Notes
to UNAUDITED Financial Statements
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS
HyreCar Inc. (which may be referred
to as “HyreCar,” the “Company,” “we,” “us” or “our”) was
incorporated on November 24, 2014 (“Inception”) in the State of Delaware. The Company’s headquarters is
located in Los Angeles, California. The Company operates a web-based marketplace that allows car and fleet owners
to rent their idle cars to Uber and Lyft drivers safely, securely and reliably. The financial statements of HyreCar Inc. are
prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”).
Initial public offering
On June 29, 2018, the Company closed its
initial public offering (“IPO”), in which the Company issued and sold 2,520,000 shares of common stock at $5.00 per
share for gross proceeds of $12,600,000, net of underwriters’ discounts and commissions totaling $1,260,000. Accordingly,
net proceeds from the IPO totaled $11,340,000, before deducting offering costs of $569,665.
In connection with the closing of the Company’s
IPO, all outstanding shares of convertible preferred stock were converted into 2,429,638 shares of common stock.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – Unaudited
Interim Financial Information
The accompanying balance sheet as of September
30, 2018, the statements of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the
nine months ended September 30, 2018 and 2017 are unaudited. The unaudited interim financial statements and related notes have
been prepared in accordance with U.S. GAAP for interim financial information, within the rules and regulations of the United States
Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in the annual
financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.
The unaudited interim financial statements have been prepared on a basis consistent with the audited financial statements and in
the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement
of the Company’s financial position as of September 30, 2018 and results of operations and cash flows for the three and nine
months ended September 30, 2018 and 2017. The financial data and the other information disclosed in these notes to the interim
financial statements related to the three and nine month periods are unaudited. Unaudited interim results are not necessarily indicative
of the results for the full fiscal year. These unaudited interim financial statements should be read in conjunction with the financial
statements of the Company for the year ended December 31, 2017 and notes thereto that are included in the prospectus, dated June
26, 2018, that formed a part of the registration statement on Form S-1 (File No. 333-225157), which was declared effective by the
SEC on June 26, 2018.
Management’s Plans
We have incurred operating losses since
Inception and historically relied on debt and equity financing for working capital. Throughout the next 12 months, the Company
intends to fund its operations through increased revenue from operations and the funds raised through the IPO. Based on our current
capital and ability to reduce cash burn if needed, as well as the increasing revenues through normal course of business, we believe
that substantial doubt about the Company’s ability to continue as a going concern has been alleviated.
Use of Estimates
The preparation of financial statements
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 revenues 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.
The Company’s most significant estimates
and judgments involve recognition of revenue, calculating the reserves for insurance, the measurement of the Company’s stock-based
compensation, including the estimation of the underlying deemed fair value of common stock in periods prior to the date of the
Company’s IPO, the estimation of the fair value of market-based awards, the valuation of warrants, allowance for doubtful
accounts, and the fair value of financial instruments
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, 2018 and December 31, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated their
fair values. These financial instruments include cash, accounts payable, accrued liabilities, notes payable, convertible debt and
settlement payable. 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 statement of cash flows,
the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash
equivalents.
Insurance Liability
The Company records a loss reserve for
insurance deductible or damage that the Company pays to car owners based on the Company’s policy in relation to the insurance
policy in effect at the time, as it may be amended. This reserve is based on changes to the Company’s insurance policy that
occurred during the second quarter of 2018 in relation to the insurance policy in effect for car owners. This reserve represents
an estimate for both reported accident 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 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 policy as to what amounts of the deductible or claim will be paid by the
Company. As of
September
30, 2018, $125,957 was included in accrued liabilities
related to the loss reserve, where the expense is reflected in the general and administrative within the statements of operations.
No such liability was recorded as of December 31, 2017 as the Company’s policy was such that it was not responsible for any
claims at the time.
