RUMBLEON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Nine-months ended September 30, |
| | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | |
| Net loss | $(5,132,623) | $(66,991) |
| Adjustments to reconcile net income | | |
| to net cash used in operating activities: | | |
| Depreciation and amortization | 302,697 | 1,425 |
| Amortization of debt discount | 91,877 | - |
| Interest expense on conversion of debt | 196,076 | - |
| Share based compensation expense | 287,550 | - |
| Changes in operating assets and liabilities: | | |
| Increase in prepaid expenses | (121,846) | (4,167) |
| Increase in inventory | (1,244,658) | |
| Increase in accounts receivable | (320,575) | - |
| Increase in other current assets | (174,419) | - |
| Increase in accounts payable and accrued liabilities | 1,683,442
| 18,095 |
| Increase in accrued interest payable - related party | 43,351
| (10,478) |
| | | |
| Net cash used in operating activities | (4,389,128) | (62,116) |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| Cash used for acquisitions | (750,000) | - |
| Technology development | (435,097) | - |
| Purchase of property and equipment | (600,175) | - |
| | | |
| Net cash used in investing activities | (1,785,272) | - |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| Proceeds from note payable | 2,167,000 | 214,358
|
| Repayments for note payable - related party | -
| (158,000) |
| Proceeds from sale of common stock | 3,313,040 | 7,000 |
| | | |
| Net cash provided by financing activities | 5,480,040 | 63,358 |
| | | |
| NET CHANGE IN CASH | (694,360) | 1,242
|
| | | |
| CASH AT BEGINNING OF PERIOD | 1,350,580 | 3,713 |
| | | |
| CASH AT END OF PERIOD | $656,220 | $4,955 |
See Notes to Condensed Consolidated Financial Statements.
NOTES TO THEUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(Dollars in thousands, except per share amounts)
(Unaudited)
NOTE 1 ––DESCRIPTION OF BUSINESS DESCRIPTIONAND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Organization
Unless the context requires otherwise, references in these financial statements to “RumbleOn,” the “Company,” “we,” “us,” and “our” refer to RumbleOn, Inc. and its consolidated subsidiaries.
RumbleOn is the nation's first, largest, and only publicly-traded, technology-based platform in the powersports industry. Headquartered in the Dallas Metroplex, RumbleOn is revolutionizing the customer experience for outdoor enthusiasts across the country and making powersport vehicles accessible to more people in more places than ever before. We are transforming the powersports customer experience by giving consumers what they want - a wide selection, great value and quality, transparency, and an easy, friction-free transaction. Every element of our business, from inventory procurement to fulfillment to overall ease of transactions, whether online or on-site at one of our 55 retail locations, has been built for a singular purpose – to create an unparalleled customer experience in the powersports industry.
Although our primary focus is on the customer experience and building market share in the powersports industry, during 2022 and 2023 we participated in the automotive industry through our wholly-owned wholesale distributor of used automotive inventory, Wholesale, Inc. (along with its consolidated subsidiaries, the “Company”("Wholesale Inc.") was incorporated in October 2013, and our exotics retailer AutoSport USA, Inc., which does business under the lawsname Got Speed. In the third quarter of 2022, we announced we would be winding down our wholesale automotive business, which we expect to complete during the Statesecond or third quarter of Nevada, as Smart Server,2023. Our logistics services company, Wholesale Express, LLC ("Wholesale Express"), provides freight brokerage services facilitating transportation for dealers and consumers.
On August 31, 2021 (the “RideNow Closing Date”), RumbleOn, Inc. completed its business combination with RideNow Powersports, the nation's largest powersports retailer group (“Smart Server”RideNow”). On February 13, 2017,18, 2022 (the “Freedom Closing Date”), the Company changedcompleted its name from Smart Server, Inc. to RumbleOn, Inc.
Nature of Operations
Smart Server was originally formed to engage in the business of designing and developing mobile application payment software for smart phones and tablet computers. After Smart Server ceased its technology development activities in 2014, it had no operations and nominal assets, meeting the definition of a “shell company” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and regulations thereunder.
In July 2016, Berrard Holdings Limited Partnership (“Berrard Holdings”) acquired 99.5% of the common stock of the Company from the principal stockholder. Shortly after the Berrard Holdings common stock purchase, the Company began exploring the development of a capital light e-commerce platform facilitating the ability of both consumers and dealers to Buy-Sell-Trade-Finance pre-owned recreation vehicles in one online location. The Company’s goal is for the platform to be widely recognized as the leading online solution for the sale, acquisition, and distribution of recreation vehicles by providing users with the most efficient, timely and transparent experience. The Company’s initial focus is the market for 601cc and larger on road motorcycles, particularly those concentrated in the “Harley-Davidson” brand. The Company will look to extend to other brands and additional vehicle types and products as the platform matures.
The Company’s business plan is currently driven by a technology platform it acquired on February 8, 2017 from NextGen Dealer Solutions, LLC (“NextGen”), which the Company owns and operates through its wholly-owned subsidiary NextGen Pro, LLC (“NextGen Pro”). The NextGen platform provides vehicle appraisal, inventory management, customer relationship management and lead management, equity mining, and other key services necessary to drive the online marketplace. For additional information, see Note 3 - “Acquisitions.”
Serving both consumers and dealers, through our online platform, we make cash offers for the purchase of their vehicles and intend to provide them the flexibility to trade, list, or auction their vehicle through our website and mobile applications. In addition, we offer a large inventory of used vehicles for sale along with third-party financing and associated products. Our operations are designed to be scalable by working through an infrastructure and capital light model that is achievable by virtue of a synergistic relationship with dealer partners. We utilize dealer partners in the acquisition of motorcycles as well as to provide inspection, reconditioningFreedom Powersports, LLC (“Freedom Powersports”) and distribution services. Correspondingly, we earn feesFreedom Powersports Real Estate, LLC (“Freedom Powersports - RE,” and transaction income,together with Freedom Powersports, the “Freedom Entities”), a retailer group with 13 locations in Texas, Georgia, and dealer partners will earn incremental revenue and enhance profitability through increased sales, leads, and fees from inspection, reconditioning and distribution programs.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alabama.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States generally accepted accounting principlesof America (“U.S. GAAP”) for interim financial information and in accordance with the instructions toon Form 10-Q and Rule 10-01 of Regulation S-X promulgated bypursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”(“SEC”) and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements.. The Company’s Condensed Consolidated Financial Statements reflectinclude the accounts of RumbleOn, Inc. and its subsidiaries, which are all wholly owned, including RideNow and the Freedom Entities from the dates these businesses were respectively acquired. In accordance with those rules and regulations, the Company has omitted certain information and notes required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, the Condensed Consolidated Financial Statements contain all adjustments, (consisting only of normal recurring adjustments) management believes areexcept as otherwise noted, necessary for the fair presentation of the Company’s financial condition,position and results of operations and cash flows for the periods presented. Certain prior period amounts have been reclassified to conform to the current year’s presentation. Amounts and percentages may not total due to rounding.The information at December 31, 2016 in the Company’s Condensed Consolidated Balance Sheets included in this quarterly reportyear-end condensed balance sheet data was derived from the audited financial statements. These Condensed Consolidated Balance Sheets included in the Company’s 2016 Annual Report on Form 10-K filed with the SEC on February 14, 2017. The Company’s 2016 Annual Report on Form 10-K, together with the information incorporated by reference into such report, is referred to in this quarterly report as the “2016 Annual Report.” This quarterly reportFinancial Statements should be read in conjunction with the 2016audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report.
Year-end
In October 2016,Report on Form 10-K for the Company changed itsyear ended December 31, 2022 (the “2022 Form 10-K”). The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results expected for the entire fiscal year-end from November 30 to December 31.
year. All intercompany accounts and material intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statementsthese Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Certain accounting estimates involve significant judgments, assumptions and estimates by management that affecthave a material impact on the reported amountscarrying value of certain assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities inand the financial statementsreported amounts of revenue and accompanying notes. Estimatesexpenses during the reporting period, which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are used for,based on historical experience, management’s experience, and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates. In particular, the continuing adverse impacts to macro economic conditions, as well as the Company’s operations, may impact future estimates including, but not limited to inventory valuation, depreciable lives, carryingvaluations, fair value
measurements, asset impairment charges and discount rate assumptions. These conditions include, but are not limited to, recession, inflation, interest rates, unemployment levels, the state of the housing market, gasoline prices, consumer credit availability, consumer credit delinquency and loss rates, personal discretionary spending levels, and consumer sentiment about the economy in general. These conditions and the economy in general could be affected by significant national or international events such as a global health crisis, acts of terrorism, or acts of war. If these economic conditions worsen or stagnate, it can have a material adverse effect on consumer demand as well as the availability of credit to finance powersports and vehicle purchases, which could adversely impact our business and results of operations.
Correction of an Immaterial Misstatement Related to Prior Periods
During the quarter ended December 31, 2022, the Company identified a misstatement in its accounting for internal powersports revenue and internal powersports cost of sales, returns, receivables valuation, restructuring-related liabilities, taxes,which were included in the consolidated statements of operations rather than being eliminated, which resulted in an overstatement of both revenue and contingencies. Actual results could differ materially from those estimates.
Earnings (Loss) Per Share
The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividingcost of sales, with no impact to gross profit, operating income (loss), or net income (loss) by. The misstatement impacted the weighted average number of shares of common stock outstanding duringunaudited Condensed Consolidated Financial Statements for the period. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common sharesthree month periods ended March 31, 2022, June 30, 2022, and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.September 30, 2022.
Revenue Recognition
Revenue is derived from two primary sources:(1)the Company’s online marketplace, which is our largest source of revenue and includes: (i) the sale of used vehicles through consumer, dealers and auction sales channels; (ii) online listing and sales fees; (iii) retail merchandise sales; (iv) vehicle financing; and (v) vehicle service contracts;and (2) subscription and other fees relating to the RumbleOn software solution, which includes: (i) a vehicle appraisal process; (ii) inventory management system; (iii) customer relationship and lead management program; and (iv) equity mining.
The Company recognizesevaluated the misstatement and concluded that the impact was not material, either individually or in the aggregate, to its current or previously issued consolidated financial statements. The Company has corrected the Condensed Consolidated Financial Statements by decreasing powersports revenue and cost of sales for the three months ended March 31, 2022 by $14,719 and $14,719, respectively.
