hyre20210630

hyre20210630_10q.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

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

For the transition period from ________________ to ________________

Commission File Number: 001-38561

HyreCar Inc.

(Exact name of registrant as specified in its charter)

Delaware		47-2480487
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

355 South Grand Avenue, Suite 1650 Los Angeles, CA		90071
(Address of principal executive offices)		(Zip Code)

(888) 688-6769

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.00001 per share		HYRE		The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 10, 2021, the registrant had 21,287,764 shares of common stock, $0.00001 par value per share, issued and outstanding.

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	Table of Contents

		Page No

Cautionary Note Regarding Forward-Looking Statements and Industry Data		ii
PART I - FINANCIAL INFORMATION		1
Item 1.	Consolidated Financial Statements (Unaudited)	1
	Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020	1
	Consolidated Statements of Operations for the Three and Six months ended June 30, 2021 and 2020	2
	Consolidated Statement of Stockholders' Equity for the Three and Six months ended June 30, 2021 and 2020	3
	Consolidated Statements of Cash Flows for the Three and Six months ended June 30, 2021 and 2020	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4.	Controls and Procedures	22

PART II - OTHER INFORMATION		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
Signatures		25

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements may be identified by such forward-looking terminology as "may," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue" or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

●

the impacts of COVID-19, or other future pandemics on our business, results of operations, financial position and cash flows;

●

our ability to effectively manage our growth and maintain and improve our corporate culture;

●

the potential benefits of and our ability to maintain our relationships with ridesharing companies, establish or maintain future collaborations or strategic relationships, and obtain additional funding;

●

our marketing capabilities and strategy;

●

our ability to maintain a cost-effective insurance program;

●

our industry is in early stages of growth;

●

our anticipated investments in new products and offerings, and the effect of these investments on our results of operations;

●

our ability to retain the continued service of our key professionals and to identify, hire and retain additional qualified professionals;

●

our competitive position, and developments and projections relating to our competitors and our industry;

●

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and

●

our ability to comply with existing, modified, or new laws and regulations applying to our business.

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC") could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.

References to HyreCar

Throughout this Quarterly Report on Form 10-Q, the "Company," "HyreCar," "we," "us," and "our" refers to HyreCar Inc. and "our Board of Directors" refers to the Board of Directors of HyreCar Inc.

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PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

HYRECAR INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	*June 30,*			*December 31,*
	*2021*			*2020*
Assets
Current assets:
Cash and cash equivalent	$	24,021,863		$	4,923,515
Restricted cash		877,586			—
Accounts receivable		101,615			109,366
Deferred offering costs		—			33,164
Insurance deposits		2,211,625			749,454
Other current assets		305,255			313,812
Total current assets		27,517,944			6,129,311

Property and equipment, net		6,823			8,425
Intangible assets, net		43,094			80,031
Other assets		—			95,000
Total assets	$	27,567,861		$	6,312,767

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable	$	5,197,794		$	2,275,559
Accrued liabilities		5,627,276			4,359,348
Insurance reserve		1,990,482			2,113,039
Note payable, current portion		1,999,175			1,554,548
Deferred revenue		63,068			76,059
Total current liabilities		14,877,795			10,378,553

Note payable, net of current portion		—			444,627
Total liabilities		14,877,795			10,823,180

Commitments and contingencies (Note 3)		—			—

Stockholders' equity (deficit):
Preferred stock, 15,000,000 shares authorized, par value $0.00001, 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		—			—
Common stock, 50,000,000 shares authorized, par value $0.00001, 20,961,319 and 17,741,713 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		209			177
Additional paid-in capital		73,467,587			39,725,445
Accumulated deficit		(60,777,730	)		(44,236,035	)
Total stockholders' equity (deficit)		12,690,066			(4,510,413	)
Total liabilities and stockholders' equity (deficit)	$	27,567,861		$	6,312,767

See accompanying notes to the unaudited consolidated financial statements

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HYRECAR INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	*Three Months Ended*			*Three Months Ended*			*Six Months Ended*			*Six Months Ended*
	*June 30,*			*June 30,*			*June 30,*			*June 30,*
	*2021*			*2020*			*2021*			*2020*