Offering Costs
The Company accounts for offering costs
in accordance with Accounting Standards Codification (“ASC”) 340, Other Assets and Deferred Costs. Prior to the completion
of an offering, offering costs were capitalized as deferred offering costs on the balance sheet. The deferred offering costs are
netted against the proceeds of the offering in stockholders’ deficit or the related debt, as applicable.
Internal Use Software
We incur software development costs to
develop software programs to be used solely to meet our internal needs and cloud-based applications used to deliver our services.
In accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, we capitalize development
costs related to these software applications once a preliminary project stage is complete, funding has been committed, and it is
probable that the project will be completed and the software will be used to perform the function intended. As of September 30,
2018, the Company has capitalized $67,689 of internal software related costs, which is included in intangible assets in the accompanying
balance sheets.
Convertible Debt and Warrant
Convertible debt is accounted for under
the guidelines established by ASC 470-20, Debt with Conversion and Other Options. ASC 470-20 governs the calculation of an embedded
beneficial conversion and/or debt issued with warrants, which is treated as a discount to the instruments where derivative accounting
does not apply. The discounts are accreted over the term of the debt.
The Company calculates the fair value of
warrants and conversion features issued with convertible instruments using the Black-Scholes valuation method, using the same assumptions
used for valuing employee options for purposes of ASC 718, Compensation – Stock Compensation, except the contractual life
of the warrant or conversion feature is used. Under these guidelines, the Company allocates the value of the proceeds received
from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on a
relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected
term of the convertible debt to interest expense.
Preferred Stock
ASC 480, Distinguishing Liabilities from
Equity, includes standards for how an issuer of equity classifies and measures on its balance sheet certain financial instruments
with characteristics of both liabilities and equity.
Management is required to determine the
presentation for the preferred stock because of the redemption and conversion provisions, among other provisions. Specifically,
management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related
to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should
be accounted for as a derivative instrument. If the host instrument and conversion feature are determined to be clearly and closely
related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging, is not required. Management
determined the host contract of the preferred stock is more akin to equity, and accordingly, derivative liability accounting is
not required by the Company. The Company has presented preferred stock within stockholders’ equity (deficit) section of the
balance sheet.
Costs incurred directly for the issuance
of the preferred stock were recorded as a reduction of gross proceeds received by the Company, resulting in a discount to the preferred
stock.
In connection with the closing of the Company’s
IPO, all outstanding shares of convertible preferred stock were converted into 2,429,638 shares of common stock.
Revenue Recognition
The Company recognizes revenue primarily
from insurance and transaction fees when a car is rented on the Company’s platform when (a) persuasive evidence an agreement
exists which occurs when the rental contract is signed electronically between the two parties involved; (b) the services have been
delivered; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts
due is reasonably assured which occurs simultaneously when the booking is accepted and the credit card or account on file is charged.
The Company defers revenue where the earnings process is not yet complete.
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 limited circumstances, the Company provides
contingent consideration in the form of a rebate or refund 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 revenues.
Measurement of the total rebate or refund obligation is based on management estimates using historical data.
The following is a breakout of revenue
components by subcategory for the three and nine months ended September 30, 2018 and 2017:
|
|
Three Months
ended
September 30,
2018
|
|
|
Three Months
ended
September 30,
2017
|
|
|
Nine Months
ended
September 30,
2018
|
|
|
Nine Months
ended
September 30,
2017
|
|
Insurance and administration fees
|
|
$
|
1,307,094
|
|
|
$
|
435,931
|
|
|
$
|
3,501,704
|
|
|
$
|
1,002,529
|
|
Transaction fees
|
|
|
866,144
|
|
|
|
387,046
|
|
|
|
2,395,245
|
|
|
|
890,107
|
|
Other fees
|
|
|
581,469
|
|
|
|
38,658
|
|
|
|
1,025,974
|
|
|
|
115,070
|
|
Incentives and rebates
|
|
|
(68,755
|
)
|
|
|
(33,350
|
)
|
|
|
(249,289
|
)
|
|
|
(42,852
|
)
|
Net revenue
|
|
$
|
2,685,952
|
|
|
$
|
828,285
|
|
|
$
|
6,673,634
|
|
|
$
|
1,964,854
|
|
Insurance and transaction fees are charged
to a driver in a single transaction. Drivers currently do not have an option to decline insurance at any point during the transaction.
