants





On March 8, 2018, in connection with the financing discussed above,
the Company issued 1,371 Series H-4 Shares and 22,850 common stock
warrants to a service provider. The Company valued these warrants
using the Black-Scholes option pricing model with the following
inputs: exercise price of $15.60; fair market value of underlying
stock of $13.20; expected term of 5 years; risk free rate of 2.63%;
volatility of 120.63%; and dividend yield of 0%. For the year ended
December 31, 2018, the Company recorded the fair market value of
the Series H-4 Shares and warrants as an increase and decrease to
additional paid in capital in the amount of $568,648 as these
services were provided in connection with the sale of the Series
H-4 shares.





Consulting Agreement





The Company entered into a two-month consulting agreement with a
vendor to receive public relations services beginning on December
24, 2018. The compensation terms are $20,000 cash payment and
33,333 shares of common stock. In accordance with ASC 505, the
shares were valued as of December 31, 2018, the reporting date. The
Company recorded $6,982 as sales and marketing expense in the
consolidated statement of operations for the year ended December
31, 2018. The Company paid the cash upon entering the agreement and
will issue the shares of common stock upon completion of the
contract term. The contracts total value is accrued ratably over
the two-month service period from December 24, 2018 through
February 24, 2019, and the Company will issue the shares upon
completion of the services.





Modification Expense





The Company modified 60,516 options that were subject to expiration
within 90 days following the sale of Suisun City Operations for
WPCS employees. The Company extended the expiration date in
accordance with the options’ original terms. The Company
recorded a modification expense related to the extension of the
expiration date and recorded $74,109 as a selling, general and
administrative expense for the year ended December 31, 2018 as part
of discontinued operations in the consolidated statement of
operations. The expense was based on the change in the fair value
before and after the modification using the Black-Scholes
option-pricing model on the date of the modification using the
following assumptions: pre-modification
(a) exercise prices of $28.56 to
$633.60, (b) fair value of common stock $2.40, (c) expected
volatility of 231%, (d) dividend yield of 0%, (e) risk-free
interest rate of 2.45%, (f) expected life of 0.25 years; and
post-modification
(a) exercise prices of $285.56 to
$633.60, (b) fair value of common stock $2.40, (c) expected
volatility of 152%, (d) dividend yield of 0%, (e) risk-free
interest rate of 2.62% to 2.69%, (f) expected life of 6.02 years to
8.35 years.





Employee and Non-employee Stock Options





The
following table summarizes stock option activity during the years
ended December 31, 2018 and 2017:





Shares
Underlying Options
Weighted Average
Exercise Price
Weighted Average
Remaining Contractual Life (years)
Aggregate
Intrinsic ValueOutstanding at
January 1, 2017
-
$-
-
-Granted
-
-
-
-Outstanding at
December 31, 2017
-
-
-
-Acquired in
Merger
133,711
36.42
3.88
-Granted
214,239
5.58
9.72
-Forfeited
(45,178)
11.64
-
-Outstanding at
December 31, 2018
302,772
$18.3
7.20
-





F-24
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





At
December 31, 2018, unamortized stock compensation for stock options
was approximately $249,219, with a weighted-average recognition
period of 2.08 years.





At December 31, 2018, outstanding options to purchase 266,394
shares of common stock were exercisable with a weighted-average
exercise price per share of $19.08.





The
following table sets forth total non-cash stock-based compensation
for common stock, RSUs, options and warrants issued to employees
and non-employees by operating statement classification for the
years ended December 31, 2018 and 2017:





Year
ended December 31,2018
2017Research
and development
$12,636
$-Selling, general
and administrative
3,780,919
708,998Stock-based
compensation from discontinued operations
74,109
-Total
$3,867,664
$708,998





Stock option pricing model








The
fair value of the stock options granted during the year ended
December 31, 2018, was estimated at the date of grant using the
Black-Scholes options pricing model with the following
assumptions:





Fair
value of common stock
$1.62-$13.26Expected
volatility
118.10%
- 151.79%Dividend
yield
0%Risk-free
interest
2.79% -
3.00%Expected
life (years)
5.13 -
5.50





No
options were granted during the year ended December 31,
2017.





