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Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
RISK FACTORS
Investing in our securities involves
a high degree of risk. You should carefully review and consider the following risk factors and in the sections entitled “Risk
Factors” contained in our most recent annual report on Form 10-K, which has been filed with the SEC and is incorporated by
reference in this prospectus, as well as any updates thereto contained in subsequent filings with the SEC, and all other information
contained in this prospectus and incorporated by reference into the prospectus before purchasing our securities. The risks and
uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties of which we are unaware,
or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our
business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price
of our common stock could decline, and you may lose some or all of your investment.
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, 2017, we had an accumulated deficit of $9.6 million. Such losses are continuing to date. We do not know
if our business operations will become profitable or if we will continue to incur net losses in the future. Our management expects
to incur significant expenses in the future in connection with the development and expansion of our business, which will make it
difficult for us to achieve and maintain future profitability. We may incur significant losses in the future for a number of reasons,
including the other risks described herein, and we may encounter unforeseen expenses, difficulties, complications, delays and other
unknown events. Accordingly, there can be no certainty regarding if or when we will achieve profitability, or if such profitability
will be sustained.
Historical losses and negative cash flows from operations
raise doubt about our ability to continue as a going concern.
Historically, we have suffered losses and have not generated
positive cash flows from operations. This raises substantial doubt about our ability to continue as a going concern. The audit
report of EisnerAmper LLP for the year ended December 31, 2017 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 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 metropolitan area. 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.
Our recent growth rate may not be sustainable, and future
growth may place significant demands on our management and infrastructure.
We have experienced strong growth in our business. This growth
has placed and may continue to place significant demands on our management and our operational and financial infrastructure, and
we may not be able to sustain these rates of growth in future 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. Continued growth could also strain
our ability to maintain reliable service levels for existing and new clients, which could adversely affect our reputation and business
in the future. For example, in the past, we have experienced, and may in the future experience, situations where the demand for
our services exceeded our estimates and our employee base was, and may in the future be, insufficient to support this higher demand.
Our client experience and overall reputation could be harmed if we are unable to grow our employee base to support higher demand.
Competition for staffing, shortages of qualified drivers
and union activity may increase our labor costs and reduce profitability.
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.
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 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 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, traditional valet and car storage providers, car sharing services and traditional
rental car companies that have recently begun offering more innovative services. Many of our competitors have greater name recognition
among our target clients and greater financial, technical and/or marketing resources than we have. Our competitors have resources
that may enable them to respond more quickly to new or emerging technologies and changes in client preferences. These competitors
could introduce new solutions with competitive prices or undertake more aggressive marketing campaigns than us. Failure to compete
effectively could have a material adverse impact on our results of operations.
Our long term sustainability relies on our ability to
anticipate or keep pace with changes in the marketplace and the direction of technological innovation and customer demands.
The automotive industry, especially the vehicle support segment
of the automotive industry in which we operate, is subject to intense and increasing competition and rapidly evolving technologies.
We believe that the automotive industry will experience significant and continued change in the coming years. In addition to traditional
competitors, we must also be responsive to the entrance of non-traditional participants in the automotive industry. These non-traditional
participants, such as ride-sharing companies and autonomous vehicles, may seek to disrupt the historic business model of the industry
through the introduction of new technologies, new products or services, new business models or new methods of travel. To compete
successfully, we will need to demonstrate the advantages of our services over alternative solutions and services, as well as newer
technologies. Failure to adapt to innovations in technology and service offerings in the automotive space could have a material
adverse impact on our ability to sustain our business and remain competitive.
Our growth depends on our ability to gain sustained access
to a sufficient number of parking locations on commercially reasonable terms that offer convenient access in reaching our clients.
We currently operate in New York City and expect that our future
growth will 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.
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 change in our insurance costs due to changes in frequency
of claims, the severity of claims, the costs of premiums or for any other reason could have a material adverse effect on our financial
position, results of operations, or cash flows.
Our success depends on the continued reliability of the
internet infrastructure.
Our services are designed primarily to work over the internet,
and the success of our platform is largely dependent on the development and maintenance of the internet infrastructure, along with
our clients’ access to low-cost, high-speed internet. The future delivery of our services will depend on third-party internet
service providers to expand high-speed internet access, to maintain a reliable network with the necessary speed, data capacity
and security, and to develop complementary products and services for providing reliable and timely internet access. Any outages
or delays resulting from damage to the internet infrastructure, including problems caused by viruses, malware and similar programs,
could reduce clients’ access to the internet and our services and could adversely impact our business.
System interruptions that impair access to our website
or mobile application could substantially harm our business and operating results.
The satisfactory performance, reliability and availability of
our website and mobile application, which enable clients to access our services, are critical to our business. Any systems interruption
that prevents clients and visitors from accessing our website and mobile app could result in negative publicity, damage to our
reputation and brand and could cause our business and operating results to suffer. We may experience system interruptions for a
variety of reasons, including network failures, power outages, cyber-attacks, problems caused by viruses and similar programs,
software errors or an overwhelming number of clients or visitors trying to reach our website during periods of strong demand. Because
we are dependent in part on third parties for the implementation and maintenance of certain aspects of our systems and because
some of the causes of system interruptions may be outside of our control, we may not be able to remedy such interruptions in a
timely manner, or at all. Any significant disruption to our website, mobile application or internal computer systems could result
in a loss of clients and adversely affect our business and results of operations.