Principal Agent Considerations
In accordance with ASC 605-45, Revenue
Recognition: Principal Agent Considerations, we evaluate 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. Our primary revenue source 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, 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 Revenues
Cost of revenues primarily include direct
fees paid for driver insurance, merchant processing fees, and motor vehicle record fees incurred for paid driver applications.
Stock-Based Compensation
The Company accounts for stock options
issued to employees under ASC 718, Compensation – Stock Compensation. Under ASC 718, stock-based compensation cost to employees
is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s
requisite vesting period. The fair value of each stock option or warrant award is estimated on the date of grant using the Black-Scholes
option valuation model.
The Company measures compensation expense
for its non-employee stock-based compensation under ASC 505, Equity. The fair value of the option issued or committed to be issued
is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured
at the value of the Company’s common stock or equity award on the date that the commitment for performance by the counterparty
has been reached or the counterparty’s performance is complete.
Stock-based compensation is included in operating expenses in
the statements of operations as follows:
|
|
Three months ended September 30, 2018
|
|
|
Three Months ended September 30, 2017
|
|
|
Nine months ended September 30, 2018
|
|
|
Nine Months ended September 30, 2017
|
|
General and administrative
|
|
$
|
60,861
|
|
|
$
|
9,607
|
|
|
$
|
1,951,849
|
|
|
$
|
119,710
|
|
Sales and marketing
|
|
$
|
37,259
|
|
|
$
|
21,108
|
|
|
$
|
164,004
|
|
|
$
|
92,038
|
|
Research and development
|
|
$
|
(11,397
|
)
|
|
$
|
11,164
|
|
|
$
|
36,591
|
|
|
$
|
26,011
|
|
Loss per Common Share
The Company presents basic loss per share
(“EPS”) and diluted EPS on the face of the 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, 2018 and 2017, there were 2,792,356 and 1,066,733 options or warrants excluded, respectively. As of September
30, 2018, and 2017, there were no debts convertible into common stock. As of September 30, 2018, there were 825,000 shares
of restricted common stock (Note 5) that were excluded.
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 relies on two insurance agencies
to provide all insurance on vehicles in service. The loss of either of these insurance carriers would have a negative effect on
our operations.
New Accounting Standards
In June 2018, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 eliminates the
separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based
payment transactions with nonemployees in the same way as share-based payment transactions with employees. The accounting remains
different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual
term election for valuing nonemployee equity share options. ASU 2018-07 is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2018 with early adoption permitted. The Company is in process of assessing the impact
of the adoption of ASU 2018-07 on the financial statements, but it is not expected to have a significant impact on the Company.
In January 2017, the FASB issued ASU No.
2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement
of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting
unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit
to determine if the quantitative impairment test is necessary. This guidance is effective for the annual or any interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company is currently reviewing the provisions of the new
standard, but it is not expected to have a significant impact on the Company.
In February 2016, the FASB issued 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 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, 2018, with early adoption permitted. The Company is currently reviewing the provisions of the new standard, but it is not expected to have a significant impact on the Company.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606) and has issued subsequent amendments to this guidance. This new standard will
replace all current guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides
a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity
expects to be entitled in exchange for those goods or services. The guidance is effective for interim and annual periods beginning
after December 15, 2017 for public business entities and December 31, 2018 for all other entities. The standard may be applied
either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has
elected the extended transition period for complying with any new or revised financial accounting standards afforded to emerging
growth companies. As the Company continually considers and reviews the provisions of the new standard, Management does not foresee
a material impact to the financial statements as a whole.
