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RUMBLEON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2017
RumbleOn, Inc.
| | | | | | | | |
| | | | | | | | Additional Paid in Capital | | | Total Stockholders' Equity |
| Balance, December 31, 2016 | - | $- | - | $- | 6,400,000 | $6,400 | $1,534,015 | $(1,000) | $(445,974) | $1,093,441 |
| | | | | | | | | | | |
| Exchange of common stock | - | - | 1,000,000 | 1,000 | (1,000,000) | (1,000) | - | - | - | - |
| | | | | | | | | | | |
| Issuance of common stock in connection with acquisition | - | - | - | - | 1,523,809 | 1,524 | 2,665,142 | - | - | 2,666,666 |
| | | | | | | | | | | |
| Issuance of stock in private placements | | | - | - | 657,500 | 658 | 2,629,342 | - | | 2,630,000 |
| | | | | | | | | | | |
| Issuance of common stock in connection with loan agreement | - | - | - | - | 1,161,920 | 1,162 | 1,348,878 | - | - | 1,350,040 |
| | | | | | | | | | | |
| Issuance of common stock in connection with conversion of a Note Payable-related party, net of debt discount | - | - | - | - | 275,312 | 275 | 284,639 | - | - | 284,914 |
| | | | | | | | | | | |
| Stock-based compensation | - | - | - | - | - | - | 287,550 | - | - | 287,550 |
| | | | | | | | | | | |
| Net loss | - | - | - | - | - | - | - | - | (5,132,623) | (5,132,623) |
| | | | | | | | | | | |
| Balance, September 30, 2017 | - | $- | 1,000,000 | $1,000 | 9,018,541 | $9,019 | $8,749,566 | $(1,000) | $(5,578,597) | $3,179,988 |
(Dollars in thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Shares | | Class B Common Shares | | Additional Paid in Capital | | Accumulated Deficit | | Class B Common Shares in Treasury | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | | Shares | | Amount | |
| Balance as of March 31, 2023 | 50,000 | | | $ | — | | | 16,295,735 | | | $ | 16 | | | $ | 588,848 | | | $ | (392,521) | | | 123,089 | | | $ | (4,319) | | | $ | 192,024 | |
| Issuance of common stock for restricted stock units | — | | | — | | | 269,654 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 4,910 | | | — | | | — | | | — | | | 4,910 | |
| | | | | | | | | | | | | | | | | |
| Tax withholding related to vesting of restricted stock units and other | — | | | — | | | — | | | — | | | (706) | | | — | | | — | | | — | | | (706) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (13,588) | | | — | | | — | | | (13,588) | |
| Balance as of June 30, 2023 | 50,000 | | | $ | — | | | 16,565,389 | | | $ | 17 | | | $ | 593,051 | | | $ | (406,109) | | | 123,089 | | | $ | (4,319) | | | $ | 182,640 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Shares | | Class B Common Shares | | Additional Paid in Capital | | Accumulated Deficit | | Class B Common Shares in Treasury | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | | Shares | | Amount | |
| Balance as of December 31, 2022 | 50,000 | | | $ | — | | | 16,184,264 | | | $ | 16 | | | $ | 585,937 | | | $ | (375,619) | | | 123,089 | | | $ | (4,319) | | | $ | 206,015 | |
| Issuance of common stock for restricted stock units | — | | | — | | | 381,125 | | | 1 | | | (1) | | | — | | | — | | | — | | — | | — | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 7,821 | | | — | | | — | | | — | | | 7,821 | |
| | | | | | | | | | | | | | | | |
| Tax withholding related to vesting of restricted stock units and other | — | | | — | | | — | | | — | | | (706) | | | — | | | — | | | — | | | (706) | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (30,490) | | | — | | | — | | | (30,490) | |
| Balance as of June 30, 2023 | 50,000 | | | $ | — | | | 16,565,389 | | | $ | 17 | | | $ | 593,051 | | | $ | (406,109) | | | 123,089 | | | $ | (4,319) | | | $ | 182,640 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Shares | | Class B Common Shares | | Additional Paid in Capital | | Accumulated Deficit | | Class B Common Shares in Treasury | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | | Shares | | Amount | |
| Balance as of March 31, 2022 | 50,000 | | | $ | — | | | 15,930,740 | | | $ | 16 | | | $ | 578,444 | | | $ | (104,965) | | | 123,089 | | | $ | (4,319) | | | $ | 469,176 | |
| Issuance of common stock for restricted stock units | — | | | — | | | 12,572 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation | — | | — | | | — | | | — | | | 2,754 | | | — | | | — | | | — | | | — | |