If we are unable to protect confidential client information,
our reputation may be harmed and we may be exposed to liability and a loss of clients.
Our system stores, processes and transmits confidential client
information, including location information and other sensitive data. We rely on encryption, authentication and other technologies
to keep this information secure. We may not have adequately assessed the internal and external risks posed to the security of our
systems and may not have implemented adequate preventative safeguards. In the event that the security of our system is compromised
in the future, we may not take adequate reactionary measures. Any compromise of information security could expose our confidential
client information, damaging our reputation and exposing 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.
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 has 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.
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.
To date, we have relied on outside consultants and other service
providers for the majority of our accounting and financial support. We plan to continue to expand existing personnel, including
adding additional members to our management team. 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.
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 costly. 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 first annual
assessment of our internal controls over financial reporting pursuant to Section as of December 31, 2018.
To comply with the requirements of Sections 302 and 404, we
may need to 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 our independent registered public accounting firm is unable to
express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in
the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. In
addition, we could become subject to investigations by The Nasdaq Capital Market, SEC or other regulatory authorities, which could
require additional financial and management resources.
A material weakness in our internal controls could have
a material adverse effect on us.
Effective internal controls are necessary for us to provide
reasonable assurance with respect to our financial reports and to adequately mitigate risk of fraud. If we cannot provide reasonable
assurance with respect to our financial reports and adequately mitigate risk of fraud, our reputation and operating results could
be harmed. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations,
including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal
controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In
addition, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject
to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected on a timely basis. A material weakness in our internal control
over financial reporting could adversely impact our ability to provide timely and accurate financial information. If we are unable
to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be
subject to, among other things, regulatory or enforcement actions by the SEC, any one of which could adversely affect our business
prospects.
Our ability to use net operating loss carryforwards may
be limited.
At December 31, 2017, we had approximately $7.9 million of operating
loss carryforwards for federal and $7.9 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 will be
revalued at the newly enacted U.S. corporate rate, and the impact, if any, will be recognized in our tax expense in the year of
enactment. We continue to examine the impact this tax reform legislation may have on our business. The overall impact of the TCJA
is uncertain and our business and financial condition could be adversely affected.
Risks Related to Our WPCS Business
Our WPCS business may be unable to successfully implement
its Organic Growth Initiatives, including into new geographic markets and market segments, and manage our growth.
We define “Organic Growth Initiatives” as our WPCS
business’ efforts to increase revenues by: (i) expanding in existing markets, by offering, among other things, new products
and services, building a direct sales force, and forming strategic alliances; (ii) opening new markets without any existing operations,
otherwise known as “greenfielding”; and (iii) entering into new markets via acquisition and then subsequently growing
such businesses through various methods other than further acquisition.
As such, WPCS’ long-term growth strategy depends, in part,
in addition to possible strategic acquisitions, on the Organic Growth Initiatives, including the expansion of its operations into
new geographic markets and market segments. WPCS’ ability to effectively implement Organic Growth Initiatives depends, among
other things, on its ability to identify and successfully enter and market its services in new geographic markets and market segments,
its ability to recruit and retain qualified personnel, its ability to coordinate its efforts across various geographic markets
and market segments, its ability to maintain and grow relationships with its existing customers and expand its customer base, its
ability to offer new products and services, its ability to form strategic alliances and partnerships, its ability to secure key
vendor and/or distributor relationships, and the availability of sufficient capital. In connection with expanding its operations
into new geographic markets, WPCS may be unable to replicate the Suisun City Operations, in other markets, based solely upon greenfielding.
While continuing to weigh all available strategic options, WPCS
decided, based upon the prior experience of key members of its operational management team in the Texas market, to launch a greenfielding
effort in Texas. As such, WPCS began operations in San Antonio, Texas in January 2016 and then commenced operations in Dallas,
Texas in April 2016. During the period from May 1, 2016 through January 31, 2017, the Texas operations generated approximately
$881,000 in revenue, while incurring approximately $1,799,000 in cost of revenue and selling, general and administrative expenses
in starting these two offices. During November 2016, WPCS instituted some changes and cost reductions in the Texas operations staffing
and related expenses to better align its operational costs with short-term projected revenue expectations. WPCS initially anticipated
expending approximately $750,000 to develop these markets and the Texas operations took longer than anticipated to begin generating
the expected level of revenue to warrant continued operation. Therefore, in late December 2016, WPCS decided to close the Texas
operations and at the end of February 2017 the San Antonio and Dallas offices were closed. If WPCS is unable to successfully implement
its Organic Growth Initiatives its long-term growth and ability to achieve profitability may be adversely impacted.
Acquisitions involve risks that could result in adverse
changes to operating results, cash flows and liquidity.