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 financial statements.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Settlement and Legal
In September 2015, a claim was made by
certain former founders against the Company for violations of the founders’ agreement. The claimants and the Company entered
into an arbitration agreement on April 25, 2016 to settle the claim. The settlement stated each of the claimants would maintain
190,177 shares of their common stock (post reverse split as described in Note 5) restricted per the founders’ agreement with
the remaining being remitted back to the Company. However, the shares while not separate in class, would not have voting rights
until such shares were sold to a non-affiliated third party. The claimants would be diluted upon subsequent money raises, stock
option offerings and vesting, however, any dilution would remain consistent and proportional to the remaining founders’ dilution
ratios and would not be diluted more than the founders’ ratios in any current or subsequent money raise. The claimants also
received a total of $110,000 paid out over eighteen (18) months starting November 1, 2016. As of September 30, 2018 and December
31, 2017, $0 and $24,444 of the balance remained outstanding, all of which are considered short term, respectively.
In July 2017, an owner of several vehicles
that he was renting through the Company’s platform filed arbitration seeking damages for losses associated with renting his
vehicles, specifically losses associated with a claimed stolen vehicle, storage fees, damage/repair fees, an insurance deductible,
and purported loss of income due to his inability to rent the stolen/damaged vehicles. In December 2017, the owner also filed a
lawsuit in Los Angeles Superior Court reasserting the same claims. The Company believes this action is without merit and is vigorously
defending itself, while also exploring whether the dispute can be settled in an expeditious manner. The Company moved to compel
the owner to arbitrate his claims and to stay his Superior Court case. That motion was heard on June 19, 2018 and the court granted
the motion to compel arbitration.
The Company is involved in claims and litigation
from time to time in the normal course of business. At September 30, 2018, the Company believes there are no pending matters, except
as noted above, that are expected to have a material adverse effect on the business of the Company, its financial condition, results
of operations or cash flows.
Agreements
In November 2017, the Company entered into
a 180-day agreement with a third-party broker/dealer to assist in raising funds under a private placement. For their services,
they were to receive five percent (5%) of the gross proceeds under the placement as a success fee defined by the agreement, non-callable
warrants equal to ten percent (10%) of the aggregate number of shares of common stock, or in the case of non-convertible securities,
the aggregate number of shares of common stock issuable as if the non-convertible securities were convertible into common stock
at the public stock price on the date of closing if the Company is public or valuation per share on the date of closing if the
Company is private (excluding warrants) sold to potential investors in the placement. The warrants were to entitle the holder to
purchase securities of the Company at the same terms as issued under the placement, except that the exercise price of the warrants
would be 110% of the lesser of (a) the price at which securities (excluding the value of any warrants) are issued or (b) the exercise
price of any warrants issued to entities funding the placement. The agreement also called for $20,000 due upon execution of the
agreement and non-accountable expense cash fees equal to three percent (3%) of the gross proceeds due and payable immediately upon
the closing of the placement. The compensation terms of this agreement were modified on June 22, 2018 prior to the IPO such that
15,445 warrants were issued with a five year term and exercise price of $2.80. The Company valued the warrants similar to stock
options in Note 5 which was recorded as a discount on the related debt, Accordingly, the Company recorded $46,600 of interest expense
related to the accretion of the discount upon conversion of the 2018 Convertible Notes. See Note 4 for 2018 Convertible Debt related
to this agreement.
Other
In November 2017, the Company entered into
a lease in Los Angeles, California commencing April 1, 2018, with the ability to occupy the facility in January 2018. The lease
term is 39 months from the commencement date. Annual base rent is as follows: 2018 - $249,381, 2019 - $342,480, 2020 - $356,145,
2021 - $183,489, respectively. The lease required a deposit of $90,000. Per the lease agreement, the monthly rate will range from
$27,708 to $31,167 a month. The Company also rents office furniture and incurs ancillary fees for building services and shared
expenses. Rent expense for the nine months ended September 30, 2018 and 2017 was $251,894 and $120,859, respectively.