Revenue	$	9,057,866		$	5,583,388		$	16,506,266		$	11,363,801

Cost of revenue		8,253,164			3,045,726			12,969,314			6,651,027

Gross profit		804,702			2,537,662			3,536,952			4,712,774

Operating Expenses:
General and administrative		6,090,899			3,911,065			11,795,352			7,139,237
Sales and marketing		2,875,084			1,871,099			5,582,275			4,161,271
Research and development		1,173,248			615,466			2,699,966			1,359,279
Total operating expenses		10,139,231			6,397,630			20,077,593			12,659,787

Operating loss		(9,334,529	)		(3,859,968	)		(16,540,641	)		(7,947,013	)

Other (income) expense
Interest expense		3,893			11,310			5,799			11,329
Other income		(4,062	)		(17,803	)		(5,545	)		(47,451	)
Total other income		(169	)		(6,493	)		254			(36,122	)

Loss before provision for income taxes		(9,334,360	)		(3,853,475	)		(16,540,895	)		(7,910,891	)

Provision for income taxes		800			—			800			800

Net loss	$	(9,335,160	)	$	(3,853,475	)	$	(16,541,695	)	$	(7,911,691	)

Weighted average shares outstanding - basic and diluted		20,521,674			17,181,496			19,881,584			16,803,232
Weighted average net loss per share - basic and diluted	$	(0.45	)	$	(0.22	)	$	(0.83	)	$	(0.47	)

See accompanying notes to the unaudited consolidated financial statements

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HYRECAR INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

												*Subscription*
									*Additional*			*Receivable -*						*Total*
	*Preferred Stock*				*Common Stock*				*Paid-in*			*Related*			*Accumulated*			*Stockholders'*
	*Shares*		*Amount*		*Shares*		*Amount*		*Capital*			*Party*			*Deficit*			*Equity*
March 31, 2020 (unaudited)		—	$	—		16,473,335	$	164	$	36,301,582		$	(7,447	)	$	(33,073,350	)	$	3,220,949
Stock option compensation		—		—		—		—		26,161			—			—			26,161
Stock option compensation modification		—		—		822,500		8		1,434,124			—			—			1,434,132
Restricted stock unit compensation		—		—		—		—		121,797			—			—			121,797
Stock options exercised		—		—		3,000		—		5,250			—			—			5,250
Shares issued for vested restricted stock units		—		—		400		—		—			—			—			—
Shares issued for legal services and settlement of payables and accrued liabilities		—		—		254,535		2		567,611			—			—			567,613
Shares issued for settlement		—		—		78,431		1		213,332			—			—			213,333
Shares issued for services		—		—		60,000		1		145,199			—			—			145,200
Net loss		—		—		—		—		—			—			(3,853,475	)		(3,853,475	)
June 30, 2020 (unaudited)		—	$	—		17,692,201	$	176	$	38,815,056		$	(7,447	)	$	(36,926,825	)	$	1,880,960

March 31, 2021 (unaudited)		—	$	—		20,353,429	$	203	$	71,158,828		$	—		$	(51,442,570	)	$	19,716,461
Stock option compensation		—		—		—		—		4,123			—			—			4,123
Restricted stock unit compensation		—		—		—		—		1,939,766			—			—			1,939,766
Stock options exercised		—		—		120,372		1		114,895			—			—			114,896
Shares issued for vested restricted stock units		—		—		435,845		4		(4	)		—			—			—
Warrants exercised - cashless		—		—		39,395		1		(1	)		—			—			—
Shares issued for services		—		—		12,278		—		249,980			—			—			249,980
Net loss		—		—		—		—		—			—			(9,335,160	)		(9,335,160	)
June 30, 2021 (unaudited)		—	$	—		20,961,319	$	209	$	73,467,587		$	—		$	(60,777,730	)	$	12,690,066