Our WPCS business has historically made and, in the future,
may continue to make, strategic acquisitions. However, WPCS may not be able to identify suitable acquisition opportunities, or
we may be unable to obtain the consent of our stockholders and therefore, may not be able to complete such acquisitions. We may
decide to pursue acquisitions in our WPCS business that investors may not agree with. In connection with most of WPCS’ historical
acquisitions, WPCS also agreed to substantial earn-out arrangements. To the extent it defers the payment of the purchase price
for any acquisition through a cash earn-out arrangement, it will reduce cash flows in subsequent periods. In addition, acquisitions
may expose WPCS to operational challenges and risks, including:
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the ability to profitably manage acquired businesses or successfully integrate the operations of acquired businesses, as well
as the acquired business’ financial reporting and accounting control systems into its existing platforms;
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increased indebtedness and contingent purchase price obligations associated with an acquisition;
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the ability to fund cash flow shortages that may occur if anticipated revenue is not realized or is delayed, whether by general
economic or market conditions, or unforeseen internal difficulties;
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the availability of funding sufficient to meet increased capital needs;
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diversion of management’s time and attention from existing operations; and
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the ability to retain or hire qualified personnel required for expanded operations.
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Completing acquisitions may require significant management time
and financial resources because WPCS may need to assimilate widely dispersed operations with distinct corporate cultures. In addition,
acquired companies may have liabilities that it failed, or were unable, to discover in the course of performing due diligence investigations.
The indemnification granted by sellers of acquired companies may not be sufficient in amount, scope or duration to fully offset
the possible liabilities associated with businesses or properties WPCS assumes upon consummation of an acquisition. WPCS may learn
additional information about its acquired businesses that could have a material adverse effect on our WPCS business, such as unknown
or contingent liabilities and liabilities related to compliance with applicable laws. Any such liabilities, individually or in
the aggregate, could have a material adverse effect on our WPCS business. Failure to successfully manage the operational challenges
and risks associated with, or resulting from, acquisitions could adversely affect WPCS’ results of operations, cash flows
and liquidity.
If WPCS fails to accurately estimate costs associated
with its fixed-price contracts using percentage-of-completion, its actual results could vary from our assumptions, which may reduce
its profitability or impair its financial performance.
A substantial portion of WPCS’ revenues is derived from
fixed price contracts. Under these contracts, WPCS sets the price of its services on an aggregate basis and assumes the risk that
the costs associated with its performance may be greater than anticipated. WPCS recognizes revenue and profit on these contracts
as the work on these projects progresses on a percentage-of-completion basis. Under the percentage-of-completion method, contracts
in process are valued at cost plus accrued profits less earned revenues and progress payments on uncompleted contracts.
The percentage-of-completion method therefore relies on estimates
of total expected contract costs. These costs may be affected by a variety of factors, such as lower than anticipated productivity,
conditions at work sites differing materially from what was anticipated at the time we bid on the contract and higher costs of
materials and labor. Contract revenue and total cost estimates are reviewed and revised monthly as the work progresses, such that
adjustments to profit resulting from revisions are made cumulative to the date of the revision. Adjustments are reflected in contract
revenue for the fiscal period affected by these revised estimates. If estimates of costs to complete long-term contracts indicate
a loss, we immediately recognize the full amount of the estimated loss. Such adjustments and accrued losses could result in reduced
profitability and liquidity.
Failure to properly manage projects could result in unanticipated
costs or claims.
WPCS project engagements may involve large scale, highly complex
projects. The quality of WPCS’ performance on such projects depends in large part upon its ability to manage the relationship
with its customers, and to effectively manage the project and deploy appropriate resources, including third-party contractors and
its own personnel, in a timely manner. Any defects or errors or failure to meet customers’ expectations could result in claims
for substantial damages against WPCS. In addition, in certain instances, WPCS guarantees customers that it will complete a project
by a scheduled date or that the network will achieve certain performance standards. If the project or network experiences a performance
problem, WPCS may not be able to recover the additional costs it would incur, which could exceed revenues realized from a project.
WPCS may be unable to obtain sufficient bonding capacity
to undertake certain projects.
Some of WPCS’ contracts require performance and payment
bonds. If WPCS is not able to renew or obtain a sufficient level of bonding capacity in the future, it may be precluded from being
able to bid for certain contracts or successfully contract with certain customers. In addition, even if it were able to successfully
renew or obtain performance or payment bonds, WPCS may be required to post letters of credit in connection with the bonds, which
could negatively affect its cash flow.
Furthermore, under standard terms in the surety market, sureties
issue or continue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of additional
collateral as a condition to issuing or renewing any bonds. If WPCS were to experience an interruption or reduction in the availability
of bonding capacity as a result of these or any other reasons, WPCS may be unable to compete for or work on certain projects that
would require bonding.
The ability of Suisun City Operations to obtain performance
and payment bonds from traditional surety markets within the insurance industry has historically been adversely impacted by operating
losses and negative working capital at the consolidated company level.
An economic downturn in any of the industries WPCS serves
could lead to less demand for its services.
As a significant majority of WPCS’ revenue is derived
from a few industries, a downturn in any of those industries could adversely affect its results of operations. Specifically, an
economic downturn in any industry it serves could result in the delay, reduction or cancellation of projects by customers as well
as cause customers to outsource less work, resulting in decreased demand for WPCS services and potentially impacting its operations
and its ability to grow. A number of other factors, including financing conditions and potential bankruptcies in the industries
served by WPCS or a prolonged economic downturn or recession, could adversely affect its customers and their ability or willingness
to fund capital expenditures in the future. Consolidation, competition, capital constraints or negative economic conditions in
the private sector, public services, healthcare energy industries and the K-12 education market may also result in reduced spending
by, or the loss of, one or more of WPCS’ customers.