NOTE 4 – NOTES PAYABLE
2016 Convertible Notes Payable
From June 2016 to September 2016, the
Company issued convertible promissory notes (the “2016 Convertible Notes”) to related parties and third parties
with the same terms and conditions totaling indebtedness of $500,000 (the “2016 Convertible Debt”), $150,000 of
which was borrowed from related parties. The 2016 Convertible Notes bore interest at 12%, with a default rate of 15% and were
due three years from the issuance date. The 2016 Convertible Notes were automatically convertible in shares of Series
Seed 1 Convertible Preferred Stock upon 1) the consummation of an investment in the Company’s equity securities of over
$250,000 through a single or series of transactions involving the same party or parties and 2) the occurrence of a liquidity
event as defined by the 2016 Convertible Notes. The holders had the option to convert the entire unpaid and
outstanding principal amount and any accrued interest thereon under the 2016 Convertible Notes on the maturity date. The
conversion price was the lesser of 1) that price per share that was eighty percent (80%) of the purchase price per share of
the same class and series of equity securities sold by the Company in a qualifying transaction or liquidity event or 2) an
amount equal to $4,000,000 divided by the total number of outstanding shares of the Company’s common stock immediately
prior to the transaction or liquidity event on a fully-diluted, as-converted basis.
In February 2017, the outstanding balance
of the 2016 Convertible Notes was converted into Series Seed 1 Convertible Preferred Stock based on the conversion terms noted
above due to the closing of a qualifying investment in equity securities. Accordingly, the 2016 Convertible Debt and accrued interest
thereon totaling $36,434 was converted into 943,908 shares of Series Seed 1 Convertible Preferred Stock. Upon conversion, the contingent
beneficial conversion feature was no longer contingent, and resulted in a discount and immediate accretion of such discount in
the amount of $134,108, which was charged to interest expense in the accompanying statement of operations during the three and
nine months ended September 30, 2017.
Interest expense for the 2016 Convertible
Debt, including the charge for the beneficial conversion feature, for the three and nine months ended September 30, 2017 $140,065.
There were no such charges in the 2018 periods presented.
2017 Notes Payable
In April and May 2017, the Company issued
promissory notes to related parties totaling $300,000 and a third party totaling $50,000 with the same terms and conditions (collectively,
the “2017 Notes”) and issued five year warrants to purchase up to 200,000 shares of common stock with an exercise price
of $2.10 per share. The Company calculated the relative fair value of the warrants using a Black-Scholes option pricing model with
similar inputs as disclosed for stock options in Note 5, resulting in a discount of $84,031. During the three and nine months ended
September 30, 2018 and 2017, the Company accreted $0, $21,008, $25,025 and $35,216 of this discount to interest expense, respectively.
The outstanding balance of the 2017 Notes has been repaid as of September 30, 2018.
2018
Convertible Notes and Warrants
During the first and second quarter of
2018, pursuant to a securities purchase agreement, the Company issued and sold senior secured convertible promissory notes (the
“2018 Convertible Notes”) to accredited investors in the aggregate principal amount of $3,046,281. Gross principal
amounts were net of $267,702 withheld for net proceeds of $2,778,579. The Company incurred additional offering costs of $67,882
for a total debt discount of $335,584, which was fully amortized by the IPO date. The 2018 Convertible Notes bore interest at the
rate of 13% per annum and were due eight months from the original issue date, which ranged from September to December 2018 (the
“Maturity Dates”). The 2018 Convertible Notes provided that the principal and all accrued and unpaid interest on the
2018 Convertible Notes were convertible into shares of common stock at a conversion rate equal to the lesser of $2.5480 per share
or seventy percent (70%) of the IPO price per share. Upon pricing the IPO, at the option of the holders, all outstanding principal
plus accrued interest underlying the 2018 Convertible Notes was converted into 1,231,165 shares of common stock at a conversion
rate of $2.5480. Upon conversion, the contingent beneficial conversion feature was no longer contingent, and resulted in a discount
and immediate accretion of such discount in the amount of $368,757 which was charged to interest expense in the accompanying statement
of operations during the nine months ended September 30, 2018.