Warrants





Merger Warrants





The warrants to purchase common stock (the “Merger
Warrants”) issued in connection with the convertible debt in
2017 are fully vested and exercisable for five years through
November 14, 2021. The warrants were valued using the Black-Scholes
option-pricing model with the following inputs: exercise price of
$59.04; fair market value of underlying stock of $16.68 and $17.40;
expected term of 5 years; risk free rate of 1.61%, 1.70%, and
2.01%; volatility of 161%, 147%, and 150%; and a dividend yield of
0.00%. The Company accounted for these warrants as debt discount.
The Company recorded amortization of $176,000 and $1,190,663 for
the years ended December 31, 2018 and 2017,
respectively.





Warrant Exchange





On April 19, 2018, the Company entered into separate Warrant
Exchange Agreements (the “Exchange Agreements”) with
the holders (the “Merger Warrant Holders”) of existing
warrants issued in the Merger (the “Merger Warrants”)
to purchase shares of common stock, pursuant to which, on the
closing date, the Merger Warrant Holders exchanged each Merger
Warrant for 1/18 of a share of common stock and 1/12 of a
warrant to purchase a share of common stock (collectively, the
“Series I Warrants”). The Series I Warrants have an
exercise price of $13.80 per share. In connection with the Exchange
Agreements, the Company issued an aggregate of (i) 48,786 new
shares of common stock and (ii) Series I Warrants to purchase an
aggregate of 73,178 shares of common stock. The Company valued (a)
the stock and warrants issued in the amount of $972,368, (b) the
warrants retired in the amount of $655,507, and (c) recorded the
difference as deemed dividend in the amount of $316,861. The
warrants were valued using the Black-Scholes option-pricing model
on the date of the exchange using the following assumptions: (a)
fair value of common stock $10.32, (b) expected volatility of 103%
and 110%, (c) dividend yield of 0%, (d) risk-free interest rate of
2.76% and 2.94%, (e) expected life of 3 years and 4.13
years.





F-25
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Exercise of Series H-4 Warrants and Issuance of Series J
Warrants





On August 31, 2018, the Company offered (the “Repricing Offer
Letter”) to the holders (the “Holders”) of the
Company’s outstanding Series H-4 Warrants to purchase common
stock of the Company issued on March 8, 2018 (the “Series H-4
Warrants”) the opportunity to exercise such Series H-4
Warrants for cash at a reduced exercise price of $3.60 per share
(the “Reduced Exercise Price”) provided such Series H-4
Warrants were exercised for cash on or before September 4, 2018
(the “End Date”). In addition, the Company issued a
“reload” warrant (the “Series J Warrants”)
to each Holder who exercised their Series H-4 Warrants prior to the
End Date, covering one share for each Series H-4 Warrant exercised
during that period. The terms of the Series J Warrants are
substantially identical to the terms of the Series H-4 Warrants
except that (i) the exercise price is equal to $6.00, (ii) the
Series J Warrants may be exercised at all times beginning on the
6-month anniversary of the issuance date on a cash basis and also
on a cashless basis, (iii) the Series J Warrants do not contain any
provisions for anti-dilution adjustment and (iv) the Company has
the right to require the Holders to exercise all or any portion of
the Series J Warrants still unexercised for a cash exercise if the
volume-weighted average price (as defined in the Series J Warrant)
for the Company’s common stock equals or exceeds $9.00 for
not less than ten consecutive trading days.





On September 4, 2018, the Company received executed Repricing Offer
Letters from a majority of the Holders, which resulted in the
issuance of 260,116 shares of the Company’s common stock and
Series J Warrants to purchase up to 260,116 shares of the
Company’s common stock. The Company received gross proceeds of $936,423
from the exercise of the Series H-4 Warrants pursuant to the terms
of the Repricing Offer Letter.





On September 5, 2018, the Company received a request from Nasdaq to
amend its Series H-4 Warrants to provide that the Series H-4
Warrants may not be exercised until the Company has obtained
stockholder approval of the issuance of Common Stock underlying the
Series H-4 Warrants pursuant to the applicable rules and
regulations of Nasdaq. In response to the request, on September 10,
2018, the Company entered into an amendment (the “Warrant
Amendment”) with the holders of the Series H-4 Stock to
provide for stockholder approval as described above prior to the
exercise of the Series H-4 Warrants. On November 15, 2018, the
Company obtained such stockholder approval.