WPCS has a significant amount of accounts receivable and
costs and estimated earnings in excess of billings assets.
WPCS performs services under contracts prior to billing customers
for that work, thereby, in effect, extending credit to its customers. At October 31, 2017, WPCS had net accounts receivable of
approximately $2.9 million and costs and estimated earnings in excess of billings of approximately $315,000. Periodically, WPCS
assesses the credit risk of its customers and continuously monitors the timeliness of payments. Adverse changes in the markets
served by WPCS, reducing WPCS’ cash flow and adversely impacting its liquidity and profitability. Additionally, it may also
result in WPCS incurring losses in excess of its current bad debt allowances.
The industry in which WPCS operates has relatively low
barriers to entry and increased competition could result in margin erosion, which could make profitability even more difficult
to sustain.
Other than the technical skills required in WPCS’ business,
the barriers to entry in its business are relatively low. WPCS does not have any intellectual property rights to protect its business
methods. Ultimately, the success of WPCS’ business depends on the quality of its services, its ability to deliver these services
efficiently and its relationships with its customers. Increased competition as a result of new entrants in our markets, may result
in reduced operating margins and loss of market share and brand recognition.
WPCS’ business depends upon its ability to keep
pace with the latest technological changes, and its failure to do so could make it less competitive.
The market for WPCS’ services is characterized by rapid
change and technological improvements. Failure to respond in a timely and cost-effective way to these technological developments
may have a material adverse impact on its business and operating results. WPCS derives, and expects it will continue to derive,
a substantial portion of its revenues from design-build services that are based upon current technologies that, it believes, are
capable of adapting to future technologies. As a result, its future success depends, in part, on its ability to develop and market
service offerings that respond in a timely manner to the technological advances of our customers, evolving industry standards and
changing customer preferences.
Amounts included in WPCS backlog may not result in actual
revenue or translate into profits.
As of February 28, 2018, WPCS had a backlog of unfilled orders
of approximately $12.7 million. This backlog amount is based on contract values and purchase orders and may not result in actual
receipt of revenue in the originally anticipated period or at all. In addition, contracts included in WPCS’ backlog may not
be profitable. WPCS has experienced variances in the realization of its backlog because of project delays or cancellations resulting
from external market factors and economic factors beyond its control and is likely to experience delays and/or cancellations in
the future. If the backlog fails to materialize, WPCS could experience a further reduction in revenue, profitability and liquidity.
The loss of one or more key members of the WPCS’
management team could adversely affect our business.
Currently, our WPCS business has only one operation —
its Suisun City Operations, which is based in California and managed by a key employee. As such, WPCS’ business and financial
performance depends on the continued service and performance of this employee, who has extensive experience and specialized expertise
in the installation and service of voice and data networks. WPCS does not have an employment agreement with this employee nor does
it carry “key man” life insurance. We cannot be assured that we can continue to retain the services of the employee
or that we can hire or train anyone to replace him, without having some effect on the operations, should his employment with us
terminate. Thus, the loss of the employee’s services, whether by resignation, retirement, disability or death, could have
a material adverse impact on WPCS’ business and operating results.
Employee strikes and other labor-related disruptions could
adversely affect WPCS’ operations.
WPCS’ Suisun City Operations is labor intensive. A significant
majority of the employees at the Suisun City Operations are unionized. The current union contract, which expired November 30, 2017,
was recently extended to November 30, 2019. Strikes or labor disputes with its unionized employees may adversely affect WPCS’
ability to conduct its business profitably. If WPCS is unable to reach agreement with any of its unionized work groups on future
negotiations regarding the terms of their collective bargaining agreements, or if additional segments of its workforce become unionized,
WPCS may be subject to work interruptions or stoppages. Any of these events could be disruptive to WPCS operations and could result
in negative publicity, loss of contracts and a decrease in revenues.
WPCS’ future plans and growth are dependent on maintaining
sufficient working capital.
WPCS’ future plans and growth depend on its ability to
increase revenues and to continue its business development efforts surrounding its contract award backlog. If WPCS continues to
incur losses and revenues do not generate from the backlog as expected, WPCS will be dependent upon us to fund expand its business.
If, in the future, the company’s plans or assumptions change or prove to be inaccurate, WPCS may be required to reduce operating
expenditures or investments in infrastructure.
Risks Related to Ownership of Our Common Stock
Our quarterly and annual operating results may fluctuate
in the future. As a result, we may fail to meet the expectations of research analysts or investors, which could cause our stock
price to decline.