Recent Pronouncements
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2016-13 on January 1, 2023. The standard did not have a material impact on the Company's Condensed Consolidated Financial Statements for the three months ended March 31, 2023.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” This ASU refines the scope of ASC 848 and clarifies some of its guidance as part of the Board's monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities. In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." This ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. These new standards were effective upon issuance and generally can be applied to applicable contract modifications. While our senior secured debt and many of our floorplan arrangements utilize LIBOR as a benchmark for calculating the applicable interest rate, some of our floorplan arrangements have already transitioned to utilizing an alternative benchmark rate. We are continuing to evaluate the impact of the transition from LIBOR to alternative reference interest rates. We cannot predict the effect of the potential changes to or elimination of LIBOR, the establishment of alternative rates or benchmarks, and the corresponding effects on our cost of capital but do not expect a significant impact on our consolidated financial position, results of operations, and cash flows.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606 instead of being recorded at fair value. The Company early adopted these requirements prospectively in the first quarter of 2022.
Accounting for Business Combinations
Total consideration transferred for acquisitions is allocated to the tangible and intangible assets acquired and liabilities assumed, if any, based on their fair values at the dates of acquisition. This purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and other fair value adjustments with respect to certain assets acquired and liabilities assumed. The fair value of identifiable intangible assets is based on detailed valuations that use information and assumptions determined by management. Any excess of purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Condensed Consolidated Statements of Operations.
We use the income approach to determine the fair value of certain identifiable intangible assets including franchise rights. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. We base our assumptions on estimates of future cash flows, expected growth rates, etc. We base the discount rates used to arrive at a present value as of the date of acquisition on the time value of money and certain industry-specific risk factors. We believe the estimated purchased franchise rights and non-compete intangible asset amounts so determined represent the fair value at the date of acquisition and do not exceed the amount a third-party would pay for the assets.
NOTE 2 - ACQUISITIONS
Freedom Transaction
On November 8, 2021, RumbleOn entered into a Membership Interest Purchase Agreement to acquire 100% of the equity interests of the Freedom Entities, and completed the acquisition on the Freedom Closing Date (the “Freedom Transaction”). The Freedom Entities own and operate powersports retail dealerships, including associated real estate, involving sales, financing, and parts and service of new and used motorcycles, ATVs, UTVs, scooters, side-by-sides, sport bikes, cruisers, watercraft, and other powersports vehicles.
We accounted for the Freedom Transaction as a business combination under ASC 805, Business Combinations. Under the terms of the Membership Interest Purchase Agreement, all outstanding equity interests of the Freedom Entities were acquired for total consideration of $97,237, consisting of $70,569 paid in cash, including certain transaction expenses paid on behalf of the Freedom Entities' equity holders, and issuance of 1,048,718 shares of Class B Common Stock with a value of $26,511 on the Freedom Closing Date. On June 22, 2022, 2,446 shares of Class B Common Stock held in escrow were cancelled as part of the final purchase price adjustment.
The following table summarizes the final components of consideration transferred by the Company for the Freedom Transaction: | | | | | | | | |
| Cash | | $ | 70,569 | |
| Class B Common Stock | | 26,511 | |
| Acquiree transaction expenses paid by the Company at closing | | 157 | |
| Total purchase price consideration | | $ | 97,237 | |
Freedom Transaction Estimated Fair Value of Assets and Liabilities Assumed
On February 18, 2022, the Company completed its acquisition of the Freedom Entities. The Company finalized its accounting for consideration transferred, assets acquired, and liabilities assumed during the quarter ended March 31, 2023. All
adjustments were recorded within the measurement period that ended on February 17, 2023. Total goodwill acquired as part of the Freedom Entities acquisition was $29,359.
All ofFreedom Entities' acquired assets and liabilities, including goodwill recognized as a result of the Freedom Transaction,have been included in the Company’sPowersports reporting segment, as the Freedom Entities business is entirely within the Company’s Powersports segment.
The Company finalized its valuation of assets acquired, including intangible assets, and has recorded appropriate adjustments to the purchase price allocation during the measurement period. The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenue and expenses, and the applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable. However, actual results may differ from these estimates.
The Company uses the income approach to determine the fair value of certain identifiable intangible assets including franchise rights. This approach determines fair value by estimating after-tax cash flows attributable to these assets over their respective useful lives and then discounting these after-tax cash flows back to a present value. The Company bases its assumptions on estimates of future cash flows, expected growth rates, retention factors, etc. Discount rates used to arrive at a present value as of the date of acquisition are based on the time value of money and certain industry-specific risk factors. The Company believes the estimated purchased franchise rights and non-compete agreements amounts so determined represent the fair value at the date of acquisition, and do not exceed the amount a third-party would pay for such assets.
The following amounts represent the final determination of the fair value of the identifiable assets acquired and liabilities assumed as a result of the Freedom Transaction.
| | | | | |
| Estimated fair value of assets: | |
| Cash | $ | 6,381 | |
| Contracts in transit | 1,170 | |
| Accounts receivable | 1,089 | |
| Inventory | 24,809 | |
| Prepaid expenses | 214 | |
| Property & equipment | 50,228 | |
| Right-of-use assets | 2,876 | |
| Other intangible assets | 2,167 | |
| Franchise rights | 39,661 | |
| Other assets | 21 | |
| Total assets acquired | $ | 128,616 | |
| Estimated fair value of liabilities assumed: | |
| Accounts payable, accrued expenses and other current liabilities | $ | 5,407 | |
| Notes payable - floor plan | 18,337 | |
| Lease liabilities | 2,002 | |
| Deferred revenue | 3,495 | |
| Mortgage notes | 26,809 | |
| Notes payable | 4,688 | |
| Total liabilities assumed | 60,738 | |
| Total net assets acquired | 67,878 | |
| Goodwill | 29,359 | |
| Total purchase price consideration | $ | 97,237 | |
The Company assumed notes payable and mortgage notes liabilities of $31,497 on the Freedom Closing Date. The outstanding balance of these liabilities were repaid in the first quarter of 2022 and are reflected as cash outflows from financing activities in the Condensed Consolidated Statements of Cash Flows. The Company funded the cash portion of the Freedom Transaction, transaction expenses, notes payable, and mortgage note repayments through an $84,500 draw on the Oaktree Credit Agreement (as defined below) and approximately $11,347 of available cash resources.
The Company expects it will be able to amortize, for tax purposes, $29,359 of goodwill.
Acquisition related costs of $284 were incurred for the three months ended March 31, 2022 and are included in Selling, General and Administrative expenses in the Condensed Consolidated Statement of Operations.
Red Hills Powersports Acquisition
On March 3, 2023, the Company acquired Red Hills powersports, a single retail location representing 10 OEMs in Tallahassee, Florida, for total consideration approximating $3,300 in cash.
Pro Forma Information for Acquisitions
The Company recognized revenue from the Freedom Entities of $56,437 for the three months ended March 31, 2023. The Company has included the operating results of the Freedom Entities in its consolidated statements of operations since February 18, 2022. The following unaudited pro forma financial information presents consolidated information of the Company as if the Freedom Transaction was completed at December 31, 2021.
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | (unaudited) |
| Pro forma revenue | | | | | $ | 346,304 | | | $ | 468,913 | |
| Pro forma net income (loss) | | | | | $ | (16,902) | | | $ | 9,141 | |
| Earnings (loss) per share - basic | | | | | $ | (1.04) | | | $ | 0.58 | |
| Weighted average number of shares - basic | | | | | 16,224,122 | | | 15,693,900 | |
| Earnings (loss) per share - fully diluted | | | | | $ | (1.04) | | | $ | 0.58 | |
| Weighted average number of shares - fully diluted | | | | | 16,224,122 | | | 15,718,441 | |
NOTE 3 – LEASES
Lease Commitments
We determine whether an arrangement is a lease at inception and whether such leases are operating or financing leases. For each lease agreement, the Company determines its lease term as the non-cancellable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. We use these options in determining our capitalized financing and right-of-use assets and lease liabilities. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. To determine the discount rate to use in determining the present value of the lease payments, we use the rate implicit in the lease if determinable, otherwise we use our incremental borrowing rate.