The Company considers the warrant amendment for the Reduced
Exercise Price and issuance of the Series J Warrants to be of an
equity nature as the amendment and issuance allowed the warrant
holders to exercise warrants and receive a share of common stock
and warrant which, represents an equity for equity exchange.
Therefore, the change in the fair value before and after the
modification and the fair value of the Series J warrants will be
treated as a deemed dividend in the amount of $1,019,040. The cash
received upon exercise in excess of par is accounted through
additional paid in capital.





The Company valued the deemed dividend as the sum of: (a) the
difference between the fair value of the modified award and the
fair value of the original award at the time of modification of
$129,476, and (b) the fair value of the Series J Warrants in the
amount of $889,564. The warrants were valued using the
Black-Scholes option-pricing model on the date of the modification
and issuance using the following assumptions: (a) fair value of
common stock $3.90, (b) expected volatility of 144.3%, (c) dividend
yield of 0%, (d) risk-free interest rate of 2.77% and 2.78%, (e)
expected life of 4.51 years and 5 years.





At the March 8, 2018 closing, the Company issued Series H-4
Warrants that entitled the holders to purchase, in aggregate, up to
447,383 shares of its common stock. As referenced above, on
September 4, 2018, the Company received executed Repricing Offer
Letters from a majority of the investors resulting in the exercise
of Series H-4 Warrants to purchase 260,116 shares of common stock.
The Series H-4 Warrants were initially exercisable at an exercise
price equal to $15.60 per share. On November 15, 2018, the Company
obtained shareholder approval to reduce the exercise price from
$15.60 per share to $3.60 per share for 187,267 Series H-4
Warrants. The Company considers the modification to the warrant
exercise price to be of an equity nature. Therefore, the change in
the fair value before and after the modification is accounted for
as a deemed dividend in the amount of $63,760.





F-26
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





Issuance of Pre-Funded Series K Warrants





On November 14, 2018, the Company entered into a securities
purchase agreement with an investor, pursuant to which the Company
agreed to issue and sell, in a registered direct offering, a
Pre-Funded Series K Warrant (the “Series K Warrant) to
purchase 277,778 shares of common stock, in lieu of shares of
common stock to the extent that the purchase of common stock would
cause the beneficial ownership of the purchaser to exceed 9.99% of
the Company’s common stock. The Pre-Funded Series K Warrants
were sold at an offering price of $3.54 per share for gross
proceeds of $983,329, are immediately exercisable for $0.06 per
share of common stock and do not have an expiration
date.





A
summary of the Company’s warrants to purchase common stock is
as follows:





Number of Warrants
Weighted Average
Exercise Price
Weighted Average
Remaining Contractual Life (years)January 1,
2017
-
$-
-Granted, Merger
Warrants
146,358
59.04
4.50Outstanding,
December 31, 2017
146,358
59.04
4.50Acquired, H-1
warrants
50,744
29.04
1.55Acquired, H-3
warrants
14,001
33.12
3.25Granted, H-4
warrants
447,383
3.60
4.18Granted, I
warrants
73,178
13.80
2.30Granted, Reload
warrants
260,116
6.00
2.60Granted, K
warrants
277,778
0.06
*Exercised, H-4
warrants
(260,116)
3.60
-Retired, Merger
Warrants
(146,358)
59.04
-Outstanding,
December 31, 2018
863,084
$6.00
2.51





* The
Series K warrants do not have an expiration date.





The
warrants expire through the years 2020-2024, except for the Series
K Warrant which has no expiration date.





10.
 Related Parties





On
July 11, 2018, the Company entered into a consulting agreement (the
“Consulting Agreement”) with Ascentaur, LLC
(“Ascentaur”). Sebastian Giordano is the Chief
Executive Officer of Ascentaur. Mr. Giordano has served on the
board of directors of the Company since February 2013 and served as
the Company’s Interim Chief Executive Officer from August
2013 through April 2016 and as the Company’s Chief Executive
Officer from April 2016 through January 2018.