| Escrow shares returned in connection with Freedom acquisition | — | | — | | | (2,446) | | | — | | | — | | | — | | | 2,446 | | | — | | | — | |
| Net income | — | | | — | | | — | | | — | | | — | | | 14,033 | | | — | | | — | | | 14,033 | |
| Balance as of June 30, 2022 | 50,000 | | | $ | 0 | | | 15,940,866 | | | $ | 16 | | | $ | 581,198 | | | $ | (90,932) | | | 125,535 | | | $ | (4,319) | | | $ | 485,963 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Shares | | Class B Common Shares | | Additional Paid in Capital | | Accumulated Deficit | | Class B Common Shares in Treasury | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | | Shares | | Amount | |
| Balance as of December 31, 2021 | 50,000 | | | $ | 0 | | | 14,882,022 | | | $ | 15 | | | $ | 550,055 | | | $ | (114,106) | | | 123,089 | | | $ | (4,319) | | | $ | 431,645 | |
| Issuance of common stock for restricted stock units | — | | | — | | | 12,572 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of common stock in acquisition | — | | | — | | | 1,048,718 | | | 1 | | | 26,511 | | | — | | | — | | | — | | | 26,512 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 4,632 | | | — | | | — | | | — | | | 4,632 | |
| Escrow shares returned in connection with Freedom acquisition | — | | | — | | | (2,446) | | | — | | | — | | | — | | | 2,446 | | | — | | | — | |
| Net income | — | | | — | | | — | | | — | | | — | | | 23,174 | | | — | | | — | | | 23,174 | |
| Balance as of June 30, 2022 | 50,000 | | | $ | 0 | | | 15,940,866 | | | $ | 16 | | | $ | 581,198 | | | $ | (90,932) | | | 125,535 | | | $ | (4,319) | | | $ | 485,963 | |
RumbleOn, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited) | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income (loss) | $ | (30,490) | | | $ | 23,174 | |
| Loss from discontinued operations | (951) | | | (57) | |
| Net income (loss) from continued operations | $ | (29,539) | | | $ | 23,231 | |
| Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: | | | |
| Depreciation and amortization | 9,996 | | | 10,285 | |
| Amortization of debt discount | 4,764 | | | 3,523 | |
| Stock based compensation expense | 7,821 | | | 4,632 | |
| Gain from change in value of derivatives | — | | | (39) | |
| Deferred taxes | (6,488) | | | 4,023 | |
| Originations of loan receivables, net of principal payments received | 2,623 | | | (12,973) | |
| Write-down of loan receivable assets | 6,156 | | | — | |
| Changes in operating assets and liabilities, net of acquisitions: | | | |
| Accounts receivable | (9,362) | | | 3,052 | |
| Inventory | 3,103 | | | (26,820) | |
| Prepaid expenses and other current assets | 97 | | | (511) | |
| Other assets | 213 | | | (19,112) | |
| Other liabilities | 4,001 | | | (3,807) | |
| Accounts payable and accrued liabilities | 1,377 | | | 15,329 | |
| Floor plan trade note borrowings | (1,056) | | | 28,140 | |
| Net cash provided by (used in) operating activities of continuing operations | (6,294) | | | 28,953 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Acquisitions, net of cash received | (3,300) | | | (64,188) | |
| Purchase of property and equipment | (6,004) | | | (1,464) | |
| Technology development | (1,066) | | | (3,462) | |
| Net cash used in investing activities of continuing operations | (10,370) | | | (69,114) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Proceeds from new secured debt | — | | | 84,500 | |
| Proceeds from ROF credit facility for the purchase of consumer finance loans | — | | | 13,650 | |
| Repayment of debt and line of credit | (8,371) | | | (32,791) | |
| Repayment of note payables | — | | | (2,091) | |
| Increase in borrowings from non-trade floor plans | 25,192 | | | 1,548 | |
| Net cash provided by financing activities of continuing operations | 16,821 | | | 64,816 | |
| CASH FLOWS FROM DISCONTINUED OPERATIONS | | | |
| Net cash provided by operating activities | 3,667 | | | 7,371 | |
| Net cash used in financing activities | (5,254) | | | (6,318) | |
Net cash provided by (used in) discontinued operations | (1,587) | | | 1,053 | |
| NET INCREASE (DECREASE) IN CASH | (1,430) | | | 25,708 | |
| Cash and restricted cash at beginning of period | 58,579 | | | 51,974 | |
| Cash and restricted cash at end of period | $ | 57,149 | | | $ | 77,682 | |
See Notes to the Condensed Consolidated Financial Statements.