The following table reflects the balance sheet presentation of our lease assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
| Leases | | Classification | | March 31, 2023 | | December 31, 2022 |
| Assets: | | | | | | |
| Operating | | Right of use assets | | $ | 163,556 | | | $ | 161,822 | |
| Finance | | Property and equipment, net | | — | | | — | |
| Total right-of-use assets | | | | $ | 163,556 | | | $ | 161,822 | |
| | | | | | |
| Liabilities: | | | | | | |
| Current: | | | | | | |
| Operating | | Accounts payable and other current liabilities | | $ | 24,170 | | | $ | 24,075 | |
| Finance | | Accounts payable and other current liabilities | | — | | | — | |
| Non-Current: | | | | | | |
| Operating | | Long-term portion of operating lease liabilities | | 129,518 | | | 126,695 | |
| Finance | | Other long-term liabilities | | — | | | — | |
| Total lease liabilities | | | | $ | 153,688 | | | $ | 150,770 | |
The weighted-average remaining lease term and discount rate for the Company's operating and financing leases are as follows: | | | | | | | | |
| March 31, 2023 | December 31, 2022 |
| Weighted average lease term-operating leases | 14.4 years | 14.6 years |
| Weighted average discount rate-operating leases | 13.9% | 14.0% |
The following table provides information related to the lease costs of finance and operating leases for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lease Expense | | Income Statement Classification | | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 |
| Operating | | Selling, general and administrative expenses | | | | | | $ | 8,149 | | | $ | 6,863 | |
| Finance: | | | | | | | | | | |
| Amortization of ROU assets | | Depreciation and amortization expense | | | | | | — | | | 41 | |
| Interest on lease liabilities | | Interest expense | | | | | | — | | | 124 | |
| Total lease costs | | | | | | | | $ | 8,149 | | | $ | 7,028 | |
In connection with the acquisition of the RideNow companies on August 31, 2021 (the "RideNow Transaction"), the Company entered into related party leases for 24 properties. The following table provides information related to the portion of lease assets and liabilities which are attributable to related party leases at March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
| Leases | | Balance Sheet Classification | | March 31, 2023 | | December 31, 2022 |
| Assets: | | | | | | |
| Right of use assets – related party | | | | $ | 104,619 | | | $ | 105,264 | |
| All other right-of-use assets | | | | 58,937 | | | 56,558 | |
| Total | | Right-of-use assets | | $ | 163,556 | | | $ | 161,822 | |
| | | | | | |
| Liabilities: | | | | | | |
| Current: | | | | | | |
| Current portion of lease liabilities – related party | | | | $ | 13,947 | | | $ | 14,492 | |
| Current portion of lease liabilities – all other leases | | | | 10,223 | | | 9,583 | |
| Total | | Accounts payable and other current liabilities | | $ | 24,170 | | | $ | 24,075 | |
| Non-Current: | | | | | | |
| Long-term portion of lease liabilities – related party | | | | 95,695 | | | 93,713 | |
| Long-term portion of lease liabilities – all other leases | | | | 33,823 | | | 32,982 | |
| Total | | Operating lease liabilities | | $ | 129,518 | | | $ | 126,695 | |
| Total lease liabilities | | | | $ | 153,688 | | | $ | 150,770 | |
| | | | | | |
Supplemental cash flow information related to operating leases for the three months ended March 31, 2023 was as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Cash payments for operating leases | $ | 6,991 | | | $ | 5,996 | |
| ROU assets obtained in exchange for new operating lease liabilities | $ | 2,786 | | | $ | 13,675 | |
The following table summarizes the future minimum payments for operating leases at March 31, 2023 due in each year ending December 31:
| | | | | |
| Year | Operating Leases |
| 2023 | $ | 21,656 | |
| 2024 | 28,389 | |
| 2025 | 26,669 | |
| 2026 | 24,859 | |
| 2027 | 23,701 | |
| Thereafter | 270,655 | |
| Total lease payments | 395,929 | |
| Less: imputed interest | (242,241) | |
| Present value of operating lease liabilities | $ | 153,688 | |
NOTE 4 –GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill, franchise rights, and other intangible assets as of March 31, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Goodwill | $ | 24,003 | | | $ | 21,142 | |
| | | |
| Other intangible assets | | | |
| Franchise rights - indefinite life | $ | 236,678 | | | $ | 236,678 | |
| Other intangibles - definite lived | 23,795 | | | 23,795 | |
| 260,473 | | | 260,473 | |
| Less: accumulated amortization | 15,573 | | | 13,060 | |
| Intangible assets, net | $ | 244,900 | | | $ | 247,413 | |
The following summarizes the changes in the carrying amount of goodwill by reportable segment from December 31, 2022 to March 31, 2023. | | | | | | | | | | | | | | | | | | | | | | | |
| Powersports | | Automotive | | Vehicle Logistics | | Total |
| Balance at December 31, 2022 | $ | 20,294 | | $ | — | | $ | 848 | | $ | 21,142 |
| Acquisition of store in Tallahassee, FL | 2,600 | | — | | — | | 2,600 |
| Freedom Powersports purchase accounting adjustments | 261 | | — | | — | | 261 |
| Balance at March 31, 2023 | $ | 23,155 | | $ | — | | $ | 848 | | | $ | 24,003 |
In addition to annual impairment testing, the Company continuously monitors for events and circumstances that could indicate that it is more likely than not that its goodwill, indefinite lived intangible assets, finite lived intangible assets, and other long-lived assets are impaired or not recoverable (a triggering event), requiring an interim impairment test. During the quarter ended March 31, 2023, the Company considered a number of factors including, but not limited to, current macroeconomic conditions such as inflation, economic growth, and interest rate movements, industry and market considerations, stock price performance (including performance relative to peers), and overall financial performance of the Company. Based on the analysis of relevant events and circumstances, the Company concluded a triggering event had not occurred as of March 31, 2023. The Company will continue to monitor both macroeconomic and company-specific events and circumstances in future periods and if a triggering event is identified prior to the Company’s fourth quarter annual impairment test, management will complete an interim impairment test at that time.
Estimated annual amortization expense related to other intangibles:
| | | | | |
| 2023 | $ | 5,397 | |
| 2024 | 2,655 | |
| 2025 | 99 | |
| 2026 | — | |
| Thereafter | — | |
| $ | 8,151 | |
NOTE 5 – NOTES PAYABLE AND LINES OF CREDIT
Notes payable consisted of the following as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Term Loan Credit Agreement maturing on August 31, 2026. Amortization payments are required quarterly. Interest rate at March 31, 2023 was 12.98%. | | $ | 346,066 | | | $ | 346,066 | |
| RumbleOn Finance line of credit maturing on February 4, 2025. Interest rate at March 31, 2023 was 9.94%. | | 20,952 | | | 25,000 | |
| Note payable for leasehold improvements | | 514 | | | — | |
| Total principal amount | | 367,532 | | | 371,066 | |
| Less: unamortized debt issuance costs | | (23,340) | | | (28,572) | |
| Total long-term debt | | 344,192 | | | 342,494 | |
| Less: Current portion of long-term debt | | (21,036) | | | (3,645) | |
| Long-term debt, net of current portion | | $ | 323,156 | | | $ | 338,849 | |
Floor plan notes payable as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Floor plans notes payable - trade | $ | 88,763 | | | $ | 75,387 | |
| Floor plans notes payable - non-trade | 156,245 | | 150,044 |
| Floor plan notes payable | $ | 245,008 | | | $ | 225,431 | |
Term Loan Credit Agreement
On the RideNow Closing Date, the Company entered into a new Term Loan Credit Agreement (the “Oaktree Credit Agreement”) among the Company, as borrower, the lenders party thereto, and Oaktree Fund Administration, LLC, as administrative agent and collateral agent (the “Administrative Agent”). The Oaktree Credit Agreement provides for secured credit facilities in the form of a $280,000 principal amount of initial term loans (the “Initial Term Loan Facility”) and a $120,000 in aggregate principal amount of delayed draw term loans (the “Delayed Draw Term Loans Facility”). The proceeds from the Initial Term Loan Facility were used to consummate the RideNow Transaction and to provide for working capital. Loans under the Delayed Draw Term Loans Facility are subject to customary conditions precedent for facilities of this type including the need to meet certain financial tests and became available six (6) months after the RideNow Closing Date and were unavailable to be drawn after the eighteen (18) month anniversary of the RideNow Closing Date, which occurred on March 1, 2023.
On February 18, 2022, in conjunction with the Freedom Transaction, the Company drew down $84,500 against the Oaktree Credit Agreement. During the fourth quarter of 2022, the Company made a voluntary principal repayment of $15,000 to the Oaktree Credit Facility. As of March 31, 2023, the Oaktree Credit Agreement does not provide for any available financing under the Delayed Draw Term Loans Facility.
The loan is reported on the balance sheet as senior secured debt, net of debt discount and debt issuance costs of $23,340, including the fair value of stock warrants of $10,950. Borrowings under the Oaktree Credit Agreement bear interest at a rate per annum equal, at the Company’s option, to either (a) LIBOR (with a floor of 1.00%), plus an applicable margin of 8.25% or (b) a fluctuating adjusted base rate in effect from time to time, plus an applicable margin of 7.25%. At the Company’s option, one percent (1.00%) of such interest may be payable in kind. The interest rate on March 31, 2023, was 12.98%. Interest expense for the three months ended March 31, 2023 and 2022 were $12,942 and $8,691, respectively, which included
amortization of $1,588 and $1,276, respectively, related to the discount and debt issuance costs. While the Oaktree Credit Agreement notes that Secured Overnight Financing Rate ("SOFR") may be selected as the alternative benchmark rate, this has not been determined as of March 31, 2023. As such, the Company cannot predict the effect of the discontinuance of LIBOR or the establishment and use of alternative rates or benchmarks on interest expense as of March 31, 2023.
Obligations under the Oaktree Credit Agreement are secured by a first-priority lien on substantially all of the following conditionsassets of the Company and its wholly-owned subsidiaries (the “Subsidiary Guarantors”), although certain assets of the Company and Subsidiary Guarantors are satisfied: (i) theresubject to a first-priority lien in favor of floor plan lenders, and such liens and priority are subject to certain other exceptions. The Subsidiary Guarantors also guarantee the obligations of the Company under the Oaktree Credit Agreement.
We provided customary representations and covenants under the Oaktree Credit Agreement which include financial covenants and collateral performance covenants. The Company is persuasive evidencein compliance with covenants under the Oaktree Credit Agreement as of March 31, 2023.
RumbleOn Finance Line of Credit
On February 4, 2022, RumbleOn Finance and ROF SPV I, LLC ("ROF"), an arrangement; (ii)indirect subsidiary of RumbleOn, entered into a consumer finance facility ("ROF Consumer Finance Facility") primarily to provide up to $25,000 for the product or service has been provided tounderwriting of consumer loans underwritten by ROF. Credit Suisse AG, New York Branch (“Credit Suisse”) is the customer; (iii)managing agent of the amount to be paidloan agreement, and RumbleOn Finance is the borrower. All loans under this agreement are secured by certain collateral including the consumer finance loans purchased by the customer is fixedROF Consumer Finance Facility.
We provided customary representations and covenants under the agreements which include financial covenants and collateral performance covenants. Loans sold to or determinable;in the ROF Consumer Finance Facility are subject to certain eligibility criteria, concentration limits and (iv)reserves.
As of March 31, 2023, RumbleOn Finance did not meet the collectioninterest rate spread requirement set forth in the ROF Consumer Finance Facility as a result of increased interest rates and limited growth of our consumer finance business. The lender has indicated no current intention to request early repayment of the Company’s paymentprincipal balance due under the ROF Consumer Finance Facility as of March 31, 2023. We intend to sell the loan portfolio held at RumbleOn Finance and pay off the outstanding balance during the second quarter of 2023. As of March 31, 2023, the outstanding balance due under the ROF Consumer Finance Facility was $20,952, which is probable.reflected in the current portion of long-term debt and line of credit in the accompanying Condensed Consolidated Balance Sheets.
Used Vehicle Sales
The Company sells used vehicles to consumers, dealers and at auctions. The sourcevalue of these vehicles is primarily from the Company’s Sell Us Your VehicleProgram and customers who trade-in their existing vehicles when making a used vehicle purchase. Revenue from used vehicle sales is recognized when the vehicle is delivered to a consumer, dealer or auction, a sales contract is signed,and the purchase price has either been received or collectability has been established. We guarantee the vehicles we sell with a 3-day, money-back guarantee. Used vehicle sales revenue is recognizedloan receivable assets held by RumbleOn Finance, which approximated $30,450 net of a reserveallowance for returns, whichloan losses, is based on historical experienceincluded in prepaid expense and trends.
Online Listing and Sales Fees
other current assets in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2023. The Company charges a non-refundable fee for sellers to list their vehicle on the RumbleOn website. During the listing period, the Company manages all sales leads, handles all the documentation necessary to complete a sale, accepts a buyer’s trade and provides financing through third-party providers to the potential buyer, if necessary. Upon a successful sale, the seller pays a fee which is based on the difference between the actual retail sales price of the vehicle sold and the net proceeds agreed to be paid by RumbleOn to the seller when the listing agreement was signed. Revenue from non-refundable online listing fees is recognized once the listing agreement is signed, the vehicle is listedloan receivable assets are considered assets held for sale and the listing fee has been received. Revenue for selling fees is recognized upon deliveryas of the vehicle to the customer, when the sales contract is signed, and the purchase price has either been received or collectability has been established.March 31, 2023.
