See accompanying notes to the unaudited condensed consolidated financial statements
See accompanying notes to the unaudited condensed consolidated financial statements
See accompanying notes to the unaudited condensed consolidated financial statements
See accompanying notes to the unaudited condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Organization and Description of Business
HyreCar Inc. (which may be referred to herein as “HyreCar,” the “Company,” “we,” “us” or “our”) was incorporated on November 24, 2014 (“Inception”) in the State of Delaware. The Company's headquarter is located in Los Angeles, California. The Company operates a web-based marketplace that allows car and fleet owners to rent their cars to Uber, Lyft and other gig economy service drivers safely, securely and reliably. The condensed consolidated financial statements of HyreCar Inc. are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Automobile Liability Insurance Program, Uber Agreement, At-The-Market Offering and Equity Line of Credit
On May 20, 2021, the Company renewed its Automobile Liability Insurance Program with Apollo 1969 of Lloyd’s until 2023 at our current rates, providing stable predictable insurance pricing for the next two years. Further, the Company has completed integration with Sedgwick, a leading insurance claim processing partner for many companies in rideshare transportation and food delivery.
On July 26, 2021, the Company entered into a certain Vehicle Rental Strategic Relationship Agreement with Uber Technologies, Inc. to become an official vehicle solution provider on the Uber platform for both electric vehicles and internal combustion engine vehicles. We are currently piloting the vehicle solutions program with Uber and refining the terms of the program as we gather additional performance data.
On November 9, 2021, the Company entered into an Equity Offering Sales Agreement (the “ATM Agreement”), with D.A. Davidson & Co. and Northland Securities, Inc. (collectively, the “Agents"), pursuant to which each Agent acts as the Company’s sales agents with respect to the offer and sale from time to time of shares of the Company’s common stock, par value $0.00001 (the “Common Stock”), having an aggregate gross sales price of up to $50.0 million in “at-the market-offerings”, as defined in Rule 415(a)(4) under the Securities Act, and pursuant to a registration statement on Form S-3 (the “Form S-3”) that was previously declared effective by the SEC. Under the Form S-3 based upon our public float at the time we filed our Annual Report on Form 10-K, our public float fell below certain minimum levels and as such, we are subject to, among other requirements applicable to our continuing eligibility to offer and sell securities, the “baby shelf” registration requirements which limits the amounts available under Form S-3, including amounts available under the ATM Agreement. On August 15, 2022, the Company amended the ATM Agreement and filed Supplement No. 1 to the Prospectus Supplement dated November 9, 2021, reducing the aggregate shares to be sold under the ATM program from $50,000,000 to $7,900,000. As of November 14, 2022, we have sold 1,346,265 shares pursuant to the ATM Agreement for total net proceeds of $1,734,502.
On August 15, 2022, the Company entered into a Purchase Agreement (the “ELOC Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company has the right to sell up to $15,000,000 in shares of the Company’s Common Stock to Lincoln Park over the thirty-six month term of the ELOC Agreement, subject to certain limitations and conditions as set forth in the ELOC Agreement (such transactions, the “Equity Line of Credit”). In consideration for entering in the ELOC Agreement, the Company issued a one-time commitment fee of 539,633 shares of the Common Stock to Lincoln Park. These amounts will be capitalized as deferred offering costs and will be offset against future proceeds at the end of the term.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with “U.S. GAAP” and include the accounts of the Company. All significant intercompany balances and transactions have been eliminated.
The consolidated balance sheet as of December 31, 2021 included herein was derived from the audited consolidated financial statements as of that date. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations, stockholders’ equity, and cash flows for the periods presented, but are not necessarily indicative of the results of operations to be anticipated for any future annual or interim period. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2021 and notes thereto that are included in the Company's Annual Report on Form 10-K.
Management's Plans
We have incurred operating losses since inception and historically relied on equity financing for working capital. Throughout the next 12 months, the Company intends to fund its operations through revenue from operations, current cash reserves and through equity/debt financial instruments including the available ATM Agreement and the Equity Line of Credit. The estimated cash flows combined with opportunities to access capital lead us to believe the Company will have sufficient resources to operate its business for the next twelve months.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of condensed consolidated financial statements and accompanying notes in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amount of revenue and expenses during the reporting period. Actual results could materially differ from these estimates. It is reasonably possible that changes in estimates will occur in the near term. All significant intercompany accounts and transactions are eliminated upon consolidation.