Our financial condition and operating results may fluctuate
from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. As a
result, period-to-period comparisons of quarterly, and even annual, results of operations may not a good indication of our future
performance. A number of factors, many of which are beyond our control, are likely to cause these fluctuations to continue. Some
of these factors include:
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our ability to achieve or maintain profitability;
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our ability to manage our growth;
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market acceptance of our products;
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our ability to accurately report our financial results in a timely manner;
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our ability to obtain, protect and enforce our intellectual property rights;
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our ability to prevent the theft or misappropriation of our intellectual property, know-how or technologies;
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potential advantages that our competitors and potential competitors may have in securing funding or developing competing technologies
or products;
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our ability to obtain additional capital that may be necessary to expand our business; and
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our dependence on, and the need to attract and retain, key management and other personnel.
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Because our operating results may vary significantly from quarter
to quarter, our operating results may not meet the expectations of securities analysts and investors, and the market price of the
our common stock could decline significantly, which may expose us to risks of securities litigation, impair our ability to attract
and retain qualified individuals using equity incentives and make it more difficult to complete acquisitions using equity as consideration.
We will need to raise additional capital, which could
cause significant dilution to our stockholders or restrict our operations.
We will required to raise additional funds. Such additional
financing may not be available to us when we need it or may not be available on favorable terms. To the extent that we raise additional
capital by issuing equity securities, the terms of such an issuance may be on worse commercial terms than previous financings and
may cause more significant dilution to our stockholders’ and the terms of any new equity securities may have preferences
over our common stock. Any debt financing by us may involve covenants that restrict our operations. These restrictive covenants
may include limitations on additional borrowing and specific restrictions on the use of our assets, as well as prohibitions on
our ability to create liens, pay dividends, redeem our stock or make investments.
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 15, 2018, our officers and directors, together with holders of 5% or more of our common stock outstanding
and their respective affiliates, beneficially own approximately 60% 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:
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issuances of new equity securities pursuant to a future offering, including issuances of preferred stock;
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the success of competitive products, services or technologies;
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regulatory or legal developments in the United States and other countries;
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adverse actions taken by regulatory agencies with respect to our services we provide;
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developments or disputes concerning patent applications, issued patents or other proprietary rights;
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the recruitment or departure of key personnel;
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actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities
analysts;
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variations in our financial results or those of companies that are perceived to be similar to us;
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variations in the costs of the services we provide;
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market conditions in the market segments in which we operate;
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variations in quarterly and annual operating results;
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announcements of new products and/or services by us or its competitors;
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the gain or loss of significant customers;
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changes in analysts’ earnings estimates;
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short selling of shares of our common stock;
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changing the exchange or quotation system on which shares of our common stock are listed;
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trading volume of our common stock;
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sales of our common stock by us, our executive officers and directors or our stockholders
in the future;
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changes in accounting principles; and
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general economic and market conditions and overall fluctuations in the U.S. equity markets;
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In addition, broad market
and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance,
and factors beyond our control may cause our stock price to decline rapidly and unexpectedly.
We may be subject to securities litigation, which is expensive
and could divert management attention.
Companies that have experienced volatility in the market price
of their stock have frequently been the objects of securities class action litigation. We may be the target of this type of litigation
in the future. Class action and derivative lawsuits could result in substantial costs to 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:
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the authorized number of directors can be changed only by resolution of our board of directors;
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our Bylaws may be amended or repealed by our board of directors or by our stockholders;
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stockholders may not call special meetings of the stockholders or fill vacancies on our board of directors;
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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;
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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
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our stockholders must comply with advance notice provisions to bring business before or nominate directors for election at
a stockholder meeting.
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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.
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. 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 meet the continuing listing requirements of The
Nasdaq Capital Market. If that were to occur, 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. In the event of a delisting, we would take actions to restore our compliance with Nasdaq’s listing requirements,
but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize
the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum
bid price requirement again or prevent future non-compliance with Nasdaq’s listing requirements. 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.
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 its 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.
Reports published by securities or industry analysts,
including projections in those reports that exceed our actual results, could adversely affect our common stock price and trading
volume.
Securities research analysts may establish and publish their
own periodic projections for our business. These projections may vary widely from one another and may not accurately predict the
results we achieve. Our stock price may decline if our actual results do not match securities research analysts’ projections.
Similarly, if one or more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable
research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to
publish reports on us regularly, our stock price or trading volume could decline. While we expect securities research analyst coverage,
if no securities or industry analysts begin to cover us, the trading price for our stock and the trading volume could be adversely
affected.
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 15, 2018, (i) 7,810,334 shares of our common stock and
29,040 shares of our convertible preferred stock is issued and outstanding and (ii) 9,221,388 shares of our common stock is reserved
for future issuance as follows:
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2,527,272 shares for issuance upon exercise of stock options granted under the 2014 Equity Incentive Plan (of which 2,496,508
shares are issuable upon exercise of currently outstanding options and vesting of restricted stock units);
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2,739,225 shares for issuance upon conversion of the outstanding shares of our convertible preferred stock; and
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3,954,891 shares for issuance upon exercise of the outstanding warrants.
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Thus, approximately 83 million shares of our common stock and
4.9 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 shelf registration statements
on Form S-3 with the SEC pursuant to which the holders of our Series H-1, Series H-2 and Series H-3 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.