Retail Merchandise Sales
Floor Plan Notes Payable
The Company recognizes sales revenue, net of sales taxesrelies on its floorplan vehicle financing credit lines (“Floorplan Lines”) to finance new and used vehicle inventory at the time it sells the merchandise or in the case of online sales when the merchandise is delivered to the customerits retail locations and payment has been received.
Vehicle Financing
Consumers can pay for their vehicle using cash or the Company offers a range of finance options through unrelated third-parties such as banks or credit unions. These third-party providers generally pay the Company afee either in a flat amount or in an amount equal to the difference between the interest rates charged to customers over the predetermined interest rates set by the financial institution.The Company may be charged back for commissions in the event a contract is prepaid, defaulted upon, or terminated.Revenue for these finance fees are recognized upon delivery of the vehicle to the customer, when the sales contract is signed, and the financing has been arranged.
Vehicle Service Contracts
At the time of vehicle sale, the Company provides customers, on behalf of unrelated third parties who are the primary obligors, a range of other related products and services, including extended protection plan (“EPP”) products and vehicle appearance protection. EPP products include extended service plans (“ESPs”) that are designed to cover unexpected expenses associated with mechanical breakdowns and guaranteed asset protection (“GAP”), which is intended to cover the unpaid balance on a vehicle loan in the event of a total loss of the vehicle or unrecovered theft. Vehicle appearance protection includes products aimed at maintaining vehicle appearance. The Companyreceives commissions from the sale of these product and service contracts andhas no contractual liability to customers for claims under these products. The EPPs and vehicle appearance protection currently offered to consumers provide coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the termwholesale segment. Floor plan notes payable - trade reflects amounts borrowed to finance the purchase of theirspecific new and, to a lesser extent, used vehicle inventory with corresponding manufacturers' captive finance contract.
Commission revenue is recognized atsubsidiaries (“trade lenders”). Floor plan notes payable - non-trade represents amounts borrowed to finance the timepurchase of sale, net of a reserve for estimated contract cancellations. The reserve for cancellations is estimated based upon historical industry experiencespecific new and recent trendsused vehicle inventories with non-trade lenders. Changes in vehicle floor plan notes payable - trade are reported as operating cash flows and is reflectedchanges in floor plan notes payable - non-trade are reported as a reduction of other sales revenuefinancing cash flows in the accompanying Consolidated Statements of Operations andCash Flows.
Inventory serves as collateral under floor plan notes payable borrowings. The inventory balance in its entirety also serves as collateral under the Oaktree Credit Agreement.
On August 31, 2021, Wholesale Inc. entered into a componentFloorplan Line with AFC (the “AFC Credit Line”) to replace an existing line of accounts payable and accrued liabilities incredit. Advances under the accompanying Consolidated Balance Sheets. Our risk related to contract cancellations isAFC Credit Line are limited to the revenue that we receive.
Subscription Fees
Subscription fees are generated from dealer partners, under a license arrangement that provides access to our software solution and ongoing support. Select and Appraisal Dealers pay a monthly subscription fee for access to and ongoing support for portions$35,000 as of the RumbleOn software solution which includes: (i) a vehicle appraisal process; (ii) inventory management system; (iii) customer relationship and lead management program; and (iv) equity mining. Dealers may also be charged an initial software installation and training fee. Dealers do not have the contractual right to take possession of the software and may cancel the license for these products and services by providing a 30-day notice. Installation and training do not have value to the user without the license and ongoing support and maintenance. Because the dealer partner has the right to cancel the license with 30 days’ notice, revenue for installation and training is recognized when complete, acceptance has occurred, and collectability of a determinable amount is probable. Revenue recognition of monthly subscription fees commences upon completion of installation, acceptance has occurred, and collectability of a determinable amount is probable.
Purchase Accounting for Business Combinations
The Company accounts for acquisitions by allocating the fair value of the consideration transferred to the fair value of the assets acquired and liabilities assumedMarch 31, 2023. Interest expense on the date of the acquisition and any remaining difference is recorded as goodwill. Adjustments may be made to the preliminary purchase price allocation when facts and circumstances that existed on the date of the acquisition surface during the allocation period subsequent to the preliminary purchase price allocation, not to exceed one year from the date of acquisition. Contingent consideration is recorded at fair value based on the facts and circumstances on the date of the acquisition and any subsequent changes in the fair value are recorded through earnings each reporting period.
Goodwill
Goodwill is not amortized but rather tested for impairment at least annually. The Company tests goodwill for impairment annually during the fourth quarter of each year. Goodwill will also be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available, and management regularly reviews the operating results of that component. The Company has concluded that currently it has one reporting unit.
Determining fair value includes the use of significant estimates and assumptions. Management utilizes an income approach, specifically the discounted cash flow analysis as a means for estimating fair value. This discounted cash flow analysis requires various assumptions including those about future cash flows, transactional and customer growth rates and discount rates. Expected cash flows are based on historical customer growth and the growth in transactions, including attrition, future strategic initiatives and continued long-term growth of the business. The discount rates used for the analysis reflect a weighted average cost of capital based on industry and capital structure adjusted for equity risk and size risk premiums. These estimates can be affected by factors such as customer and transaction growth, pricing, and economic conditions that can be difficult to predict.
Intangible Assets
Included in “Intangible Assets” on the Company’s Condensed Consolidated Balance Sheets are identifiable intangible assets including customer relationships, non-compete agreements, trademarks, trade names and internet domain names. The estimated fair value of these intangible assets at the time of acquisition are based upon various valuation techniques including replacement cost and discounted future cash flow projections. Trademarks, trade names and internet domain names are not amortized. Customer relationships are amortized on a straight-line basis over the expected average life of the acquired accounts, which are based upon several factors, including historical longevity of customers and contracts acquired and historical retention rates. Non-compete agreements are amortized on a straight-line basis over the term of the agreement, which will generally not exceed three years. The Company reviews the recoverability of these assets if events or circumstances indicate that the assets may be impaired and periodically reevaluates the estimated remaining lives of these assets.
Trademarks, trade names and internet domain names are considered to be indefinite lived intangible assets unless specific evidence exists that a shorter life is more appropriate. Indefinite lived intangible assets are tested for impairment, at a minimum, on an annual basis using an income approach or sooner whenever events or changes in circumstances indicate that an asset may be impaired.
Long-Lived Assets
Property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used are measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. If such assets or asset groups are considered to be impaired, the impairment to be recognized will be measured by the amount by which the carrying amount of the assets or asset groups exceeds the related fair values. The Company also performs a periodic assessment of the useful lives assigned to the long-lived assets.
Technology Development Costs
Technology development costs are accounted for pursuant to ASC 350, Intangibles — Goodwill and Other. Technology development costs include internally developed software and website applications that are used by the Company for its own internal use and to provide services to its customers, which include consumers, dealer partners and ancillary service providers. Under the terms of these customer arrangements the Company retains the revenue generating technology and hosts the applications on its servers and mobile applications. The customer does not have a contractual right to take possession of the software during the term of the arrangement and are not permitted to run the software itself or contract with another party unrelated to the entity to host the software. Technology development costs consist principally of (i) development activities including payroll and related expenses billed by a third-party contractor involved in application, content, production, maintenance, operation, and platform development for new and existing products and services, (ii) technology infrastructure expenses, and (iii) costs of Company employees devoted to the development and maintenance of software products. Technology and content costs for design, maintenance and post-implementation stages of internal-use software and general website development are expensed as incurred. For costs incurred to develop new website functionality as well as new software products and significant upgrades to existing internally used platforms or modules, capitalization begins during the application development stage and ends when the software is available for general use. Capitalized technology development is amortized on a straight-line basis over periods ranging from 3 to 7 years. The Company will perform periodic assessment of the useful lives assigned to capitalized software applications. Additionally, the Company from time-to-time may abandon additional development activities relating to specific software projects or applications and charge accumulated costs to technology development expense in the period such determination is made.
Vehicle Inventory
Vehicle inventory is accounted for pursuant to ASC 330, Inventory and consists of the cost to acquire and recondition a used vehicle. Reconditioning costs are billed by third-party providers and includes parts, labor, and other repair expenses directly attributable to a specific vehicle. Transportation costs are expensed as incurred. Inventory is stated at the lower of cost or net realizable value. Vehicle inventory cost is determined by specific identification. Net realizable value is the estimated selling price less costs to complete, dispose and transport the vehicles. Selling prices are derived from historical data and trends, such as sales price and inventory turn times of similar vehicles, as well as independent market resources. Each reporting period, the Company recognizes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value through cost of sales in the accompanying Condensed Consolidated Statements of Operations.
Valuation Allowance for Accounts Receivable
The Company estimates the allowance for doubtful accounts for accounts receivable by considering a number of factors, including overall credit quality, age of outstanding balances, historical write-off experience and specific account analysis that projects the ultimate collectability of the outstanding balances. Ultimately, actual results could differ from these assumptions.
Cash and Cash Equivalents
The Company considers all cash accounts and all highly liquid short-term investments purchased with an original maturity of three months or less to be cash or cash equivalents. As of September 30, 2017 and 2016, the Company did not have any investments with maturities greater than three months.
Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation and amortization and consists of capitalized technology development costs, furniture and equipment. Depreciation and amortization is recorded on a straight-line basis over the estimated useful life of the assets. Costs of significant additions, renewals and betterments, are capitalized and depreciated. Maintenance and repairs are charged to expense when incurred.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.
ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are from sources independent of the Company, whereas unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. Inputs other than quoted market prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, are Level 2 inputs.
Level 3: If inputs from Levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date.” Earlier in the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
Beneficial Conversion Feature
From time to time, the Company may issue convertible notes that may have conversion prices that create an embedded beneficial conversion feature pursuant to the guidelines established by the ASC Topic 470-20, Debt with Conversion and Other Options. The Beneficial Conversion Feature (“BCF”) of a convertible security is normally characterized as the convertible portion or feature of certain securities that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a convertible security when issued and also records the estimated fair value of any conversion feature issued with those securities. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
The BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the conversion feature, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method. The Company calculates the fair value of the conversion feature embedded in any convertible security using either a) the Black Scholes valuation model or b) a discount cash flow analysis tested for sensitivity to key Level 3 inputs using Monte Carlo simulation.