Joint Venture/Investments
The Company elected the measurement alternative to account for the Joint Venture (defined below) and investments. Under the measurement alternative, the carrying value of the non-marketable equity securities are adjusted based on price changes from observable transactions of identical or similar securities of the same issuer or for impairment. Any changes in carrying value are recorded within other income (expense), net in the Company's condensed consolidated statement of operations.
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HYRECAR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company’s most significant estimates and judgments involve recognition of revenue and estimates for insurance reserves, and the measurement of the Company’s stock-based compensation.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2022 and December 31, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, accounts payable, and accrued liabilities. Fair values for these items were assumed to approximate carrying values because of their short-term nature or they are payable on demand.
Cash and Cash Equivalents
For purpose of the condensed consolidated statement of cash flows, the Company considers institutional money market funds and all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash consist primarily of amounts held in a restricted bank account at Cogent Bank as collateral for the amount pledged by the Company to secure a revolving line of credit made by Cogent Bank to AmeriDrive, as well as escrow accounts held for our insurance claims processing partner to pay out claims in a timely fashion. Amounts held in escrow for insurance claims payments are netted against claims payable and not included within restricted cash.
Accounts Receivable
Accounts receivable are reported net of allowance for expected losses. It represents the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are charged to operations in the year in which those differences are determined, with an offsetting entry to a valuation allowance. As of September 30, 2022 and December 31, 2021, the Company has a reserve allowance of $50,079 and $50,079, respectively. The Company has a diverse customer base and as of September 30, 2022 and December 31, 2021 the Company had no customers who individually accounted for more than 10% of accounts receivable.
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HYRECAR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Insurance Reserve and Insurance Deposits
The Company records a loss reserve for physical damage and other liability coverage caused to owner vehicles up to the Company's insurance deductibles or relevant limits. This reserve represents an estimate for both reported accidents, claims not yet paid, and claims incurred but not yet reported and are recorded on a non-discounted basis. The lag time in reported claims for physical damage is minimal and as such represents a low risk of unreported claims being excluded from the loss reserve assessment. The adequacy of the reserve is monitored quarterly and is subject to adjustment in the future based upon changes in claims experience, including the number of incidents for which the Company is ultimately responsible and changes in the cost per claim, or changes to the Company’s insurance policy which dictates what amounts of a claim will be paid by the Company. Effective March 1, 2021, the Company entered into a two-year claim adjusting agreement with Sedgwick which included an escrow account requirement of $1,750,000 to be held by Sedgwick for claim payments. This escrow account is replenished by the Company on a quarterly basis or more frequently dependent on the actual claims paid during that quarter. Separate from the escrow account, as of September 30, 2022 and December 31, 2021, $3,527,923 and $2,330,190, respectively, were included in the accompanying condensed consolidated balance sheets, related to the estimated loss reserve, where the expense is included in costs of revenue. For financial presentation purposes, the amount of escrow balance at quarter end is netted against claims payable to our TPA.
Effective May 15, 2021, the Company entered into a new policy term for its automobile liability insurance program. As part of this program the Company has paid deposit premiums of $1,500,000 and $250,000 for the primary and excess, respectively which will be available to offset premiums due during the final quarter or offset past due premiums during the policy period.
While certain liability claims may take several years to completely settle, the Company's liability exposure limit is generally met in the near term. Due to our limited operational history, the Company makes certain assumptions based on both currently available information to estimate the insurance reserves as well as third party claims adjuster data provided on existing claims. A number of factors can affect the actual cost of a claim, including the length of time the claim remains open, economic and healthcare cost trends, venue, and the results of similar litigation. Furthermore, claims may emerge in future periods for events that occurred in a prior period that differs from expectations. Accordingly, actual losses may vary significantly from the estimated amounts reported in the condensed consolidated financial statements. Reserves are reviewed quarterly and adjusted as necessary as experience develops or new information becomes known. However, ultimate results may differ from the Company’s estimates, which could result in losses over the Company’s reserved amounts. Such adjustments are recorded in costs of revenue.
Leases
Lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized when the Company takes possession of the leased property (“Commencement Date”) based on the present value of lease payments over the lease term. The Company estimates the incremental borrowing rate based upon the cost of its own debt financing, current market interest rates and quoted offerings or the rate implicit in the lease. Operating lease right-of-use assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The lease terms used to calculate the right-of-use asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less are expensed as incurred and are not recorded as right-of-use assets on the condensed consolidated balance sheets.