Pursuant
to the terms of the Consulting Agreement, Ascentaur has agreed to
provide advisory services with respect to the strategic development
and growth of the Company, including advising the Company on market
strategy and overall Company strategy, advising the Company on the
sale of the Company’s Suisun City Operations, providing
assistance to the Company in identifying and recruiting prospective
employees, customers, business partners, investors and advisors
that offer desirable administrative, financing, investment,
technical, marketing and/or strategic expertise, and performing
such other services pertaining to the Company’s business as
the Company and Ascentaur may from time to time mutually agree. The
term of the Consulting Agreement commenced on July 11, 2018 and
will continue until April 9, 2019 or until terminated in accordance
with the terms of the Consulting Agreement. During the year ended
December 31, 2018, the Company recorded $147,754 as general and
administrative related to this consulting agreement. As of December
31, 2018, approximately $51,000 was paid in cash and approximately
$97,000 is recorded as accounts payable. Of this amount, Ascentaur
received $90,000 in relation to the sale of Suisun City Operations
(see Note 3).





During
2018 and 2017, the Company has entered into various financial
transactions with Alpha Capital Anstalt through the issuance of
$1,350,000 convertible notes in 2017, issued 213,707 shares of
common stock in connection with the merger on January 30, 2018 for
merger related services and cost of providing capital, issued
11,093 Series A Preferred Stock for $2,612,500 in the March 8, 2018
PIPE transaction, and was issued 277,778 Series K prefunded common
stock warrants on November 14, 2018 for proceeds of approximately
$983,000.





Palladium
Capital Advisors has provided investment banking services in
connection with the merger on January 30, 2018 and received 35,558
shares of common stock for merger related services, received 1,371
Series H-4 preferred shares and warrants in the March 8, 2018 PIPE
transaction for advisory services.





F-27
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





11.
 Subsequent Events





The Company has analyzed its operations subsequent to December 31,
2018 and noted the following subsequent events:





On January 10, 2019, the Company entered into a consulting
agreement for investor relation services in which the Company
agreed to issue 75,000 shares of the Company’s common stock.
On January 28, 2019, the Board of Directors issued 75,000 shares of
common stock in accordance with this agreement.





On January 25, 2019, the Company entered into a consulting
agreement for investor relation services in which the Company
agreed to issue 8,333 shares of the Company’s common stock.
On January 28, 2019, the Board of Directors issued 8,333 shares of
common stock in accordance with this agreement.





On January 30, 2019, the Company issued 49,536 options each to the
CEO and Chief Business Development Officer, 99,072 options in the
aggregate, which vest over 720 days with one-eighth (1/8) shares
vesting every 90 days, to purchase shares of the Company’s
common stock at $2.3124, the closing price of the Company’s
common stock on January 30, 2019. The options were issued in
accordance with the CEO’s and Chief Business Officer’s
employment agreements.





On January 30, 2019, the Company received $4,010 in cash proceeds
upon the exercise of 66,667 Series K Warrants and issued 66,667
shares of common stock.





On February 23, 2019, the board of directors approved the issuance
of 33,333 shares of common stock in accordance with the December
24, 2018 consulting agreement (see Note 9, “Consulting
Agreement”).





On March 8, 2019, the Company filed a certificate of amendment to
its amended and restated certificate of incorporation with the
Secretary of State of the State of Delaware to effect a one-for-six
reverse stock split of the Company’s outstanding shares of
common stock. As a result of the reverse stock split, every six
shares of the Company’s outstanding pre-reverse split common
stock were combined and reclassified into one share of common
stock. Unless otherwise noted, all share and per share data
included in these financial statements retroactively reflect the
1-for-6 reverse stock split.





On March 12, 2019, the Company received $12,667 in cash proceeds
upon the exercise of 211,111 Series K Warrants and issued 211,111
shares of common stock.





On March 26, 2019, the Board of Directors, with the consent of the
Chief Executive Officer (“CEO”)and Chief Business
Officer, agreed to amend the vesting period for the RSUs issued on
February 28, 2018 to vest in full on May 17, 2019 (see Note
9).





On March 26, 2019, the Company entered into a Securities Purchase
Agreement with certain existing investors, pursuant to which the
Company agreed to issue and sell, 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 gross proceeds of approximately $2.0
million before the deduction of offering expenses.





Subsequent to the year ended December 31, 2018, the Company issued
1,412,420 shares of common stock upon the conversion of 21,591
Series H-4 Shares.