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 DESCRIPTION
Organization
RumbleOn, Inc. (along with its consolidated subsidiaries, the “Company”) was incorporated in October 2013 under the laws of the State of Nevada, as Smart Server, Inc. (“Smart Server”). On February 13, 2017, the Company changed 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, reconditioning and distribution services. Correspondingly, we earn fees and transaction income, 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 OFAND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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 and largest publicly traded, technology-enhanced dealership group platform in the powersports industry. Headquartered in the Dallas Metroplex, RumbleOn is revolutionizing the customer experience for outdoor enthusiasts across the country and providing more choices in making powersports vehicles accessible to more people in more places than ever before. We strive to build long-term value for our customers, employees, and shareholders with the nation’s largest network of powersports dealerships, service departments, and fulfillment centers operated by our highly-trained and knowledgeable team. We are transforming the powersports customer experience by giving consumers what they want - a wide selection, great value and quality, and an easy transaction. Every element of our business, from inventory procurement, to fulfillment, to overall ease of transactions, has been built for a singular purpose – to create an unparalleled customer experience in the powersports industry regardless of whether they are shopping our inventory online or in-store.
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. ("Wholesale Inc."), and our exotics retailer AutoSport USA, Inc., which does business under the name Got Speed. In the third quarter of 2022, we announced we would be winding down our wholesale automotive business. The process of winding down this business was completed as of June 30, 2023, and we have reported the operations of this segment of our business as discontinued operations within the Condensed Consolidated Financial Statements. 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 ("RideNow"), the nation's largest powersports retailer group. On February 18, 2022 (the “Freedom Closing Date”), the Company completed its acquisition of Freedom Powersports, LLC (“Freedom Powersports”) and Freedom Powersports Real Estate, LLC (“Freedom Powersports - RE,” and together with Freedom Powersports, the “Freedom Entities”), a retailer group with 13 locations in Texas, Georgia, and Alabama.
Since the acquisitions of RideNow and Freedom Powersports, we have made a handful of smaller acquisitions. We plan to continue the growth of our powersports footprint through strategic acquisitions.
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 respective dates these businesses were 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 and six months ended June 30, 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, current or future macro economic conditions, as well as the effect of economic conditions on 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 may 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 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.
Liquidity and Management’s Plans
As described more completely in Note 5, the Company was not in compliance with certain financial covenants contained in various debt agreements at June 30, 2023, providing the lenders the ability to accelerate the outstanding loan balances to the Company if a compliance waiver or loan amendment is not obtained.
On August 9, 2023, the Company and Oaktree Fund Administration, LLC executed Amendment No. 5 (as defined in Note 5) to the Term Loan Credit Agreement, which provides the Company a covenant waiver as of June 30, 2023 and as of September 30, 2023, and more favorable financial covenants for each quarter through the second quarter of 2024. Amendment No. 5 also requires the Company to undertake certain actions in the coming months to generate additional liquidity that will be used to repay a portion of the outstanding balance of the Term Loan Credit Agreement. These actions include divesting of certain assets and completing a $100,000 rights offering, for which the Company has received binding commitments for up to $100,000 if the rights offering is not fully subscribed.
Management has initiated plans that will allow the Company to remain in compliance with all revised covenants under Amendment No. 5. The Company has classified certain assets as held for sale at June 30, 2023 and also executed a Standby Purchase Agreement on August 8, 2023 that provides binding commitments for up to $100,000 from certain existing shareholders if the rights offering is not fully subscribed. Management has considered these plans, including if they are within the control of the Company, in evaluating ASC 205-40, Presentation of Financial Statements. Management believes the above actions are sufficient to allow the Company to meet its obligations as they become due for a period of at least 12 months from the issuance of these financial statements and to comply with the amended financial covenants of Amendment No. 5. Management believes that it has alleviated any substantial doubt regarding the Company’s ability to continue as a going concern.
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, which were included in the consolidated statements of operations rather than being eliminated, which resulted in an overstatement of both revenue and cost of sales, with no impact to gross profit, operating income (loss), or net income (loss). The misstatement impacted the unaudited Condensed Consolidated Financial Statements for the three month periods ended March 31, 2022, June 30, 2022, and September 30, 2022.
The Company evaluated 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 June 30, 2022 by $18,094 and $18,094, respectively, and for the six months ended June 30, 2022 by $32,813 and $32,813, 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 six months ended June 30, 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. Our senior secured debt and most of our floorplan arrangements have transitioned from LIBOR to the use of SOFR or an alternative benchmark rate as of June 30, 2023.
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"). 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.
Assets Held for Sale
We consider properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and we expect the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is reasonable given our estimate of current market value. Upon designation of a property as an asset held for sale, we record the property’s value at the lower of its carrying amount or its estimated fair value, less estimated costs to sell, and we cease depreciation.
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, returns, receivablesfinancing, 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 restructuring-related liabilities, taxes,of assets acquired, including intangible assets, and contingencies. Actualhas 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 couldmay differ materially from thosethese estimates.
Earnings (Loss) Per Share
The Company followsuses the Financial Accounting Standards Board (“FASB”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.
Pro Forma Information for Acquisitions
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.