Revenue Recognition
The Company generates the majority of its revenue from its car sharing marketplace platform that connects vehicle owners and drivers and the related insurance issued for each rental. Vehicle owners and drivers agree to terms of service with the Company in order to use the HyreCar platform and enter into a rental contract that governs each rental. In entering into a rental agreement, the driver is charged in a single transaction: the base rental fee as agreed upon between the driver and vehicle owner, a 15% HyreCar fee on the base rental fee, and a daily insurance charge (“Insurance and administrative fees”), all based on the number of days the vehicle is to be rented within the contract. HyreCar retains 15%-30% of the base rental fee by offering physical damage protection plans and remits the remaining portion to the vehicle owner. The 15% fee collected from the driver and 15-30% retained from the owner are considered “Transaction Fees” and recorded on a net basis as described below. The Company recognizes revenue daily during the rental periods as the Company is required to maintain insurance underlying the transaction and as a customary business practice, a driver can return a vehicle early for a refund of the unused rental period. Drivers currently do not have an option to decline insurance at any point during the transaction.
The Company also recognizes revenue from other sources such as referrals, motor vehicle record fees (application fees), late rental fees, and other fees charged to drivers in specific situations.
In applying the guidance of Accounting Standards Codification (“ASC”) 606, the Company (i) identifies the contract with the customer, (ii) identifies the performance obligations in the contract, (iii) determines the transaction price, (iv) determines if an allocation of that transaction price is required to the performance obligations in the contract, and (v) recognizes revenue when or as the Company satisfies a performance obligation.
Refunds may occur when the driver returns the owner vehicle early based on the terms of the original contract or cancels the rental prior to completing the exchange. In limited circumstances, the Company provides contingent consideration in the form of a rebate that is redeemable only if the customer completes a specific level of transaction over a specific time period. In such cases, the rebate or refund obligation is recognized as a reduction of revenue. The Company defers revenue in all instances when the earnings process is not yet complete.
For the three and nine months ended September 30, 2022 and September 30, 2021, the Company had no customers who individually accounted for more than 10% of revenue.
The following is a breakout of revenue components by subcategory for the three and nine months ended September 30, 2022 and 2021.
| | Three Months Ended | | | Three Months Ended | | | Nine Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Insurance and administration fees | | $ | 5,772,329 | | | $ | 4,955,697 | | | $ | 16,671,466 | | | $ | 13,363,492 | |
Transaction fees | | | 4,039,883 | | | | 4,308,576 | | | | 12,488,341 | | | | 11,873,358 | |
Other fees | | | 534,974 | | | | 475,042 | | | | 1,487,473 | | | | 1,170,428 | |
Incentives and rebates | | | (75,467 | ) | | | (87,975 | ) | | | (316,789 | ) | | | (249,672 | ) |
Net revenue | | $ | 10,271,719 | | | $ | 9,651,340 | | | $ | 30,330,491 | | | $ | 26,157,606 | |
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HYRECAR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Principal Agent Considerations
The Company evaluates our service offerings to determine if we are acting as the principal or as an agent, which we consider in determining if revenue should be reported gross or net. One of our primary revenue sources is a transaction fee made from a confirmed booking of a vehicle on our platform. Key indicators that we evaluate to reach this determination include:
| ● | the terms and conditions of our contracts; |
| ● | whether we are paid a fixed percentage of the arrangement's consideration or a fixed fee for each transaction; |
| ● | the party which sets the pricing with the end-user, has the credit risk and provides customer support; and |
| ● | the party responsible for delivery/fulfillment of the product or service to the end consumer. |
We have determined we act as the agent in the transaction for vehicle bookings (Transaction Fees), as we are not the primary obligor of the arrangement and receive a fixed percentage of the transaction. Therefore, revenue is recognized on a net basis.
For other fees such as insurance, referrals, and motor vehicle records (application fees) we have determined revenue should be recorded on a gross basis. In such arrangements, the Company sets pricing, has risk of economic loss, has certain credit risk, provides support services related to these transactions, and has decision making ability about service providers used.
Cost of Revenue
Cost of revenue primarily include direct fees paid for insurance to cover the vehicle driver and owner, insurance claim payments and estimated liabilities based on the policy in effect at the time of loss, merchant processing fees, technology and hosting costs, and motor vehicle record fees incurred for paid driver applications. General liability insurance that covers corporate risk from activity on our platform is included in general and administrative costs.
Advertising
The Company expenses the cost of advertising and marketing as incurred. Advertising and marketing expenses were $1,940,161 and $2,598,370 for the nine months ended September 30, 2022 and 2021, respectively.