												*Subscription*
									*Additional*			*Receivable -*						*Total*
	*Preferred Stock*				*Common Stock*				*Paid-in*			*Related*			*Accumulated*			*Stockholders'*
	*Shares*		*Amount*		*Shares*		*Amount*		*Capital*			*Party*			*Deficit*			*Equity*
December 31, 2019		—	$	—		16,393,171	$	164	$	35,857,835		$	(7,447	)	$	(29,015,134	)	$	6,835,418
Stock option compensation		—		—		—		—		278,233			—			—			278,233
Stock option compensation modification		—		—		822,500		8		1,434,124			—			—			1,434,132
Restricted stock unit compensation		—		—		—		—		284,897			—			—			284,897
Stock options exercised		—		—		43,869		—		33,825			—			—			33,825
Stock options exercised – cashless		—		—		2,645		—		—			—			—			—
Shares issued for vested restricted stock units		—		—		37,050		—		—			—			—			—
Shares issued for legal services and settlement of payables and accrued liabilities		—		—		254,535		2		567,611			—			—			567,613
Shares issued for settlement		—		—		78,431		1		213,332			—			—			213,333
Shares issued for services		—		—		60,000		1		145,199			—			—			145,200
Net loss		—		—		—		—		—			—			(7,911,691	)		(7,911,691	)
June 30, 2020 (unaudited)		—	$	—		17,692,201	$	176	$	38,815,056		$	(7,447	)	$	(36,926,825	)	$	1,880,960

December 31, 2020		—	$	—		17,741,713	$	177	$	39,725,445		$	—		$	(44,236,035	)	$	(4,510,413	)
Stock option compensation		—		—		—		—		10,770			—			—			10,770
Restricted stock unit compensation		—		—		—		—		5,700,793			—			—			5,700,793
Stock options exercised		—		—		120,372		1		114,895			—			—			114,896
Shares issued for vested restricted stock units		—		—		435,845		4		(4	)		—			—			—
Warrants exercised for cash		—		—		20,232		1		64,539			—			—			64,540
Warrants exercised - cashless		—		—		100,879		1		(1	)		—			—			—
Common stock issued for cash		—		—		2,530,000		25		29,727,475			—			—			29,727,500
Offering costs		—		—		—		—		(2,126,305	)		—			—			(2,126,305	)
Shares issued for services		—		—		12,278		—		249,980			—			—			249,980
Net loss		—		—		—		—		—			—			(16,541,695	)		(16,541,695	)
June 30, 2021 (unaudited)		—	$	—		20,961,319	$	209	$	73,467,587		$	—		$	(60,777,730	)	$	12,690,066

See accompanying notes to the unaudited consolidated financial statements

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HYRECAR INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	*Six Months Ended*			*Six Months Ended*
	*June 30,*			*June 30,*
	*2021*			*2020*
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,541,695	)	$	(7,911,691	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		38,539			38,316
Stock-based compensation		5,961,543			2,466,312
Provision for losses on accounts receivable		50,079			—
Changes in operating assets and liabilities:
Accounts receivable		(42,328	)		25,431
Insurance deposits		654,454			(749,454	)
Lease deposit and other current assets		103,557			155,862
Accounts payable		838,775			443,372
Accrued liabilities		1,267,927			(17,112	)
Insurance reserve		(122,557	)		26,426
Deferred revenues		(12,991	)		(10,564	)
Net cash used in operating activities		(7,804,697	)		(5,533,102	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities		—			—

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock		29,727,500			—
Offering costs associated with public offering		(2,126,305	)
Proceeds from exercise of stock options		114,896			33,825
Proceeds from note payable		—			2,004,175
Principal repayment on note payable		—			(5,000	)
Proceeds from exercise of warrants		64,540			—
Net cash provided by financing activities		27,780,631			2,033,000

Increase (decrease) in cash, cash equivalents and restricted cash		19,975,934			(3,500,102	)
Cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash - beginning of period		4,923,515			10,657,140
Cash, cash equivalents and restricted cash - end of period	$	24,899,449		$	7,157,038

Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets
Cash and cash equivalents	$	24,021,863		$	7,157,038
Restricted cash		877,586			—
Total cash, and cash equivalents and restricted cash to the consolidated balance sheets	$	24,899,449		$	7,157,038

Supplemental disclosures of cash flow information:
Cash paid for:
Interest expense	$	—		$	19
Income taxes	$	800		$	8,500

See accompanying notes to the unaudited consolidated financial statements

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HYRECAR INC.