F-28
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements





12.
 Restatements of Previously Issued Condensed Consolidated Interim
Financial Statements (Unaudited)





The Company, while undergoing the audit of its consolidated
financial statements for the year ended December 31, 2018,
commenced an evaluation of its accounting in connection with the
Merger for i) lock-up agreements entered into with the holders of
the Notes (see Note 6), and ii) shares of common stock issued to
Alpha Capital Anstalt and Palladium Capital Advisors (see Note 9,
Service Based Common Stock). These agreements, which management
originally deemed to be primarily equity in nature and would not be
recognized as compensatory, were recorded as a debit and credit to
additional paid in capital. On March 29, 2019, under the authority
of the board of directors, the Company determined that these
agreements should have been recorded as compensatory in nature
which gives rise to an adjustment in the amount of $1,119,294 for
the periods ended March 31, 2018, June 30, 2018, and September 30,
2018. Accordingly, the Company will restate those
condensed consolidated interim financial statements and
include the required disclosures.





The
following tables sets forth the effects of the adjustments on
affected items within the Company’s previously reported
Condensed Consolidated Interim Balance Sheets at March 31, 2018,
June 30, 2018, and September 30, 2018, had the adjustments
been made in the corresponding quarters:





March 31,
2018As
reported
Adjustment
As
restatedAdditional paid in
capital
$25,080,301
$1,119,294
$26,199,595Accumulated
deficit
$(12,966,338)
$(1,119,294)
$(14,085,632)





June 30,
2018As
reported
Adjustment
As
restatedAdditional paid in
capital
$26,464,626
$1,119,294
$27,583,920Accumulated
deficit
$(17,275,449)
$(1,119,294)
$(18,394,743)





September 30,
2018As
reported
Adjustment
As
restatedAdditional paid in
capital
$29,207,669
$1,119,294
$30,326,963Accumulated
deficit
$(21,623,262)
$(1,119,294)
$(22,742,556)





The
following tables sets forth the effects of the adjustments on
affected items within the Company’s previously reported
Condensed Consolidated Interim Statement of Operations for the
three months ended March 31, 2018, had the adjustments been made in
the appropriate quarter:





Three Months Ended March 31, 2018As reported
Adjustment
As restatedSelling,
general and administrative expense
$3,067,608
$447,150
$3,514,758Total
operating expenses
$3,203,685
$447,150
$3,650,835Operating
loss
$(2,951,188)
$(447,150)
$(3,398,338)Interest
income (expense), net
$(410,253)
$(672,144)
$(1,082,397)Net
loss
$(3,361,411)
$(1,119,294)
$(4,480,735)Net
loss attributable to common stockholders
$-
$-
$-Net
loss per common shares, basic and diluted
$(3.33)
$(1.11)
$(4.44)





F-29
  DropCar, Inc., and Subsidiaries
 Notes
to Consolidated Financial Statements


The
following tables sets forth the effects of the adjustments on
affected items within the Company’s previously reported
Condensed Consolidated Interim Statements of Operations for the six
months ended June 30, 2018 and nine months ended September 30,
2018, had the adjustments been made in the appropriate
quarter:





Six Months Ended
June 30, 2018As
reported
Adjustment
As
restatedSelling, general
and administrative expense
$7,101,731
$447,150
$7,548,881Total operating
expenses
$7,406,418
$447,150
$7,853,568Operating
loss
$(6,943,738)
$(447,150)
$(7,390,888)Interest income
(expense), net
$(409,953)
$(672,144)
$(1,082,097)Net
loss
$(7,353,691)
$(1,119,294)
$(8,472,985)Net loss
attributable to common stockholders
$(7,670,552)
$(1,119,294)
$(8,789,985)Net loss per common
shares, basic and diluted
$(6.57)
$(0.96)
$(7.53)





Nine Months Ended
September 30, 2018As
reported
Adjustment
As
restatedSelling, general
and administrative expense
$10,426,604
$447,150
$10,873,754Total operating
expenses
$10,905,941
$447,150
$11,353,091Operating
loss
$(10,269,338)
$(447,150)
$(10,716,488)Interest income
(expense), net
$(413,076)
$(672,144)
$(1,085,220)Net
loss
$(10,682,464)
$(1,119,294)
$(11,801,758)Net loss
attributable to common stockholders
$(12,018,365)
$(1,119,294)
$(13,137,659)Net loss per common
shares, basic and diluted
$(9.52)
$(0.89)
$(10.41)





F-30