Research and Development
We incur research and development costs during the process of researching and developing our technologies and future offerings. Our research and development costs consist primarily of non-capitalized development and maintenance costs. We expense these costs as incurred unless such costs qualify for capitalization under applicable guidance.
Stock-Based Compensation
The Company accounts for stock awards issued under ASC 718, Compensation – Stock Compensation. Under ASC 718, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award. Stock-based compensation is recognized as expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services. The fair value of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model. Restricted shares are measured based on the fair market value of the underlying stock on the grant date.
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HYRECAR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-based compensation is included in the condensed consolidated statements of operations as follows:
| | Three Months Ended | | | Three Months Ended | | | Nine Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
General and administrative | | $ | 735,596 | | | $ | 657,148 | | | $ | 2,011,423 | | | $ | 4,837,382 | |
Sales and marketing | | | 234,109 | | | | 210,739 | | | | 816,960 | | | | 1,127,521 | |
Research and development | | | 246,325 | | | | 160,512 | | | | 509,535 | | | | 1,025,039 | |
| | $ | 1,216,030 | | | $ | 1,028,399 | | | $ | 3,337,918 | | | $ | 6,989,942 | |
Net Loss per Common Share
The Company presents basic net loss per share (“EPS”) and diluted EPS on the face of the condensed consolidated statements of operations. Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. For periods in which we incur a net loss, the effects of potentially dilutive securities would be antidilutive and would be excluded from diluted EPS calculations. For the nine months ended September 30, 2022 and 2021, there were 3,850,199 and 691,255 options and warrants excluded, and 1,006,761 and 803,360 restricted stock units excluded, respectively.
Concentration of Credit Risk
The Company maintains its cash with a major financial institution located in the United States of America which it believes to be credit worthy. Balances are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, the Company maintains balances in excess of the federally insured limits.
Other Concentrations
The Company has historically relied on a single insurance broker and one to two underwriters at any given time to provide all automobile insurance on vehicles rentals on the HyreCar platform. There are multiple brokers and carriers who issue this type of insurance coverage, and the Company is regularly reviewing leading insurers in the transportation and mobility sectors as this is an important part of our operations. The Company does not believe the loss of our current broker or underwriters would have a material effect on our operations.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), specifying the accounting for leases, which supersedes the leases requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of condensed consolidated financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors' accounting is largely unchanged from the previous accounting standard. In addition, Topic 842 expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes several practical expedients. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021 for emerging growth companies, with early adoption permitted.
The Company has reviewed and adopted the provisions of the new standard starting January 1, 2022 under retrospective modified method. The standard requires all lease to be reported on a company's balance sheets as assets and liabilities. See Other section of Note 5 - Leases for breakdown of lease Liability for the term of the lease.
In December 2019, the FASB issued guidance that simplifies the accounting for income taxes by removing certain exceptions in existing guidance and improves consistency in application by clarifying and amending existing guidance. This guidance is effective for annual periods beginning after December 15, 2021, and interim periods within those annual periods, where the transition method varies depending upon the specific amendment. Early adoption is permitted, including adoption in any interim period. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period, and all amendments must be adopted in the same period. The Company has adopted the provisions of the new standard as of January 1, 2022 and it did not have a significant impact on the Company.
In January 2020, the FASB issued ASU 2020-01 which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. The adoption of this standard did not have a material impact to our consolidated financial statements.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to not take this exemption and, as a result, will adopt new or revised accounting standards on the relevant effective dates on which adoption of such standards is required for other public companies that are not emerging growth companies.