SELLING SECURITYHOLDERS
The shares of common stock being offered
by the selling securityholders are those issuable to the selling securityholders upon exercise of the warrants and the conversion
of Series H-4 Preferred Stock. For additional information regarding the issuance of the warrants and the preferred stock, see “Prospectus
Summary — Recent Events” above. We are registering (i) 304,464 shares of common stock issuable upon the exercise of
the Reload Warrants, (ii) 878,146 shares of common stock issuable upon exercise of the Merger Warrants, (iii) 150% (or 4,026,450
shares) of the 2,684,300 shares of common stock issuable upon the conversion of the Series H-4 Preferred Stock and (iv) 150% (or
4,026,450 shares) of the 2,684,300 shares of common stock issuable upon exercise of the Series H-4 Warrants, in order to permit
the selling securityholders to offer the shares for resale from time to time.
The table below lists the selling securityholders
and other information regarding the beneficial ownership (as determined under Section 13(d) of the Exchange Act and the rules
and regulations thereunder) of the shares of common stock held by each of the selling securityholders. The second column lists
the percentage of shares of common stock beneficially owned by the selling securityholders, based on their respective ownership
of shares of common stock, as of April 3, 2018, assuming exercise of the warrants and conversion of the Preferred Stock held by
each such selling securityholder on that date but taking account of any limitations on exercise set forth therein. The percentage
of shares beneficially owned prior to the offering is based on 7,810,334 shares of our common stock outstanding as of March 15,
2018. The number of shares in the column “Maximum Number of Shares of Common Stock to be Sold Pursuant to this Prospectus”
represents all of the shares that the selling securityholder may offer under this prospectus and does not take into account any
limitations on the exercise of warrants set forth therein.
The Reload Warrants, which are exercisable
to purchase up to 304,464 shares of common stock, were issued to the holders of our Series H-1 warrants (the “Holders”)
in consideration for the exercise by the Holders of such Series H-1 warrants for cash at a reduced exercise price during a stated
time period and cover one share for each Series H-1 warrant exercised during that period with a strike price equal to the fair
market value of a share of our common stock on the date such reload warrant became issuable. The terms of the Reload Warrants are
substantially identical to the terms of the original Series H-1 warrants except that: (i) the expiration date of the reload warrant
is seven (7) years from the date of issuance; (ii) the exercise price of the Reload Warrants is $4.84; (iii) the Reload Warrants
have more limited cashless exercise rights than the H-1 warrants; and (iv) our obligation to register the resale of the shares
issuable upon exercise of the Reload Warrants was deferred.
The Merger Warrants, which are exercisable
to purchase up to 878,146 shares of common stock, were issued in exchange for previously outstanding Private DropCar warrants and
have terms identical to the terms of the Private DropCar warrants for which they were exchanged, except that the number of shares
covered by the warrants and the exercise price per share were adjusted for an exchange ratio of
0.3273.
The Series H-4 Warrants, which are exercisable
to purchase up to 2,684,300 shares of common stock, are exercisable immediately after issuance and have a five-year term. They
feature an exercise price of $2.60 per share. The Series H-4 Preferred Stock have as a stated value of $235.50. Each share of Series
H-4 Preferred Stock is convertible at any time at the option of the holder thereof, into a number of shares of common stock determined
by dividing the stated value by the initial conversion price of $2.355 per share, subject to a 9.99% blocker provision. We are
registering 150% of the shares issuable upon the conversion of the Series H-4 Preferred Stock and the Series H-4 Warrants.
Under the terms of the warrants, a selling
securityholder may not exercise the warrants to the extent (but only to the extent) such selling securityholder or any of its affiliates
would beneficially own a number of shares of our common stock which would exceed 9.99% of the total number of shares of our common
stock then issued or outstanding. The numbers in the fourth column reflects these limitations. The selling securityholders may
sell all, some or none of their shares in this offering. See “Plan of Distribution.”