In connection with the issuance of the
2018 Convertible Notes, each holder also received contingent five-year warrants to purchase common stock in an amount equal to
50% of the shares of common stock that the holder was entitled to in connection with the conversion of the holder’s 2018
Convertible Note when such note first became convertible, which was at the time the IPO was priced. Prior to the 2018 Convertible
Note being convertible, the holder did not have a right to exercise these warrants. At the IPO pricing date, 615,585 warrants to
purchase common stock became exercisable upon the conversion of the outstanding balance of the 2018 Convertible Notes, including
accrued interest. The warrants have an exercise price of 125% of the conversion price, or $3.185. The Company calculated the fair
value of the warrants at $1,741,334 using a Black-Scholes pricing model. The Company valued the warrants at $2.8288 per warrant
using a common stock fair value of $5.00, a term of five years, a volatility of 45% and a risk free interest rate of 2.75%. The
Company allocated the debt proceeds on a relative fair value basis between the note and warrant, in which the Company recognized
a note discount for $1,107,982. This was immediately recognized in interest expense as of the note conversion date. As of September
30, 2018, all of the warrants were outstanding.
NOTE 5 – STOCKHOLDERS’ DEFICIT
Reverse Stock Split
The Company effected a 1 for 1.8404 reverse
stock split for each share of common stock outstanding on May 17, 2017. Unless otherwise stated, all share information herein has
been retrospectively adjusted to reflect the reverse stock split.
Preferred Stock
The Company is authorized to issue 15,000,000
shares of preferred stock, $0.00001 par value per share, all of which shares of preferred stock are undesignated. As described
in Note 1, on June 29, 2018, at the closing of the IPO, 2,429,638 shares of outstanding Series Seed 1 Convertible Preferred Stock
automatically converted into 2,429,638 shares of common stock.
Common Stock
The Company is authorized to issue 50,000,000
shares of common stock, $0.00001 par value per share.
Private Placement
Starting in June 2017, the Company undertook
a private placement for the sale of common stock for $1.75 per share. During the year ended December 31, 2017, 1,236,588 shares
of common stock were sold for gross proceeds of $2,164,029. Relating to this offering, the Company was required to pay the placement
agent for the private placement a cash commission equal to 13% of the gross proceeds and issue the placement agent, or its designees,
warrant to purchase shares of common stock equal to 10% the amount of monies raised divided by $1.75. Accordingly, as of December
31, 2017, $281,324 in cash commissions have been paid or were payable along with $38,806 in related legal and other fees, both
of which were netted against the gross proceeds of the offering. Based on the amounts raised through December 31, 2017, the Company
issued the placement agent warrants to purchase 123,659, exercisable at $2.00 per share. The value of these placement agent warrants,
for which similar inputs were used compared to stock options below, were both an increase and reduction to additional paid-in capital
for a net zero effect on the gross proceeds of the offering.
On June 22, 2018, the placement agent warrants
that were to be earned per the description in Note 3, were amended to (i) decrease the amount of shares that can be purchased at
an exercise price of $2.00 per share to 60,392 shares of common stock and (ii) reduce the remaining 63,267 shares to 28,993 shares
at a modified exercise price of $7.50 per share, due to the fact that such placement agent warrants were earned 180 days immediately
preceding the filing date of the IPO registration statement.
Shares for Services
In December 2017, the Company issued 37,755
shares of common stock for payment of $66,070 in accounts payable related to legal services.