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HYRECAR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The FASB issues ASUs to amend the authoritative literature in ASC. There have been several ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our condensed consolidated financial statements.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Settlement and Legal
On August 27, 2021, a putative securities class action complaint captioned Baron v. Hyrecar Inc. et al., Case No. 21-cv-06918, was filed in the United States District Court for the Central District of California against the Company; its Chief Executive Officer, Joseph Furnari; and its former Chief Financial Officer, Robert Scott Brogi. This action asserts claims and seeks damages for alleged violations of sections 10(b) and 20(a) of securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The alleged class period is May 14, 2021 to August 10, 2021, inclusive. Pursuant to the Private Securities Litigation Reform Act, on November 19, 2021, the Court appointed Turton Inc. to serve as Lead Plaintiff. Lead Plaintiff then filed an amended complaint (the “First Amended Complaint”). The First Amended Complaint alleged that defendants made material misrepresentations or failed to disclose material facts that, among other things, the Company had materially understated its expenses and insurance reserves in coordination with a third-party adjuster which Lead Plaintiff alleged was conflicted. On December 27, 2021, the Company and the individual defendants moved to dismiss the First Amended Complaint, arguing that Lead Plaintiff failed to adequately plead that any of the Company’s public statements were materially false or misleading, or that defendants acted with scienter– meaning defendants either knew those statements were false or were deliberately reckless to their truth or falsity at the time they were made. On February 16, 2022, the Court (Hon. Percy Anderson) granted defendants’ motion to dismiss on the basis that Lead Plaintiff failed to adequately plead any of defendants’ statements were materially false or misleading. Because the Court ruled that Lead Plaintiff did not sufficiently plead falsity, the Court did not address the additional arguments regarding scienter at the time. The Court permitted Lead Plaintiff leave to amend its complaint. Plaintiff filed its Second Amended Complaint on March 21, 2022. The Second Amended Complaint asserts the same violations of the Exchange Act and Rule 10b-5, again alleging, among other things, HyreCar made materially false or misleading statements related to its first quarter 2021 reserves, and by extension misstated expenses and revenues. On April 4, 2022, the Company and individual defendants moved to dismiss the Second Amended Complaint on the basis that Plaintiff failed to plead sufficient facts that would cure the deficiencies identified in the Court’s order on the first motion to dismiss—i.e., that Plaintiff again failed to plead that any statements were materially false or misleading when made—and Plaintiff failed to plead that defendants acted with scienter. On April 21, 2022, the case was transferred to a new judge, and on April 27, 2022, the Court issued a Reassignment Order that, among other things, vacated all hearing dates. The Court subsequently set the hearing for the Motion to Dismiss the Second Amended Complaint for October 20, 2022, and also set a Scheduling Conference for December 8, 2022. On October 18, 2022, the Court issued an order that the Court found the Motion to Dismiss appropriate for decision without oral argument, and thereby vacated the hearing and took the Motion to Dismiss under submission. As of the date of the preparation of this filing, the Motion to Dismiss remains under submission. The Company believes that the allegations in this lawsuit are without merit and will continue to vigorously defend against them. The Company’s chances of success on the merits are still uncertain and any possible loss or range of loss cannot be reasonably estimated.
Other
From time to time, we are a party to various claims and litigation in the normal course of business. As of December 31, 2021 and September 30, 2022, the amounts are immaterial and does not have material impact on consolidated financial statements.
We connect drivers and vehicle owners in many tax jurisdictions throughout the United States. After the Supreme Court of the United States decision in South Dakota v. Wayfair Inc. (Wayfair) in June 2018, states commenced enacting laws that would require certain online sellers to collect sales and use tax despite not having a physical presence in the buyer’s state. In response to Wayfair, or otherwise, states or local governments may adopt, or begin to enforce, laws requiring us to calculate, collect, and remit taxes on sales in their jurisdictions. A successful assertion by one or more states requiring us to collect taxes could result in tax liabilities, including taxes on past sales, as well as penalties and interest. Based on our analysis of certain state regulations on peer-to-peer activities, we do not believe risk of loss is probable on historical revenue activities. We continuously monitor state regulations as it relates to peer-to-peer vehicle rental activities and will implement required collection and remittance procedures if and when we believe we would become subject to such regulations.
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HYRECAR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 – DEBT AND LIABILITIES
Accrued Liabilities
A summary of accrued liabilities as of September 30, 2022 and December 31, 2021 is as follows:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
Accrued payables | | $ | 1,472,132 | | | $ | 1,737,473 | |
Insurance premiums | | | 425,378 | | | | 333,493 | |
Driver deposit | | | 439,054 | | | | 336,787 | |
Payroll tax liabilities | | | 414,169 | | | | 417,493 | |
Other accrued liabilities | | | 50,653 | | | | 52,192 | |
Accrued liabilities | | $ | 2,801,386 | | | $ | 2,877,438 | |
As of September 30, 2022, the accrued payables amounted to $1,472,132, which consists of incurred but not invoiced business expenditures including legal fees, professional services and other operational expenditures. As of September 30, 2022, the payroll tax liabilities amounted to $414,169, which consists of the employer and employees share of the payroll tax liabilities related to stock options exercised and vested restricted stock units.