NOTES TO 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 headquarters are 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 consolidated financial statements of HyreCar Inc. are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

Strategic Partnership, Recent Public Offering and Insurance Program Renewal

On January 28, 2021, the Company announced new and expanded strategic partnerships 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 with Cogent Bank assigning all right, title and interest in a Company deposit account of $750,000 plus 5% fees to secure that certain revolving line of credit made by the bank to AmeriDrive.

On February 4, 2021, the Company entered into an underwriting agreement with Lake Street Capital Markets, LLC and Northland Securities, Inc., as representatives of the several underwriters, in connection with the public offering (the "2021 offering") of a total of 2,530,000 shares of Company common stock. The initial closing of the offering occurred on February 8, 2021. The net proceeds to the Company from the 2021 offering was approximately $27.6 million, after deducting the underwriting discounts and commissions and offering expenses payable by the Company.

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.

Basis of Presentation

The accompanying unaudited 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, 2020 included herein was derived from the audited financial statements as of that date. The accompanying unaudited interim 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 consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2020 and notes thereto that are included in the Company's Annual Report on Form 10-K.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 revenue from operations, and capital raised through the 2021 offering described in Note 1. The funds received from the 2021 offering and our existing capital causes us to continue to believe the Company has sufficient resources to continue as a going concern.

In March 2020, COVID-19 began spreading rapidly throughout the world, prompting governments and businesses to take unprecedented measures in response. Such measures included restrictions on travel and business operations, temporary closures of businesses, quarantines and shelter-in-place orders. The full extent of the future impact of the COVID-19 pandemic on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, and the imposition of protective public safety measures.

Use of Estimates

The preparation of 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.

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HYRECAR INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company’s most significant estimates and judgments involve recognition of revenue and estimates for future contingent customer incentive obligations, 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 June 30, 2021 and December 31, 2020. 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 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 restricted bank account at Cogent Bank as collateral for the amount pledged by the Company to secure that certain revolving line of credit made by Cogent Bank to AmeriDrive, as well as escrow accounts held for our claims processing partner to pay out claims in a timely fashion.

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 June 30, 2021 and December 31, 2020, the Company has a reserve allowance of $50,079 and $0, respectively.

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HYRECAR INC.

NOTES TO 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 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 dependent on the actual claims paid during that quarter. As of June 30, 2021 and December 31, 2020, $1,990,482 and $2,113,039 was included in the accompanying consolidated balance sheets, respectively, related to the loss reserve, where the expense is included in costs of revenue.

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 of the policy period, which is the fourth quarter of 2022 or at any time to remediate overdue premiums. In addition, effective June 15, 2021, a separate primary automobile liability was placed for California only, which required a $300,000 deposit premium that will be available to offset premiums due during the first quarter of 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 and the results of related 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 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.

The Company has been in the process of finalizing the integration and transition to Sedgwick which is expected to provide an improved customer experience but has impacted the claims portfolio in the short term. Specifically, in the quarter ended June 30, 2021 our claims processes were adjusted and resulted in higher than historical loss payouts. The Company intends to monitor closely the claims settlement process/guidelines and make any necessary adjustments to continuously improve overall performance.

Revenue Recognition

The Company generates the majority of its revenue from its ridesharing marketplace 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 10%-20% 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%-25% of the base rental fee and remits the remaining portion to the vehicle owner. The 10%-20% fee collected from the driver and 15-25% retained from the owner are considered “Transaction Fees” and the 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.

The following is a breakout of revenue components by subcategory for the three and six months ended June 30, 2021 and 2020.

	*Three Months Ended*			*Three Months Ended*			*Six Months Ended*			*Six Months Ended*
	*June 30,*			*June 30,*			*June 30,*			*June 30,*
	*2021*			*2020*			*2021*			*2020*
Insurance and administration fees	$	4,659,596		$	2,904,507		$	8,407,795		$	5,923,708
Transaction fees		4,148,061			2,376,448			7,564,782			5,058,037
Other fees		364,059			387,733			695,386			626,558
Incentives and rebates		(113,850	)		(85,300	)		(161,697	)		(244,502	)
Net revenue	$	9,057,866		$	5,583,388		$	16,506,266		$	11,363,801

Table of Contents

HYRECAR INC.

NOTES TO 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 sh

SEC Form 10-Q filed by HyreCar Inc.