Cost of Revenue
Cost of vehicle sales includes the cost to acquire vehicles and the reconditioning and transportation costs associated with preparing the vehicles for resale. Vehicle acquisition costs are driven by the mix of vehicles the Company acquires, the source of those vehicles, and supply and demand dynamics in the vehicle market. Reconditioning costs are billed by third-party providers and include parts, labor, and other repair expenses directly attributable to specific vehicles. Transportation costs consist of costs incurred to transport the vehicles from the point of acquisition or delivery. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Cost of subscription and other fee revenue includes the (i) various data feeds from third parties; (ii) hosting of the customer facing website; (iii) commissions for new sales; and (iv) implementation and training of new and existing customers. These costs and expenses are charged to cost of revenue as incurred.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses primarily include compensation and benefits, advertising and marketing, professional fees, technology development expenses, rent and other occupancy costs, insurance, travel and other administrative expenses.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. Advertising and marketing expenses were $775,456 and $1,071,398, respectivelyAFC Credit Line for the three months ended March 31, 2023 and nine-month periods ended September 30, 2017. There were no advertising2022 was $144 and marketing costs incurred$363, respectively.
On October 26, 2022, the Company entered into a Floorplan Line with J.P. Morgan (the “J.P. Morgan Credit Line”). As of March 31, 2023, advances under the J.P. Morgan Credit Line are limited to $75,000 and the outstanding balance was $28,126. Interest expense on the J.P. Morgan Credit Line for the same periods in 2016.three months ended March 31, 2023 was $387.
NOTE 6 –STOCKHOLDER EQUITY
Stock-Based Compensation
On January 9,June 30, 2017, the Company’s Board of Directorsshareholders approved subject to stockholder approval, the RumbleOn, Inc. 2017a Stock Incentive Plan (the “Plan”) under whichallowing for the issuance of restricted stock units (“RSUs”("RSUs"), stock options, and other equity awards may be granted to employees and non-employee members(collectively “Awards”). As of March 31, 2023, the Boardnumber of Directors. On June 30, 2017,shares authorized for issuance under the Plan was approved by2,700,000 shares of Class B Common Stock. To date, most RSU and Option awards are service/time based vested over a period of up to three years. In connection with the Company's stockholders atclosing of the 2017 Annual MeetingRideNow Transaction, the Company accelerated all the outstanding RSU awards for all participants and waived certain market-based share price hurdles for all market-based awards on the RideNow Closing Date. This waiver was accounted for as a modification of Stockholders. the awards. The fair value of the awards was remeasured as of effective date of the waiver.
The Company estimates the fair value of all awards granted under the Plan on the date of grant. TheIn the case of time or service based RSU awards, the fair value of an RSU is based on the averageshare price of the high and low market prices of the Company’s Class B Common Stock on the date of grant and is recognized as anthe award, with the fair value expense on a straight-linestraight line basis over itsthe vesting period; to date,period.
The following table reflects the Company has only issued RSUs that vest over a three-year period utilizing the following vesting schedule: (i) 20% on the first anniversary of the grant date; (ii) 30% on the second anniversary of the grant date; and (iii) 50% on the third anniversary of the grant date. During the nine-month period ended September 30, 2017, the Company granted 560,000 RSUs under the Plan to members of the Board of Directors, officers and employees. Compensation expense associated with RSU grantsstock-based compensation for the three months ended March 31, 2023 and nine-month periods ended September 30, 20172022:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | 2023 | | | | 2022 |
| Restricted Stock Units | | | $ | 2,911 | | | | | $ | 1,879 | |
| Stock Options | | | — | | | | | — | |
| Total stock-based compensation | | | $ | 2,911 | | | | | $ | 1,879 | |
As of March 31, 2023, there was $157,763 and $287,550, respectively and is included in selling, general and administrative expenses in1,323,598 RSUs outstanding. The total unrecognized compensation expense related to outstanding equity awards was approximately $18,948, which the Condensed Consolidated StatementsCompany expects to recognize over a weighted-average period of Operations.approximately 26 months. Total unrecognized equity-based compensation expense will be adjusted for actual forfeitures.
Security Offering
Income Taxes
The Company follows ASC Topic 740, Income Taxes, for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or allAs part of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. ASC Topic 740 only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities. As of September 30, 2017,Freedom Transaction, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a fifty percent likelihoodissued to Freedom's security holders 1,048,718 shares of being sustained upon examination by the taxing authorities, therefore this standard has not had a material effect on the Company.
The Company classifies tax-related penalties and net interest as income tax expense. As of September 30, 2017, no income tax expense has been incurred.
Recent Pronouncements
The Company has adopted Accounting Standards Update 2015-11 Inventory (Topic 330), Simplifying the Measurement of Inventory, which requires inventory to be stated at the lower of cost or net realizable value. Vehicle inventory cost is determined by specific identification. Net realizable value is the estimated selling price less costs to complete, dispose and transport the vehicles. Selling prices are derived from historical data and trends, such as sales price and inventory turn times of similar vehicles, as well as independent, market resources. Each reporting period the Company recognizes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value through cost of revenue in the accompanying Condensed Consolidated Statements of Operations.
NOTE 3 – ACQUISITIONS
On February 8, 2017, the Company acquired substantially all of the assets of NextGen in exchange for $750,000 in cash, plus 1,523,809 unregistered shares ofRumbleOn Class B Common Stock of the Company, which were issued at a negotiated fair value of $1.75 per share and a subordinated secured promissory note issued by the Company in favor of NextGen in the amount of $1,333,334 (the “NextGen Note”). The NextGen Note maturestotaling $26,511 on the third anniversary of the closing date (the “Maturity Date”).
The following table presents the purchase price consideration as of September 30, 2017:
Issuance of shares | $2,666,666
|
Debt | 1,333,334
|
Cash paid | 750,000
|
| $4,750,000
|
| |
Net tangible assets acquired: | |
Technology development | $1,400,000
|
Customer contracts | 10,000
|
Non-compete agreements | 100,000
|
Tangible assets acquired | 1,510,000
|
Goodwill | 3,240,000
|
Total purchase price | 4,750,000
|
Less: Issuance of shares | (2,666,666)
|
Less: Debt issued | (1,333,334)
|
| |
Cash paid | $750,000
|
Supplemental pro forma information
The results of operations of NextGen since the acquisition date are included in the accompanying Condensed Consolidated Financial Statements.
The following supplemental pro forma information presents the financial results as if the acquisition of NextGen was made as of January 1, 2017 for both the three and nine-month periods ended September 30, 2017 and on January 1, 2016 for both the three and nine-month periods ended September 30, 2016.
Pro forma adjustments for the nine-month period ended September 30, 2017 and 2016 primarily include adjustments to reflect additional depreciation and amortization of $29,866 and $48,788, respectively, related to technology development and identifiable intangible assets recorded as part of the acquisition, and interest expense related to the NextGen Note of $27,353 and $42,833, respectively.
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | |
| Pro forma revenue | $3,706,142 | $45,606 | $3,868,079 | $100,006 |
| Pro forma net loss | $(2,317,503) | $(567,401) | $(5,237,814) | $(1,625,690) |
| Loss per share - basic and fully diluted | $(0.23) | $(0.08) | $(0.58) | $(0.23) |
| Weighted-average common shares and common stock equivalents outstanding basic and fully diluted | 10,018,541 | 7,023,809 | 9,105,429 | 7,023,809 |
NOTE 4 – PROPERTY AND EQUIPMENT, NET
The following table summarizes property and equipment, net of accumulated depreciation and amortization as of September 30, 2017 and December 31, 2016:
| | |
Vehicles | $472,870
| $-
|
Furniture and equipment | 127,306
| -
|
Technology development | 1,835,097
| -
|
Total property and equipment | 2,435,273
| -
|
Less: accumulated depreciation and amortization | 268,947
| -
|
Property and equipment, net | $2,166,326
| $-
|
At September 30, 2017, capitalized technology development costs were $1,835,097, which includes $1,400,000 of software acquired in the NextGen transaction. For additional information, see Note 3 - “Acquisitions.” Total technology development costs incurred for the nine-month period ended September 30, 2017 were $713,766, of which $435,097 was capitalized and $278,669 was charged to expense in the accompanying Condensed Consolidated Statements of Operations. The amortization of capitalized technology development costs for the three and nine-month periods ended September 30, 2017 was $89,429 and $219,374, respectively. There were no technology development costs incurred and no amortization of capitalized development costs for the same periods in 2016. Depreciation expense on vehicles, furniture and equipment for the three and nine-month periods ended September 30, 2017 was $28,598 and $49,573, respectively. Depreciation on furniture and equipment for the three and nine-month periods ended September 30, 2016 was $475 and $1,425, respectively.
NOTE 5 – INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following at September 30, 2017 and December 31, 2016:
| |
Amortized Identifiable Intangible Assets: | |
| |
Customer agreements | |
Balance at December 31, 2016 | $-
|
Customers acquired | 10,000
|
Amortization | (3,750)
|
Balance at September 30, 2017 | $6,250
|
| |
Non-compete agreements | |
Balance at December 31, 2016 | $ -
|
Agreements | 100,000
|
Amortization | (30,000)
|
Balance at September 30, 2017 | $70,000
|
| |
Unamortized Identifiable Intangible Assets: | |
Domain names | |
Balance at December 31, 2016 | $45,515
|
Domain names acquired | -
|
Impairment or write down | -
|
Balance at September 30, 2017 | $45,515
|
| |
Intangible assets, net at September 30, 2017 | $121,765
|
Amortization expense related to intangible assets for the three and nine-month periods ended September 30, 2017 was $11,250 and $33,750, respectively. The estimated future amortization expenses related to identifiable intangible assets is as follows:
| Remainder through December 31, 2017 | $11,250 |
| 2018 | 45,000 |
| 2019 | 20,000 |
| | $76,250 |
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table summarizes accounts payable and other accrued liabilities as of September 30, 2017 and December 31, 2016:
| | | |
| Accounts payable | $1,539,572 | $219,101 |
| Sales taxes | 296 | - |
| Accrued compensation and benefits | 354,790 | - |
| Other | 7,885 | - |
| Total accounts payable and accrued liabilities | $1,902,543 | $219,101 |
NOTE 7 – NOTES PAYABLE
Notes payable consisted of the following as of September 30, 2017 and December 31, 2016:
| | | |
| Notes payable-NextGen dated February 8, 2017. Interest is payable semi-annually at 6.5% through February 9, 2019 and 8.5% through maturity which is February 8, 2020. | $1,333,334 | $- |
| Notes payable-private placement dated March 31, 2017. Interest is payable at maturity and accrues at 6.5% through March 31, 2019 and 8.5% through maturity which is March 31, 2020. | 667,000 | - |
| Convertible note payable-related party dated July 13, 2016. Interest rate of 6.0% which is accrued and paid at maturity. Note matures on July 26, 2026. Note is convertible into common stock, in whole at any time before maturity at the option of the holder at $.75 per share. | - | 197,358 |
| Senior Secured Promissory Notes dated September 5, 2017. Interest rate of 5.0% through December 31, 2017 and a rate of 10% through maturity which is accrued and paid at maturity. Note matures on September 5, 2018. | 1,650,000 | |
Less: Debt discount
| (725,123) | (196,076) |
| | $ 2,925,211
| $ 1,282
|
Current portion (net of $139,726 of debt discount)
| 1,510,274
| -
|
Long-term portion
| $ 1,414,937
| $ 1,282
|
Convertible Note Payable-Related Party
On July 13, 2016, the Company entered into an unsecured convertible note (the “BHLP Note”) with Berrard Holdings, an entity owned and controlled by a current officer and director, Mr. Berrard, pursuant to which the Company was required to repay $191,858 on or before July 13, 2026 plus interest at 6% per annum. The BHLP Note was also convertible into common stock, in whole, at any time before maturity at the option of the holder at the greater of $0.06 per share or 50% of the price per share of the next qualified financing which is defined as $500,000 or greater. Effective August 31, 2016, the principal amount of the BHLP Note was amended to include an additional $5,500 loaned to the Company, on the same terms. On November 28, 2016, the Company completed its qualified financing at $1.50 per share which established the conversion price per share for the BHLP Note of $0.75 per share, resulting in the principal amount of the BHLP Note being convertible into 263,144 shares of Class B Common Stock. As such, November 28, 2016 became the “commitment date” for determining the value of the BHLP Note conversion feature. Because there had been no trading in the Company’s common stock since July 2014, other than the purchase by Berrard Holdings of 99.5% of the outstanding shares in a single transaction, the Company used the Monte Carlo simulation to determine the intrinsic value of the conversion feature of the BHLP Note, which resulted in a value in excess of the principal amount of the BHLP Note. Thus, the Company recorded a note discount of $197,358 with the corresponding amount as an addition to paid in capital. This note discount was amortized to interest expense until the scheduled maturity of the BHLP Note in July 2026 or until it was converted using the effective interest method. On March 31, 2017, the Company issued 275,312 shares of Class B Common Stock upon full conversion of the BHLP Note, having an aggregate principal amount, including accrued interest, of $206,484 and a conversion price of $0.75 per share. In connection with the conversion of the BHLP Note, the remaining debt discount of $196,076 was charged to interest expense in the Condensed Consolidated Statements of Operations and the related deferred tax liability was credited to additional paid in capital in the Condensed Consolidated Balance Sheets.