Related Party Debt
On August 15, 2022, the Company entered into a promissory note agreement with each of Joseph Furnari, the Company’s Chief Executive Officer, and Michael Furnari, the Company’s Chief Business Development Officer. Pursuant to the respective Promissory Notes, Joseph Furnari and Michael Furnari agreed to loan the Company $200,000 and $300,000, respectively. The Promissory Notes will accrue interest at a rate of 7% per year on the outstanding principal amounts. Any unpaid principal amounts and accrued interest under the Promissory Notes will be payable in full on September 30, 2023. At the discretion of the Company’s Board of Directors, the aggregate unpaid principal amounts, and any unpaid accrued interest, may be convertible into shares of the Company’s Common Stock, at a conversion price that is equal to the last reported closing price of the Company’s Common Stock on the Nasdaq Capital Market.
NOTE 5 – LEASES
In November 2021, the Company entered into a lease in Los Angeles, California commencing January 1, 2022, we occupied the facility in January 2022. The lease term is 48 months from the commencement date. The lease required a deposit of $25,563. Per the lease agreement, the monthly rate will range from $23,394 to $25,563 a month prior to discounts and abatements that may apply. The Company also rents office furniture and incurs ancillary fees for building services and shared expenses. In accordance with ASC 842 mentioned above, the Company recorded a Right to Use asset account and Lease Liability account for $997,109 as of January 1, 2022 (the present value of the lease payments) and those accounts will be amortized over the 48 month period of the lease agreement. Rent expense for the nine months ended September 30, 2022 and 2021 was $207,632 and $158,249, respectively. Maturities of the Company’s operating lease liabilities as of September 30, 2022 were as follows (in thousands):
Year Ending December 31, | Payment |
2022 (remaining) | $ | 74 |
2023 | | 289 |
2024 | | 298 |
2025 | | 230 |
Total | $ | 891 |
NOTE 6 – STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
The Company is authorized to issue up to 15,000,000 shares of preferred stock, $0.00001 par value per share. The Company’s board of directors has the authority, without further action by the stockholders, to issue such shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, and to fix the dividend, voting, and other rights, preferences and privileges of the shares.
Series A Convertible Non-Voting Preferred Stock
On September 2, 2022, the Company designated 1,500,000 shares of the Company’s preferred stock as Series A Convertible Non-Voting Preferred Stock (“Series A Preferred Stock”), which is to be issued solely in the event and to the extent that a certain warrant exceeds a designated share cap. The shares of Series A Preferred Stock have no voting rights.
Each share of Series A Preferred Stock is convertible at any time at the holder’s option into such number of fully paid and non-assessable shares of the Company’s Common Stock as determined by multiplying one share of Series A Preferred Stock by the Series A Conversion Rate in effect at the time of conversion. The “Series A Conversion Rate” is initially 1.0, but is subject to adjustment for stock splits and combinations. Additionally, the Series A Preferred Stock will automatically convert, without further action by a holder, in the event such holder, directly or indirectly, transfers such shares to a person other than the holder or an affiliate of such holder.
PIPE Related Party Transaction
On September 7, 2022, we sold an aggregate of 5,789,716 shares of our Common Stock pursuant to that certain Common Stock Purchase Agreement, dated August 11, 2022 (the “PIPE Agreement”), to an entity affiliated with Arctis Global, LLC, a beneficial owner of more than 10% of our capital stock, and certain other accredited investors named therein (the “Purchasers”). The shares sold pursuant to the PIPE Agreement were sold at a purchase price of $0.8636, which was the average closing price of our Common Stock as reported on Nasdaq for the five trading days immediately prior to the signing of the PIPE Agreement. We received total proceeds of approximately $5 million, of which approximately $1 million was paid by an entity affiliated with Arctis Global, LLC to purchase 1,157,943 shares of our common stock. At the time of issuance, the PIPE Shares were not registered under the Securities Act.
Pursuant to the PIPE Agreement, the Company also agreed to provide the entity affiliated with Arctis Global, LLC and the other Purchasers with certain registration rights, pursuant to which the Company filed a registration statement on September 28, 2022 covering the resale of the PIPE Shares by the Purchasers
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, $0.00001 par value per share.
Equity Incentive Plans
In 2016, the Board of Directors adopted the HyreCar Inc. 2016 Incentive Plan (the “2016 Plan”). The 2016 Plan provides for the grant of equity awards to qualified personnel, including stock options, restricted stock, stock appreciation rights, and restricted stock units to purchase shares of common stock. The 2016 Plan is administered by the Compensation Committee, and expires ten years after adoption, unless terminated earlier by the Board of Directors. The Company does not currently utilize the 2016 Plan for equity award grants.