Name of Selling Securityholder
|
|
Shares
of
Common Stock
Beneficially Owned
Prior to Offering
|
|
|
Maximum Number
of Shares of
Common Stock
to be Sold
Pursuant to this
Prospectus
|
|
|
Shares
of
Common Stock
Beneficially Owned
After Offering
|
|
|
% of Shares
of Common
Stock Beneficially Owned
After
Offering
|
|
Iroquois Capital Investment Group LLC (1)
|
|
|
981,481
|
|
|
|
1,219,070
|
|
|
|
80,811
|
|
|
|
1.03
|
%
|
Iroquois Master Fund Ltd. (1)
|
|
|
1,493,153
|
|
|
|
975,497
|
|
|
|
517,656
|
|
|
|
6.63
|
%
|
American Capital Management, LLC (2)
|
|
|
20,297
|
|
|
|
20,297
|
|
|
|
0
|
|
|
|
*
|
|
Michael Ades (3)
|
|
|
24,690
|
|
|
|
6,358
|
|
|
|
18,332
|
|
|
|
*
|
|
Alpha Capital Anstalt (4)
|
|
|
3,113,484
|
|
|
|
3,539,860
|
|
|
|
682,924
|
|
|
|
8.74
|
%
|
American European Insurance Co. (5)
|
|
|
45,713
|
|
|
|
16,956
|
|
|
|
28,757
|
|
|
|
*
|
|
Arista Holdings Group LLC (6)
|
|
|
14,378
|
|
|
|
8,478
|
|
|
|
5,900
|
|
|
|
*
|
|
Jake Arjang Maziar (7)
|
|
|
18,691
|
|
|
|
11,022
|
|
|
|
7,669
|
|
|
|
*
|
|
Jack Basch (8)
|
|
|
14,378
|
|
|
|
8,478
|
|
|
|
5,900
|
|
|
|
*
|
|
Brio Capital Master Fund Ltd. (9)
|
|
|
657,322
|
|
|
|
696,248
|
|
|
|
173,374
|
|
|
|
2.22
|
%
|
Anthony Chiellino (10)
|
|
|
24,690
|
|
|
|
6,358
|
|
|
|
18,332
|
|
|
|
*
|
|
Ellis International LP (11)
|
|
|
50,332
|
|
|
|
29,674
|
|
|
|
20,658
|
|
|
|
*
|
|
Fame Associates (12)
|
|
|
313,945
|
|
|
|
320,401
|
|
|
|
193,544
|
|
|
|
2.48
|
%
|
Isaac Fruchthandler (13)
|
|
|
14,800
|
|
|
|
22,200
|
|
|
|
0
|
|
|
|
*
|
|
H&M Machine Co. (14)
|
|
|
86,267
|
|
|
|
50,870
|
|
|
|
35,397
|
|
|
|
*
|
|
The Hewlett Fund LP (15)
|
|
|
212,200
|
|
|
|
318,300
|
|
|
|
0
|
|
|
|
*
|
|
Osher Jungries (16)
|
|
|
14,378
|
|
|
|
8,478
|
|
|
|
5,900
|
|
|
|
*
|
|
L1 Capital Global Opportunities Master Fund (17)
|
|
|
424,391
|
|
|
|
615,391
|
|
|
|
0
|
|
|
|
*
|
|
Liberty Dropcar LLC (18)
|
|
|
64,700
|
|
|
|
38,152
|
|
|
|
26,548
|
|
|
|
*
|
|
Mada Equities LLC (19)
|
|
|
264,947
|
|
|
|
352,213
|
|
|
|
18,834
|
|
|
|
*
|
|
Richard Molinsky (20)
|
|
|
73,050
|
|
|
|
57,300
|
|
|
|
34,850
|
|
|
|
*
|
|
Onyx Property Group LLC (21)
|
|
|
97,678
|
|
|
|
16,956
|
|
|
|
80,722
|
|
|
|
1.03
|
%
|
Palladium Capital Advisors, LLC (22)
|
|
|
487,546
|
|
|
|
468,749
|
|
|
|
155,897
|
|
|
|
2.00
|
%
|
Rosenberg Brothers Investments (23)
|
|
|
21,567
|
|
|
|
12,717
|
|
|
|
8,850
|
|
|
|
*
|
|
SOS Investors Group LLC (24)
|
|
|
205,071
|
|
|
|
167,466
|
|
|
|
69,405
|
|
|
|
*
|
|
Nachum Stein (25)
|
|
|
28,756
|
|
|
|
16,956
|
|
|
|
11,800
|
|
|
|
*
|
|
Laurie Latt Wolff GST Trust 092895 (26)
|
|
|
14,378
|
|
|
|
8,478
|
|
|
|
5,900
|
|
|
|
*
|
|
Zeiger Tower LLC (27)
|
|
|
251,121
|
|
|
|
222,587
|
|
|
|
28,534
|
|
|
|
*
|
|
(1) Ownership by Iroquois Capital Investment Group LLC includes
(i) Reload Warrants to acquire 20,297 shares of common stock, (ii) 150% (or 477,600 shares) of Series H-4 Preferred Stock convertible
into 318,400 shares of common stock and (iii) 150% (or 477,600 shares) of Series H-4 Warrants to acquire 318,400 shares of common
stock. Ownership by Iroquois Master Fund Ltd. includes (i) Reload Warrants to acquire 263,870 shares of common stock, (ii) 150%
(or 477,600 shares) of Series H-4 Preferred Stock convertible into 318,400 shares of common stock and (iii) 150% (or 477,600 shares)
of Series H-4 Warrants to acquire 318,400 shares of common stock. Richard Abbe is the natural person with voting and dispositive
power over the shares held by Iroquois Capital Investment Group LLC and Iroquois Master Fund.
(2) Includes Reload Warrants to acquire 20,297 shares of common
stock.
(3) Includes Merger Warrants to acquire 6,358 shares of common
stock.
(4) Includes (i) Merger Warrants to acquire 211,960 shares of
common stock, (ii) 150% (or 1,663,950 shares) of Series H-4 Preferred Stock convertible into 1,109,300 shares of common stock and
(iii) 150% (or 1,663,950 shares) of Series H-4 Warrants to acquire 1,109,300 shares of common stock. The selling stockholder shares
voting and investment power with Konrad Ackermann.
(5) Includes Merger Warrants to acquire 16,956 shares of common
stock. The selling stockholder shares voting and investment power with Nachum Stein, Chairman of American European Insurance Co.
(6) Includes Merger Warrants to acquire 8,478 shares of common
stock. Raphael Weiss is the natural person with voting and dispositive power over the shares held by the selling stockholder.
(7) Includes Merger Warrants to acquire 11,022 shares of common
stock.