Note Payable-NextGen
On February 8, 2017, in connection with the acquisition of NextGen, the Company issued a subordinated secured promissory note in favor of NextGen in the amount of $1,333,334. Interest accrues and will be paid semi-annually (i) at a rate of 6.5% annually from the closing date through the second anniversary of such date and (ii) at a rate of 8.5% annually from the second anniversary of the closing date through the Maturity Date. Upon the occurrence of any event of default, the outstanding balance under the NextGen Note shall become immediately due and payable upon election of the holder. The Company’s obligations under the NextGen Note are secured by substantially all the assets of NextGen Pro, pursuant to an Unconditional Guaranty Agreement (the “Guaranty Agreement”), by and among NextGen and NextGen Pro, and a related Security Agreement between the parties, each dated as of February 8, 2017. Under the terms of the Guaranty Agreement, NextGen Pro has agreed to guarantee the performance of all the Company’s obligations under the NextGen Note. Interest expense on the NextGen Notes for the three and nine-month periods ended September 30, 2017 was $21,370 and $54,849, respectively.
Notes Payable-Private Placement
On March 31, 2017, the Company completed funding of the second tranche of the 2016 Private Placement (as defined below). The investors were issued 1,161,920 shares of Class B Common Stock of the Company and promissory notes (the “Private Placement Notes”) in the amount of $667,000, in consideration of cancellation of loan agreements having an aggregate principal amount committed by the purchasers of $1,350,000. Under the terms of the Private Placement Notes, interest shall accrue on the outstanding and unpaid principal amounts until paid in full. The Private Placement Notes mature on March 31, 2020. Interest accrues at a rate of 6.5% annually from the closing date through the second anniversary of such date and at a rate of 8.5% annually from the second anniversary of the closing date through the maturity date. Upon the occurrence of any event of default, the outstanding balance under the Private Placement Notes shall become immediately due and payable upon election of the holders. Based on the relative fair values attributed to the Class B Common Stock and promissory notes issued in the 2016 Private Placement, the Company recorded a debt discount on the promissory notes of $667,000 with the corresponding amounts as addition to paid in capital. The debt discount is amortized to interest expense until the scheduled maturity of the Private Placement Notes in March 2020 using the effective interest method. The effective interest rate at September 30, 2017 was 26.0%. Interest expense on the Private Placement Notes for the three and nine-month periods ended September 30, 2017 was $94,885 and $184,943, respectively, which included debt discount amortization of $41,979 and $81,603, respectively for the three and nine-month periods ended September 30, 2017.
Notes Payable-Senior Secured Promissory Notes
On September 5, 2017, the Company executed Senior Secured Promissory Notes (the “Notes”) in favor of several investors, including certain executive officers and directors of the Company, in the aggregate principal amount of $1,650,000 (“Principal Amount”), which includes an aggregate original issue discount of $150,000. The proceeds to the Company from the Notes, net of original issuance discount, was $1,500,000. The Notes are secured by an interest in all the Company’s Collateral, as such term is defined in the Notes.The Notes mature on September 5, 2018 and bear interest at a rate equal to 5% per annum through December 31, 2017, and a rate of 10% per annum thereafter. Interest is payable monthly in arrears. Upon the occurrence of any event of default, the outstanding balance under the Notes shall become immediately due and payable upon election of the holders.The Principal Amount and any unpaid interest accrued thereon may be prepaid by the Company at any time prior to the maturity date without premium or penalty upon five days prior written notice to the noteholder. If the Company consummates in one or more transactions financing of any nature resulting in net proceeds available to the Company of $5,000,000 or more, then the noteholders may require the Company to prepay the Notes on thirty (30) days prior written notice to the Company. The original issue discount is amortized to interest expense until the scheduled maturity of the Notes in September 2018 using the effective interest method. The effective interest rate at September 30, 2017 was 10.0%. Interest expense on the Notes for the three and nine-month periods ended September 30, 2017 was $15,925 which included $10,274 of original issue discount amortization. On October 23, 2017, the Company completed a public offering and used approximately $1,661,075 of the net proceeds of the offering for the repayment of the Notes in the aggregate principal amount of $1,650,000, plus accrued interest, which resulted in the termination of the Notes. For additional information, see Note 15 “Subsequent Events.”
NOTE 8 – STOCKHOLDERS’ EQUITY
On November 28, 2016, the Company completed a private placement with certain purchasers, with respect to the sale of an aggregate of 900,000 shares of common stock of the Company at a purchase price of $1.50 per share for total consideration of $1,350,000 (the “2016 Private Placement”). In connection with the 2016 Private Placement, the Company also entered into loan agreements, pursuant to which the purchasers would loan to the Company their pro rata share of up to $1,350,000 in the aggregate upon the request of the Company at any time on or after January 31, 2017 and before November 1, 2020. On March 31, 2017, the Company completed the second tranche of the 2016 Private Placement. For additional information, see Note 7 - “Notes Payable.”
On January 9, 2017, the Company’s Board of Directors approved, subject to stockholder approval, the adoption of the Plan.18, 2022. On June 30, 2017, the Plan was approved by the Company’s stockholders at the 2017 Annual Meeting of Stockholders. The purposes of the Plan are to attract, retain, reward and motivate talented, motivated and loyal employees and other service providers (“Eligible Individuals”) by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum effort for the growth and success of the Company, so as to strengthen the mutuality of the interests between such persons and the stockholders of the Company. The Plan will allow the Company to grant a variety of stock-based and cash-based awards to Eligible Individuals. Twelve percent (12%) of the Company’s issued and outstanding shares of Class B Common Stock from time to time are reserved for issuance under the Plan. As of September 30, 2017, 9,018,541 shares are issued and outstanding, resulting in up to 1,082,225 shares available for issuance under the Plan. As of September 30, 2017, the Company has granted 560,000 RSUs under the Plan to certain officers and employees of the Company. The aggregate fair value of the RSUs was $2,103,500. The RSUs vest over a three-year period as follows: (i) 20% on the first anniversary of the grant date; (ii) 30% on the second anniversary of the grant date; and (iii) 50% on the third anniversary of the grant date. The fair value of the grant is amortized over the period from the grant date through the vesting dates. Compensation expense recognized for these grants for the three and nine-month periods ended September 30, 2017 was $157,763 and $287,550, respectively. The Company has approximately $1,605,600 in unrecognized stock-based compensation, with an average remaining vesting period of three years.
On January 9, 2017, the Company’s Board of Directors and stockholders holding 6,375,000 of the Company’s issued and outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation (the “Certificate of Amendment”), to change the name of the Company to RumbleOn, Inc. and to create an additional class of common stock of the Company, which was effective on February 13, 2017 (the “Effective Date”).
Immediately before approving the Certificate of Amendment, the Company had authorized 100,000,000 shares of common stock, $0.001 par value (the “Authorized Common Stock”), including 6,400,000 issued and outstanding shares of common stock (the “Outstanding Common Stock, and together with the Authorized Common Stock, the “Common Stock”). Pursuant to the Certificate of Amendment, the Company designated 1,000,000 shares of Authorized Common Stock as Class A Common Stock (the “Class A Common Stock”), which Class A Common Stock ranks pari passu with all of the rights and privileges of the Common Stock, except that holders of the Class A Common Stock are entitled to ten votes per share of Class A Common Stock issued and outstanding, and all other shares of Common Stock, including all shares of Outstanding Common Stock shall be deemed Class B Common Stock (the “Class B Common Stock”), which Class B Common Stock is identical to the Class A Common Stock in all material respects, except that holders of the Class B Common Stock are entitled to one vote per share of Class B Common Stock issued and outstanding.
Also on January 9, 2017, the Company’s Board of Directors and stockholders holding 6,375,000 of the Company’s issued and outstanding shares of common stock approved the issuance to (i) Marshall Chesrown of 875,000 shares of Class A Common Stock in exchange for an equal number of22, 2022, 2,446 shares of Class B Common Stock held by Mr. Chesrown, and (ii) Steven R. Berrard of 125,000 shares of Class A Common Stock in exchange for an equal number of shares of Class B Common Stock held by Mr. Berrard, effective at the time the Certificate of Amendment was filed with the Secretary of State of Nevada.