In 2018, the Board of Directors adopted the HyreCar Inc. 2018 Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the grant of equity awards to acquire shares of common stock. Three million shares of common stock were initially reserved for issuance under the 2018 Plan, with the share reserve number subject to increases that occur starting in 2021. Pursuant to the terms of the 2018 Plan, the reserve automatically increased by 300,000 shares on each of January 1, 2021 and January 1, 2022. The 2018 Plan is administered by the Compensation Committee, and expires ten years after adoption, unless terminated earlier by the Board.
In 2021, the Board of Directors adopted the HyreCar Inc. 2021 Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the grant of equity awards to acquire shares of common stock. Three million shares of common stock were initially reserved for issuance under the 2021 Plan, with the share reserve number subject to increases that occur starting in 2024. The 2021 Plan is administered by the Compensation Committee, and expires ten years after adoption, unless terminated earlier by the Board.
Stock Options, Restricted Stock Units and Shares Issued for Services
No stock options were granted during the nine months ended September 30, 2022 and 2021. Stock-based compensation expense for the vesting of stock options for the nine months ended September 30, 2022 and 2021 was immaterial. As of September 30, 2022, there is no remaining stock-based compensation expense as all options are fully vested.
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HYRECAR INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of activity with our restricted stock units (“RSUs”) solely with service conditions for the nine months ended September 30, 2022 is as follows:
| | Number of shares | | | Weighted average grant date fair value per share | |
Unvested as of December 31, 2021 | | | 769,486 | | | $ | 10.46 | |
Granted | | | 1,433,943 | | | | 1.39 | |
Vested | | | (944,283 | ) | | | 3.94 | |
Forfeited | | | (252,385 | ) | | | 10.90 | |
Unvested as of September 30, 2022 | | | 1,006,761 | | | $ | 3.53 | |
During the
nine months ended September 30, 2022, the Company granted
790,587 RSUs to employees, which generally vest over
four years,
415,346 RSUs to employees that immediately vested and
198,010 shares of common stock to board members. During the
nine months ended
September 30, 2021, the Company granted
466,266 and
365,000 RSUs to employees and executives, respectively, of which a large portion vested upon issuance while the remaining generally vest over
four years. Additionally, for the
nine months ended
September 30, 2021, the Company granted
206,068 RSUs to Board members, of which
50% vested on grant date and the remaining
50% vest over the next
four quarters following the date of grant.
Stock-based compensation related to restricted stock units for the three months ended September 30, 2022 and 2021 was $1,186,929 and $1,027,767, respectively. Stock-based compensation related to restricted stock units for the nine months ended September 30, 2022 and 2021 was $3,264,617 and $6,728,560, respectively. As of September 30, 2022, unrecognized compensation expense related to the unvested restricted stock units is $3,202,229 and is expected to be recognized over approximately 3.2 years.
An addition to the above grants, 30,000 RSUs were granted during the nine months ended September 30, 2022 in exchange for consulting services provided during the period. The Company recognized stock-based compensation cost of $29,100 during the nine months ended September 30, 2022 based on the closing price of the Company’s common stock on the grant date.
During the nine months ended September 30, 2022, the Company granted long-term equity incentive performance awards for a fixed monetary amount of $250,000 that will be settled through the issuance of a variable number of restricted stock units. The performance awards vest upon satisfaction of both a four-year service condition and the achievement of certain performance conditions. The performance conditions are based on various Company performance metrics, including but not limited to, the achievement of targeted revenue and EBITDA amounts. Compensation cost related to these awards is measured at the end of each reporting period if and when the awards are deemed probable of achievement based on the fixed monetary amount until settlement, forfeiture, or expiration. If compensation cost is required to be recognized, the amount recognized is based on the requisite service performed to date. As the performance metrics are not probable of achievement as of September 30, 2022, no compensation cost related to these performance awards has been recognized for the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, the Company granted 13,000 shares of common stock as part of an employee severance agreement. The Company recognized stock-based compensation during the nine months ended September 30, 2022 of $44,200 based on the closing price of the Company’s common stock on the date of grant.
During the nine months ended September 30, 2021, the Company granted 12,278 shares of common stock in exchange for legal services. The Company recognized stock-based compensation of $249,980 during the nine months ended September 30, 2021 based on the closing price of the Company’s common stock on the date of grant.
ATM Program
During the nine months ended September 30, 2022, the Company issued 1,326,695 shares of Common Stock pursuant to the ATM Agreement. No shares of Common Stock were issued pursuant to the ATM Agreement during the nine months ended September 30, 2021.