Collateralized Restricted Stock Purchases
In 2016, the Company issued 1,032,387 shares
of restricted common stock to related parties that vest as follows: 33% upon a sale of securities for gross proceeds of at least
$250,000 in one or more transactions and the remaining 67% vest monthly over three years, becoming fully vested in April 2019.
For consideration of these shares, the related parties entered into note agreements totaling $138,700 that call for the principal
and interest to be paid back in ten years from the date of the loan. The notes bear interest at 1%. The loans are secured by the
related shares of common stock. On May 31, 2018, the board of directors determined that it was in the best interest of the Company,
in order to comply with the requirements of Section 402 of the Sarbanes-Oxley Act of 2002 prior to filing the IPO registration
statement with the SEC, to (i) issue a bonus to those related parties serving as an officer and/or director of the Company in the
amount owed by each party. Each such related party bonus was used to repay and terminate the note agreements. An aggregate of $131,400
in principal was repaid and terminated along with accrued interest thereon. Remaining balance of $7,392 is outstanding to a related
party that is not serving as an officer or director of the Company. As of September 30, 2018, 897,890 shares have vested.
Stock Options
A summary of our stock option activity for the nine months
ended September 30, 2018, is as follows:
|
|
Number of shares
|
|
|
Weighted
average exercise
price
|
|
|
Weighted average remaining
contractual life (years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
1,021,171
|
|
|
$
|
1.04
|
|
|
|
9.3
|
|
Granted
|
|
|
557,500
|
|
|
|
4.11
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited or expired
|
|
|
(29,340
|
)
|
|
|
1.42
|
|
|
|
–
|
|
Outstanding at September 30, 2018
|
|
|
1,549,331
|
|
|
$
|
2.14
|
|
|
|
9.1
|
|
Stock-based compensation expense for stock
options for the three months ended September 30, 2018 and 2017 was $86,722 and $41,951, respectively, and $318,018 and $182,307
for the nine months ended September 30, 2018, and 2017, respectively.
As of September 30, 2018, the total estimated
remaining stock-based compensation expense for unvested stock options is $1,395,906 which is expected to be recognized over a weighted
average period of 2.41 years.
The Company estimates the fair value of
stock options that contain service and/or performance conditions using the Black-Scholes option pricing model. The range of input
assumptions used by the Company were as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
45%
|
|
45%
|
|
45%
|
|
40% – 45%
|
Risk-free interest rate
|
|
2.47%
|
|
2.33%
|
|
2.60%
|
|
2.32
%
|
Expected life in years
|
|
6.25
|
|
5.5
|
|
5.39 – 6.25
|
|
5.0 – 6.0
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
The Company recognizes stock option forfeitures
as they occur as there is insufficient historical data to accurately determine future forfeitures rates.
Management estimated the fair value of
common stock prior to the IPO date by looking at a market approach which takes into consideration past sales of our common and
preferred stock, as well Company developments to date.
Subsequent to the period ended September 30, 2018, the Company granted 140,000 stock options exercisable
at $2.29 per share.
Restricted Shares
A summary of activity with our
restricted shares for the nine months ended September 30, 2018, is as follows:
|
|
Number
of shares
|
|
|
Weighted
average grant date fair value per share
|
|
|
|
|
|
|
|
|
Unvested as of December 31, 2017
|
|
|
–
|
|
|
|
–
|
|
Granted
|
|
|
1,099,285
|
|
|
$
|
5.00
|
|
Vested
|
|
|
(274,285
|
)
|
|
$
|
5.00
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Unvested as of September 30, 2018
|
|
|
825,000
|
|
|
$
|
5.00
|
|
During the
nine months ended September 30, 2018, the Company granted 264,285 shares of restricted common stock to three consultants for services.
All shares of restricted common stock fully vested upon the IPO. Accordingly, stock-based compensation of $1,321,425 was recognized
during the nine months ended September 30, 2018.