On the Effective Date, the Company filed the Certificate of Amendment with the Secretary of Stateescrow were cancelled as part of the State of Nevada changing the Company’s name to RumbleOn, Inc. and creating the Class A and Class B Common Stock. Also on the Effective Date, the Company issued an aggregate of 1,000,000 shares of Class A Common Stock to Messrs. Chesrown and Berrard in exchange for an aggregate of 1,000,000 shares of Class B Common Stock held by them. Also on the Effective Date, the Company amended its bylaws to reflect the name change to RumbleOn, Inc. and to reflect the Company’s primary place of business as Charlotte, North Carolina.final purchase price adjustment.
On March 31, 2017, the Company completed the sale of 620,000 shares of Class B Common Stock, par value $0.001, at a price of $4.00 per share for aggregate proceeds of $2,480,000 in the private placement (the “2017 Private Placement”). Officers and directors of the Company acquired 175,000 shares of Class B Common Stock in the 2017 Private Placement. In May 2017, the Company completed the sale of an additional 37,500 shares of Class B Common Stock in the 2017 Private Placement. Proceeds from the 2017 Private Placement were used to complete the launch of the Company’s website, www.rumbleon.com, acquire vehicle inventory, continue development of the Company’s platform, and for working capital purposes.
On June 30, 2017, the Company filed a Registration Statement on Form S-1 (the “Registration Statement”) with the SEC covering the resale of 8,993,541 shares of Class B Common Stock issued in the NextGen acquisition and the 2017 Private Placement and other shares previously held by our stockholders, including our officers and directors. The SEC declared the Registration Statement effective on July 7, 2017. In connection with the filing of the Registration Statement, our officers and directors and certain stockholders entered into a lock-up agreement restricting, through December 31, 2017, the resale of an aggregate of 6,848,800 shares of our common stock held by them and subject to the Registration Statement.
NOTE 9 – SELLING, GENERAL AND ADMINISTRATIVE
The following table summarizes the detail of selling, general and administrative expense for the three and nine-month periods ended September 30, 2017 and 2016:
| | Three-months ended September 30, | Nine-months ended September 30, |
| | | | | |
| Selling, general and administrative: | | | | |
| Compensation and related costs | $1,028,819 | $- | $1,951,911 | $- |
| Advertising and marketing | 752,017 | - | 1,060,195 | - |
| Professional fees | 192,041 | 34,044 | 724,486 | 49,017 |
| Technology development | 91,967 | - | 278,668 | - |
| General and administrative | 261,199 | 2,662 | 674,956 | 9,118 |
| | $2,326,043 | $36,706 | $4,690,216 | $58,135 |
NOTE 107 – SUPPLEMENTAL CASH FLOW INFORMATION
The following table includes supplemental cash flow information, including noncash investing and financing activity for the nine-month periodsthree months ended September 30, 2017March 31, 2023 and 2016.2022:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| Cash paid for interest | $ | 15,843 | | | $ | 10,777 | |
| Cash paid for (refunds from) taxes | $ | (47) | | | $ | — | |
| Capital expenditures and technology development costs included in accounts payable and other current liabilities | $ | 125 | | | $ | 3,344 | |
| Capital expenditures included in line of credit and notes payable | $ | 514 | | | $ | — | |
| Fair value of 1,048,718 Class B Common Stock issued in the Freedom Transaction | $ | — | | | $ | 26,511 | |
| | Nine-Months Ended September 30, |
| | | |
| Cash paid for interest | $42,502 | $- |
| | | |
| Note payable issued on acquisition | $1,333,334 | $- |
| | | |
| Conversion of notes payable-related party | $206,484
| $- |
| | | |
| Issuance of shares for acquisition | $2,666,666 | $- |
The following table shows the cash and restricted cash reported within the accompanying Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Cash | $ | 51,784 | | | $ | 48,579 | |
Restricted cash (1) | 10,000 | | | 10,000 | |
| Total cash, cash equivalents, and restricted cash | $ | 61,784 | | | $ | 58,579 | |
(1)Amounts included in restricted cash are primarily comprised of the deposits required under the Company's various floor plan lines of credit and RumbleOn Finance line of credit.
NOTE 118 – INCOME TAXES
The Company's provision for (benefit from) income taxes for the three months ended March 31, 2023 and 2022 was ($1,603) and $2,380, respectively, representing effective income tax rates of 8.7% and 17.9%, respectively. The difference between the U.S. federal income tax rate of 21.0% and RumbleOn’s overall income tax rate for the three months ended March 31, 2023 was primarily due to the tax effect of non-deductible executive compensation, non-deductible interest expense, and discrete tax impacts of stock compensation vesting in the quarter.
In projectingThe difference between the U.S. federal income tax rate of 21.0% and the Company’s overall income tax rate for the three months ended March 31, 2022 was primarily due to income tax expense for the year ended December 31, 2017, management has concluded it is not likely to recognize the benefit of its deferred tax asset, net of deferred tax liabilities, and as a result a fullon non-deductible expenses, valuation allowance will be required. As such, noexpense associated with state net operating losses, and state income taxes, offset by a benefit associated with the change in the Company's effective state income tax benefit has been recorded for the three and nine-month periods ended September 30, 2017 or 2016.rate.
NOTE 12 — LOSS9– EARNINGS (LOSS) PER SHARE
Net lossThe Company computes basic and diluted earnings (loss) per share attributable to common stockholders in conformity with the two-class method required for participating securities. Basic earnings (loss) per share attributable to common stockholders is computedcalculated by dividing the net lossincome (loss) attributable to common stockholders by the weighted averageweighed-average number of shares of common sharesstock outstanding during the period. The computation of diluted net lossDiluted earnings (loss) per share attributable to common stockholders is computed giving effect to all potential dilutive common stock equivalents outstanding for the three-month and nine-month periodsperiod.
For purposes of this calculation for the quarter ended September 30, 2017 did not include 560,000March 31, 2023, 1,323,598 of restrictedunvested RSUs, 2,340 of stock unitsoptions, 1,212,121 of Oaktree Warrants to purchase shares of Class B Common Stock, 16,531 of other warrants to purchase shares of Class B Common Stock and 982,107 shares of Class B Common Stock issuable in connection with convertible debt are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their inclusion would bethe effect is antidilutive. There
For purposes of this calculation for the quarter ended March 31, 2022, 805,183 of unvested RSUs, 2,425 of stock options, 1,212,121 of warrants to purchase shares of Class B Common Stock, 16,531 of other warrants to purchase shares of Class B Common Stock and 982,107 shares of Class B Common Stock issuable in connection with convertible debt are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect is antidilutive.
The weighted average number of shares outstanding of Class A Common Stock and Class B Common Stock, giving effect to all potential dilutive common stock equivalents outstanding, were no restricted stock units outstanding50,000 and 16,174,122, and 50,000 and 15,668,441, for the three months ended March 31, 2023 and nine-month periods ended September 30, 2016.2022, respectively.
NOTE 1310 – RELATED PARTY TRANSACTIONS
Promissory Notes
AsIn connection with the acquisition of December 31, 2015,RideNow, the Company had loans of $141,000assumed two promissory notes totaling principal and accrued interest of $13,002$2,821 as of August 31, 2021 due to entities controlled by former directors and executive officers of the Company. Amounts due under these two promissory notes have been paid in full as of March 31, 2023 and totaled $791 as of March 31, 2022.
RideNow Leases
In connection with the RideNow Transaction, the Company entered into related party leases for 24 properties consisting of dealerships and offices. Each related party lease is with a wholly owned subsidiary of the Company as the tenant and an entity that is owned and controlled by former directors and executive officers of the Company, as the landlord. The initial aggregate base rent payment for all 24 leases is approximately $1,229 per month, and each lease commenced a family membernew 20-year term on September 1, 2021, with each lease containing annual 2% increases on base rent. Rent expense associated with the leases approximated $4,324 and $4,606 during the three months ended March 31, 2023 and 2022, respectively, and are included in Selling, General and Administrative expenses in the Condensed Consolidated Statement of Operations.
Payments to RideNow Management, LLLP
The Company made $0 and $116 in payments to RideNow Management, LLLP, an entity owned equally by two former directors and executive officers during the three months ended March 31, 2023 and 2022.
Payments to Coulter Management Group LLLP
The company made $5 and $120 in payments to Coulter Management Group LLLP, an entity owned by two former directors and executive officers of the Company, during the three months ended March 31, 2023 and 2022.
Bidpath Software License
On January 19, 2022, the Audit Committee approved, and the Company entered into two agreements with Bidpath Incorporated, a company owned by Adam Alexander, a director of the Company that provides the Company with (i) a perpetual, non-exclusive license to the then-current source code, as well as all future source code, of foundational technology for our inventory management platform, and (ii) support and maintenance services, all of which remain in development as of March 31, 2023.
The Company made cash payments for the license totaling $0 and $1,080, respectively, during the three months ended March 31, 2023 and 2022. The Company also pays, on monthly basis since the agreement was signed, $30 for development of the platform. The initial term is thirty-six (36) months but can be terminated by either party at any time by providing sixty (60) days' notice to the other party.
Ready Team Grow, LLC
The Company paid $42 and $54 to Ready Team Grow, LLC for employee recruiting services during the three months ended March 31, 2023 and 2022. Ready Team Grow, LLC is an entity owned by the domestic partner of the Company’s Chief Executive Officer.
Death Benefit to former Chief Financial Officer and Director
On September 30, 2021, the Audit Committee approved the issuance of 154,731 shares of the Company’s Class B Common Stock as a gift of a death benefit to the widow and children of the Company's former Chief Financial Officer and Director. Also, on September 30, 2021, the Audit Committee approved a gift of a death benefit to the widow and children of Mr. Berrard in an amount equal to (1) $1,338, which shall be paid in equal weekly installments beginning October 1, 2021 and ending June 30, 2024 and (2) the cash bonus paid to the Company’s Chief Executive Officer each quarter over the same period ending June 30, 2024, if and when paid to the Chief Executive Officer in accordance with the Company’s Executive Incentive Program. A total of $123 and $123 in cash payments were made under these awards during the three months ended March 31, 2023 and 2022.
Employment of Immediate Family Members
William Coulter, a former executive officer and director of the Company. Interest expense on these loans forCompany, has one immediate family member who was employed by the Company during 2021 and until August 30, 2022. This family member received aggregate gross pay of approximately $0 and $100 during the three months ended March 31, 2023 and nine-month period ended September 30, 2016 was $2,878 and $7,431,2022, respectively. All convertible notes and related party notes outstanding as of July 13, 2016 were paid in full in July 2016.