NOTE 7 – INVESTMENT
On January 28, 2021, the Company announced a new and expanded strategic partnership with AmeriDrive Holdings (“AmeriDrive”) intended to create a national network of vehicle supply and fleet maintenance operations. In connection therewith, the Company entered into a Collateral Pledge Agreement (“Agreement”) with Cogent Bank assigning all right, title and interest in a Company deposit account of $750,000 plus 5% fees to secure a revolving line of credit made by the bank to AmeriDrive. The restricted deposit account was gradually expanded to a $1,500,000 pledge during the quarter ended September 30, 2021 resulting from a greater revolving line of credit for AmeriDrive under the same terms. Further on November 4, 2021, the Company expanded its partnership with Cogent and AmeriDrive in an effort to help drive additional car supply to the Company’s platform. As part of the agreement, the Company agreed to increase the collateral held by Cogent bank by $1,500,000 (now $3,000,000 in total) in exchange for a credit line increase to expand AmeriDrive's vehicle fleet contributed exclusively to the Company platform.
In addition, the Company and AmeriDrive formed a joint venture HyreDrive, LLC (“HyreDrive”) that was established for the primary purpose of expanding the parties’ strategic relationship intended to create a larger national network of vehicle supply for the Company’s technology platform. The Company holds a 1% membership in HyreDrive, and AmeriDrive holds a 99% membership interest therein. HyreDrive is a special purpose entity, and, pursuant to generally accepted accounting principles, its assets, liabilities and results of operations will not be consolidated with those of the Company. HyreDrive has established a bankruptcy remote, wholly owned subsidiary of HyreDrive (the “HyreDrive SPV”) and a titling trust to facilitate the acquisition and financing of vehicles.
HyreDrive SPV may from time to time issue series of secured asset-backed notes pursuant to the terms of a base indenture between it and Wilmington Trust, National Association, as trustee and securities intermediary. Proceeds from any asset-backed notes issued will be used to fund all or part of the purchase price of vehicles allocated to a special unit of beneficial interest in a titling trust or to finance the purchase of new vehicles from third parties that will be similarly allocated to such special unit of beneficial interest.
In Q3 of 2022, Hyredrive has begun to fund the purchase of vehicles utilizing the a portion of the warehouse line of credit and such vehicles will be deployed on the HyreCar platform
Warrants
Credit Suisse Securities (USA) LLC
The company issued 2,680,179 warrants to Credit Suisse Securities (USA) LLC on September 2, 2022 as part of investment in HyreDrive, at an exercise price of $1.02. As of the Issue Date, these warrants are exercisable for up to 1,340,090 shares of Common Stock, and the remaining 1,340,089 shares of Common Stock will become vested and available for exercise upon the earliest occurrence of certain events as set forth in the warrants. The Company valued the warrants using the Black Scholes model and are recorded as other long term assets on the balance sheet and are considered part of the investment in HyreDrive. The balance on September 30, 2022, is $1,536,654.
Medalist Partners Asset-Based Private Credit Master Fund III-B, L.P.
The company issued 541,451 warrants to Medalist Partners Asset-Based Private Credit Master Fund III-B, L.P. on September 2, 2022, at an exercise price of $1.02. As of the Issue Date, these warrants are exercisable for up to 270,726 shares of Common Stock, and the remaining 270,725 shares of Common Stock will become vested and available for exercise upon the earliest occurrence of certain events as set forth in the warrants. The company valued the warrants using back Scholes model and are recorded as other long term assets on the balance sheet. The balance on September 30, 2022, is $ 310,435.
In order to prevent dilution of the purchase rights granted under the above mentioned Warrants, the Exercise Price and the number of Shares issuable upon exercise of these Warrants shall be subject to adjustment.
The Company elected the measurement alternative to account for these warrants. Under the measurement alternative, the carrying value of the non-marketable equity securities are adjusted based on price changes from observable transactions of identical or similar securities of the same issuer or for impairment. Any changes in carrying value are recorded within other income (expense), net in the Company's condensed consolidated statement of operations. There was no change in the carrying value of the non-marketable equity securities since issuance of warrants. These investments are included in other assets in the Company’s condensed consolidated balance sheets. The Company had no such investments in 2021.
NOTE 8 – SUBSEQUENT EVENTS
On October 19, 2022, and November 12, 2022, Company made a capital contribution $0.6 million and $0.9 million respectively as part of that Limited Liability Company Agreement of Hyredrive by and between HyreCar and AmeriDrive entered on August 31, 2022. As part of the agreement the company has committed to invest up to $9 million.
Since September 30, 2022, the Company has issued 100,000 shares of Common Stock to Lincoln Park pursuant to the Equity Line of Credit for total gross proceeds of $67,430.
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