During the nine months ended September
30, 2018, the Company also granted 10,000 shares of restricted common stock to a consultant for services which fully vested upon
the IPO. The Company recognized stock-based compensation expense of $50,000 during the nine months ended September 30, 2018 for
the vesting of the 10,000 shares of restricted common stock. In addition, the Company also agreed to issue the consultant an aggregate
of 825,000 shares of restricted common stock with the issuance of 275,000 shares of restricted common stock upon each of three
milestones. Each of the three milestones has a specific target in which the Company must meet or exceed which include i) gross
bookings of rentals, ii) average daily active rentals, or iii) market capitalization. As of September 30, 2018, it is not probable
that the performance metrics will be met and therefore no compensation expense has been recognized and no shares of restricted
common stock have been issued. Unrecognized compensation expense related to the unvested restricted stock is $2,103,750 as of September
30, 2018 based on the market value of the Company’s common stock at September 30, 2018. Actual future expense is dependent
on the measurement date and when vesting becomes probable.
Warrants
Relating
to the 2017 Notes as described in Note 4, the Company issued warrants to purchase up to 200,000 shares of common stock with a
fixed exercise price of $2.10 per share.
Relating
to the private placement described above, the Company agreed to issue warrants to the placement agent, equal to 10% the amount
of monies raised divided by $1.75. The Company received $2,164,029 in gross funds from the private placement which has earned
the placement agent warrants to purchase up to 123,659 shares of common stock with an exercise price of $2.00 per share. On June
22, 2018, such placement agent warrants were amended to (i) decrease the amount of shares that can be purchased at an exercise
price of $2.00 per share to 60,392 shares of common stock and (ii) reduce the remaining 63,267 shares to 28,993 shares at a modified
exercise price of $7.50 per share, due to the fact that such placement agent warrants were earned 180 days immediately preceding
the filing date of the IPO registration statement.
Relating
to the 2018 Convertible Notes, warrants to purchase up to 615,585 shares of our common stock at a price of $3.185 per share
were issued to the holders of such notes, and 15,455 were issued to the broker/dealer.
|
|
Relating to the
IPO, the Company agreed to issue warrants to purchase up to 75,600 shares of common stock to the underwriters in connection
with this primary offering. The value of the warrants nets against the equity related funds raised but is added back
to equity for a net zero effect on equity.
|
In June
2018, the Company entered into agreements with two service provider firms pursuant to which the Company agreed to pay cash compensation
and issue warrants to purchase up to an aggregate amount of 250,000 shares of common stock. The warrants are fully vested and
non-forfeitable. The warrants range from three (3) or five (5) years and are exercisable for $5.00. Accordingly, stock-based compensation
of $463,000 was recognized in general and administrative expenses in the accompanying statements of operations.
The Company
used the Black-Scholes pricing model to value the above warrants, which had similar inputs to stock options included in the stock
option section above except for the expected life of the warrants, which was set to match the related term of the warrant.
As of September
30, 2018 and December 31, 2017, all warrants were vested.
NOTE
6 – RELATED PARTY TRANSACTIONS
Related
Party Advances
From time
to time during the years ended December 31, 2017 and 2016, the Company received advances from related parties for short-term working
capital. Such advances are considered short-term and non-interest bearing and due on demand. As of September 30, 2018 and December
31, 2017 $9,629, remained outstanding.
During the
nine months ended September 30, 2017, advances of $7,500 to former officers were forgiven.
Insurance
The president of the Company’s
primary insurance broker, providing gap coverage for vehicles on the platform, when existing policy coverage is not
applicable, is also a minority stockholder and a holder of 2017 Notes with related warrants. As of September 30, 2018 and
December 31, 2017, the Company had outstanding balances to the insurer totaling $83,115 and $337,882, included in accounts
payable, respectively. During the nine months ended September 30, 2018 and 2017, the Company paid the insurer $3,357,305 and
$1,516,565, respectively.