As of December 31, 2016, the Company had the BHLP Note payable of $197,358 and accrued interest of $5,508 due to an entity that is owned and controlled byMark Tkach, a currentformer executive officer and director of the Company. OnCompany, has two immediate family members that are, or have been, employed by the Company between January 1, 2021, and the date hereof. One of these family members was employed by the Company during 2021 and until February 21, 2022. This family member received aggregate gross pay of approximately $0 and $100 during the three months ended March 31, 2017,2023 and 2022, respectively. The other family member
has received aggregate gross pay of approximately $109 and $100 during the Company issued 275,312three months ended March 31, 2023 and 2022, respectively, and grants of restricted stock units with respect to 15,000 shares of Class B Common Stock upon full conversionduring 2021.
NOTE 11 - SEGMENT REPORTING
Business segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. Our operations are organized by management into operating segments by line of business. We have determined that we have three reportable segments as defined in U.S. GAAP for segment reporting: (1) powersports, (2) automotive, and (3) vehicle logistics. Our powersports and automotive segments consist of the BHLP Note.sale of new and used vehicles. The accrued interest is included in accrued interest under Long-term liabilitiespowersports segment consists of the distribution principally of motorcycles and other powersports vehicles, while the automotive segment distributes cars and trucks. Our vehicle logistics segment provides nationwide transportation brokerage services between dealerships and auctions. Our vehicle logistics reportable segment has been determined to represent one operating segment and reporting unit.
Reportable segment financial information for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Powersports | | Automotive | | Vehicle Logistics | | Eliminations(1) | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
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| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Three Months Ended March 31, 2023 | | | | | | | | | |
| Total assets | $ | 1,888,163 | | | $ | 11,215 | | | $ | 5,014 | | | $ | (866,514) | | | $ | 1,037,878 | |
| Revenue | $ | 319,543 | | | $ | 11,921 | | | $ | 14,999 | | | $ | (159) | | | $ | 346,304 | |
| Operating income (loss) | $ | (2,144) | | | $ | (88) | | | $ | 1,431 | | | $ | — | | | $ | (801) | |
| Depreciation and amortization | $ | 4,717 | | | $ | 14 | | | $ | 10 | | | $ | — | | | $ | 4,741 | |
| Interest expense | $ | (17,602) | | | $ | (144) | | | $ | — | | | $ | — | | | $ | (17,746) | |
| Change in derivative liability | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | |
| Three Months Ended March 31, 2022 | | | | | | | | | |
| Total assets | $ | 1,854,998 | | | $ | 54,673 | | | $ | 16,805 | | | $ | (705,670) | | | $ | 1,220,806 | |
| Revenue | $ | 322,095 | | | $ | 110,755 | | | $ | 13,612 | | | $ | (1,261) | | | $ | 445,201 | |
| Operating income (loss) | $ | 21,768 | | | $ | (262) | | | $ | 1,067 | | | $ | 90 | | | $ | 22,663 | |
| Depreciation and amortization | $ | 4,447 | | | $ | 17 | | | $ | 10 | | | $ | — | | | $ | 4,474 | |
| Interest expense | $ | (10,662) | | | $ | (518) | | | $ | (1) | | | $ | — | | | $ | (11,181) | |
| Change in derivative liability | $ | 39 | | | $ | — | | | $ | — | | | $ | — | | | $ | 39 | |
(1)Intercompany investment balances related to the acquisitions of RideNow, Freedom Entities, Wholesale Inc. and Wholesale Express, and receivables and other balances related to intercompany freight services of Wholesale Express are eliminated in the Condensed Consolidated Balance Sheets. For additional information, see Note 7 - “Notes Payable.”
On March 31, 2017, the Company completed the sale of 620,000 shares of Class B Common Stock in the 2017 Private Placement. OfficersRevenue and directors of the Company acquired 175,000 shares of Class B Common Stock in the 2017 Private Placement. In May 2017, the Company completed the sale of an additional 37,500 shares of Class B Common Stock in the 2017 Private Placement. For additional information, see Note 8 - “Stockholders’ Equity.”
A key component of the Company’s business model is to use dealer partners in the acquisition of motorcycles as well as utilizecosts for these dealer partners to provide inspection, reconditioning and distribution services. Correspondingly, the Company will earn fees and transaction income, and the dealer partner may earn incremental revenue and enhance profitability through increased sales, leads, and fees from inspection, reconditioning and distribution programs. In connection with the development of the dealer program, the Company tested various aspects of the program by utilizing a dealership (the “Test Dealer”) to which Mr. Chesrown, the Company’s Chief Executive Officer has provided financing in the form of a $400,000 convertible promissory note. The note matures on May 1, 2019, interest is payable monthly at 5% per annum and can be converted into a 25% ownership interest in the Test Dealer at any time. The Test Dealer is expected to be named a Select Dealer by an agreement with the same material terms as the Company’s other Select Dealer agreements. Revenue generated by the Company from the Test Dealer for the three and nine-month periods ended September 30, 2017 was $924,069 and $946,824, respectively. Included in accounts receivable at September 30, 2017 is $264,464 owed to the Company by the Test Dealer.
In connection with the NextGen acquisition, the Company entered into a Consulting Agreement (the “Consulting Agreement”) with Kartik Kakarala, who formerly served as the Chief Executive Officer of NextGen and now serves as a director of the Company. Pursuant to the Consulting Agreement, Mr. Kakarala serves as a consultant to the Company. The Consulting Agreement may be cancelled by either party, effective upon delivery of a written notice to the other party. Mr. Kakarala’s compensation pursuant to the Consulting Agreement is $5,000 per month. For the three and nine-month periods ended September 30, 2017, the Company paid $15,000 and $35,000, respectively under the Consulting Agreement. These amounts are included in selling, general and administrative expensesintercompany freight services have been eliminated in the Condensed Consolidated Statements of Operations. For additional information, see Note 3 - “Acquisitions.”
In connection with the NextGen acquisition, the Company entered into a Services Agreement (the “Services Agreement”) with Halcyon Consulting, LLC (“Halcyon”), to provide development and support services to the Company. Mr. Kakarala currently serves as the Chief Executive Officer of Halcyon. Pursuant to the Services Agreement, the Company will pay Halcyon hourly fees for specific services, set forth in the Services Agreement, and such fees may increase on an annual basis, provided that the rates may not be higher than 110% of the immediately preceding year’s rates. The Company will reimburse Halcyon for any reasonable travel and pre-approved out-of-pocket expenses in connection with its services to the Company. For the three and nine-month periods ended September 30, 2017 the Company paid $221,400 and $678,766, respectively under the Services Agreement.
As of September 30, 2017, the Company had promissory notes of $370,556 and accrued interest of $12,076 due to an entity controlled by a director and to the director of the Company. The promissory notes were issued in connection with the completion of the 2016 Private Placement on March 31, 2017. Interest expense on the promissory notes for the three and nine-month periods ended September 30, 2017 was $29,392 and $63,416, respectively, which included debt discount amortization of $23,321 and $45,335, respectively for the three and nine-month periods ended September 30, 2017. The interest was charged to interest expense in the Condensed Consolidated Statements of Operations and included in accrued interest under long-term liabilities in the Condensed Consolidated Balance Sheets.
On September 5, 2017, the Company executed Senior Secured Promissory Notes (the “Notes”) in favor of several investors, including certain executive officers and directors of the Company, in the aggregate principal amount of $1,650,000 (“Principal Amount”), which includes an aggregate original issue discount of $150,000. As of September 30, 2017, the Company had Notes of $1,214,144 and accrued interest of $4,144 due to certain executive officers and directors of the Company. Interest expense on the Notes due to certain executive officers and directors for the three and nine-month periods ended September 30, 2017 was $11,678, which included $7,534 of original issue discount amortization. On October 23, 2017, the Company completed a public offering and used $1,661,075 of the net proceeds of the offering for the repayment of the Notes in the aggregate principal amount of $1,650,000, plus accrued interest, which resulted in the termination of the Notes. For additional information, see Note 7 - “Notes Payable” and Note 15 “Subsequent Events.”
NOTE 14 – COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions (or settlements) may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 15 – SUBSEQUENT EVENTS
On October 23, 2017, the Company completed an underwritten public offering of 2,910,000 shares of Class B common stock at a public offering price of $5.50 per share for net proceeds to the Company of approximately $14,500,000 after deducting the underwriting discount and offering fees and expenses payable by the Company (the “Offering”). The Company also granted the underwriters a 30-day option, which expires on November 19, 2017, to purchase up to an additional 436,500 shares of Class B common stock to cover over-allotments.
The Company used $1,661,075 of the net proceeds of the Offering for the repayment of the Senior Secured Promissory Notes in the aggregate principal amount of $1,650,000, plus accrued interest, which resulted in the termination of the Senior Secured Promissory Notes. The Company intends to use the remaining net proceeds of the Offering for working capital and general corporate purposes, which may include purchases of additional inventory held for sale, increased spending on marketing and advertising and capital expenditures necessary to grow the business.
In connection with the Offering, on October 23, 2017, the Company issued to the representatives of the underwriters warrants to purchase 218,250 shares of Class B common stock, which is equal to 7.5% of the aggregate number of shares of Class B common stock sold in the Offering (the “Representatives’ Warrants”). The Representatives’ Warrants are exercisable at a per share price of $6.325, which is equal to 115% of the Offering price per share of the shares sold in the Offering. The Representatives’ Warrants are exercisable at any time and from time to time, in whole or in part, during the four-year period commencing one year from the effective date of the registration statement related to the Offering.
Also, in connection with the Offering, on October 19, 2017, the Class B Common Stock uplisted from the OTCQB and began trading on The NASDAQ Capital Market under the symbol “RMBL.”
On November 2, 2017, the Company through its wholly-owned subsidiary RMBL Missouri, LLC (the “Borrower”), entered into a floor plan line of credit (the "Credit Line") with NextGear Capital, Inc. (the “Lender”) in the amount of $2,000,000, or such lesser sum which may be advanced to or on behalf of the Borrower from time to time, pursuant to that certain Demand Promissory Note and Loan and Security Agreement. Any advance under the Credit Line bears interest on a per annum basis from the date of the request of such advance (or date of the financed receivable, as applicable), based upon a 360-day year, and such interest shall be compounded daily until such outstanding advances are paid in full at a rate of interest set forth in schedules published by the Lender. As of November 2, 2017, the effective rate of interest is 6.5%. Advances and interest under the Credit Line are due and payable upon demand, but, in general, in no event later than 150 days from the date of request for the advance (or the date of purchase in the case of a universal funding agreement), or of the receivable, as applicable. Upon any event of default (including, without limitation, the Borrower’s obligation to pay upon demand any outstanding liabilities of the Credit Line), Lender may, at its option and without notice to the Borrower, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to Lender and its affiliates by the Borrower and its affiliates. The Credit Line is secured by a grant of a security interest in the vehicle inventory and other assets of the Borrower and payment is guaranteed by the Company pursuant to a guaranty in favor of the Lender and its affiliates.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations.