(8) Includes Merger Warrants to acquire 8,478 shares of common
stock.
(9) Includes (i) Merger Warrants to acquire 59,348 shares of
common stock, (ii) 150% (or 318,450 shares) of Series H-4 Preferred Stock convertible into 212,300 shares of common stock and (iii)
150% (or 318,450 shares) Series H-4 Warrants to acquire 212,300 shares of common stock. The selling stockholder shares voting and
investment power with Shaye Hirsch, Director of Brio Capital Master Fund Ltd.
(10) Includes Merger Warrants to purchase 6,358 shares of common
stock.
(11) Includes Merger Warrants to purchase 29,674 shares common
stock. The selling stockholder shares voting and investment power over all securities with Martin Chopp, General Partner of Ellis
International LP.
(12) Includes (i) Merger Warrants to acquire 97,501 shares of
common stock, (ii) 150% (or 111,450 shares) of Series H-4 Preferred Stock convertible into 74,300 shares of common stock and (iii)
150% (or 111,450 shares) of Series H-4 Warrants to acquire 74,300 shares of common stock. The selling stockholder shares voting
and investment power with Abraham Fruchthandler.
(13) Includes (i) 150% (or 11,100 shares) of Series H-4 Preferred
Stock convertible into 7,400 shares of common stock and (ii) 150% (or 11,100 shares) of Series H-4 Warrants to acquire 7,400 shares
of common stock.
(14) Includes Merger Warrants to purchase 50,870 shares of common
stock. Naham Herschel Parnes is the natural person with voting and dispositive power over the shares held by the selling stockholder.
(15) Includes (i) 150% (or 159,150 shares) of Series H-4 Preferred
Stock convertible into 106,100 shares of common stock and (ii) 150% (or 159,150 shares) of Series H-4 Warrants to acquire 106,100
shares of common stock. The selling stockholder shares voting and investment power over all securities with Martin Chopp.
(16) Includes Merger Warrants to acquire 8,478 shares of common
stock.
(17) Includes (i) Merger Warrants to acquire 42,391 shares of
common stock, (ii) 150% (or 286,500 shares) of Series H-4 Preferred Stock convertible into 191,000 shares of common stock and (iii)
150% (or 286,500 shares) of Series H-4 Warrants to acquire 191,000 shares of common stock. The selling stockholder shares voting
and investment power over all securities with David Feldman.
(18) Includes Merger Warrants to acquire 38,152 shares of common
stock. The selling stockholder shares voting and investment power over all securities with Yosef Rabinowitz, Member of Liberty
DropCar LLC, who may be deemed a beneficial owner of the securities.
(19) Includes (i) Merger Warrants to acquire 33,913 shares of
common stock, (ii) 150% (or 159,150 shares) of Series H-4 Preferred Stock convertible into 106,100 shares of common stock and (iii)
150% (or 159,150 shares) of Series H-4 Warrants to acquire 106,100 shares of common stock. The selling stockholder shares voting
and investment power over all securities with Mark Weinberger, Member of Mada Equities LLC.
(20) Includes (i) 150% (or 28,650 shares) of Series H-4 Preferred
Stock convertible into 19,100 shares of common stock and (ii) 150% (or 28,650 shares) of Series H-4 Warrants to acquire 19,100
shares of common stock. The selling stockholder shares voting and investment power over 18,850 shares with Maria Molinsky.
(21) Includes Merger Warrants to acquire 16,956 shares of common
stock.
(22) Includes (i) Merger Warrants to acquire 57,449 shares of
common stock, (ii) 150% (or 205,650 shares) of Series H-4 Preferred Stock convertible into 137,100 shares of common stock and (iii)
150% (or 205,650 shares) of Series H-4 Warrants to acquire 137,100 shares of common stock. Joel Padowitz, CEO, is the natural person
with voting and dispositive power over the shares held by Palladium Capital Advisors, LLC.
(23) Includes Merger Warrants to acquire 12,717 shares of common
stock. Sheldon Rosenberg, Bernard Rosenberg and Oscar Rosenberg are the natural persons with voting and dispositive power over
the shares held by Rosenberg Brothers Investments.
(24) Includes (i) Merger Warrants to acquire 72,066 shares of
common stock, (ii) 150% (or 47,700 shares) of Series H-4 Preferred Stock convertible into 31,800 shares of common stock and (iii)
150% (or 47,700 shares) of Series H-4 Warrants to acquire 31,800 shares of common stock. The selling stockholder shares voting
and investment power over all securities with Dovid Obstfeld.
(25) Includes Merger Warrants to acquire 16,956 shares of common
stock.
(26) Includes Merger Warrants to acquire 8,478 shares of common
stock. The selling stockholder shares voting and investment power over all securities with Richard J. Wolff, who may be deemed
a beneficial owner of the securities.
(27) Includes (i) Merger Warrants to acquire 63,587 shares of
common stock, (ii) 150% (or 79,500 shares) of Series H-4 Preferred Stock convertible into 53,000 shares of common stock and (iii)
150% (or 79,500 shares) of Series H-4 Warrants to acquire 53,000 shares of common stock. The selling stockholder shares voting
and investment power over all securities with Samuel Reinhold.