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2023 | | 2022 |
| | (unaudited) |
| Pro forma revenue from continuing operations | | $ | 717,115 | | | $ | 770,396 | |
| Pro forma net income (loss) from continuing operations | | $ | (29,539) | | | $ | 23,387 | |
| Earnings (loss) per share from continuing operations - basic | | $ | (1.81) | | | $ | 1.48 | |
| Weighted average number of shares - basic | | 16,343,758 | | | 15,778,461 | |
| Earnings (loss) per share from continuing operations - fully diluted | | $ | (1.81) | | | $ | 1.48 | |
| Weighted average number of shares - fully diluted | | 16,343,758 | | | 15,841,346 | |
Red Hills Powersports Acquisition
On March 3, 2023, the Company acquired Red Hills powersports, a single retail location representing 10 original equipment manufacturers ("OEMs") Accounting Standards Codification (“ASC”in Tallahassee, Florida, for total consideration approximating $3,300 in cash.
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 | | June 30, 2023 | | December 31, 2022 |
| Assets: | | | | | | |
| Operating | | Right-of-use assets | | $ | 170,733 | | | $ | 161,822 | |
| Total right-of-use assets | | | | $ | 170,733 | | | $ | 161,822 | |
| | | | | | |
| Liabilities: | | | | | | |
| Current: | | | | | | |
| Operating | | Accounts payable and other current liabilities | | $ | 24,591 | | | $ | 24,075 | |
| Non-Current: | | | | | | |
| Operating | | Long-term portion of operating lease liabilities | | 138,282 | | | 126,695 | |
| Total lease liabilities | | | | $ | 162,873 | | | $ | 150,770 | |
The weighted-average remaining lease term and discount rate for the Company's operating leases are as follows: | | | | | | | | |
| June 30, 2023 | December 31, 2022 |
| Weighted average lease term-operating leases | 14.0 years | 14.6 years |
| Weighted average discount rate-operating leases | 14.0% | 14.0% |
The following table provides information related to the lease costs of finance and operating leases for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Lease Expense | | Income Statement Classification | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | 2023 | | 2022 | | 2023 | | 2022 |
| Operating | | Selling, general and administrative expenses | | $ | 8,525 | | | $ | 7,565 | | | $ | 16,674 | | | $ | 14,428 | |
| Finance: | | | | | | | | | | |
| Amortization of ROU assets | | Depreciation and amortization expense | | — | | | — | | | — | | | 41 | |
| Interest on lease liabilities | | Interest expense | | — | | | — | | | — | | | 124 | |
| Total lease costs | | | | $ | 8,525 | | | $ | 7,565 | | | $ | 16,674 | | | $ | 14,593 | |
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 June 30, 2023:
| | | | | | | | | | | | | | | | | | | | |
| Leases | | Balance Sheet Classification | | June 30, 2023 | | December 31, 2022 |
| Assets: | | | | | | |
| Right of use assets – related party | | | | $ | 104,376 | | | $ | 105,264 | |
| All other right-of-use assets | | | | 66,357 | | | 56,558 | |
| Total | | Right-of-use assets | | $ | 170,733 | | | $ | 161,822 | |
| | | | | | |
| Liabilities: | | | | | | |
| Current: | | | | | | |
| Current portion of lease liabilities – related party | | | | $ | 13,997 | | | $ | 14,492 | |
| Current portion of lease liabilities – all other leases | | | | 10,594 | | | 9,583 | |
| Total | | Accounts payable and other current liabilities | | $ | 24,591 | | | $ | 24,075 | |
| Non-Current: | | | | | | |
| Long-term portion of lease liabilities – related party | | | | 96,538 | | | 93,713 | |
| Long-term portion of lease liabilities – all other leases | | | | 41,744 | | | 32,982 | |
| Total | | Operating lease liabilities | | $ | 138,282 | | | $ | 126,695 | |
| Total lease liabilities | | | | $ | 162,873 | | | $ | 150,770 | |
Supplemental cash flow information related to operating leases for the six months ended June 30, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | 2023 | | 2022 |
| Cash payments for operating leases | | | $ | 14,244 | | | $ | 12,240 | |
| ROU assets obtained in exchange for new operating lease liabilities | | | $ | 14,383 | | | $ | 15,103 | |
The following table summarizes the future minimum payments for operating leases at June 30, 2023 due in each year ending December 31:
| | | | | |
| Year | Operating Leases |
| 2023 | $ | 15,394 | |
| 2024 | 30,314 | |
| 2025 | 28,601 | |
| 2026 | 26,927 | |
| 2027 | 26,131 | |
| Thereafter | 282,415 | |
| Total lease payments | 409,782 | |
| Less: imputed interest | (246,909) | |
| Present value of operating lease liabilities | $ | 162,873 | |
NOTE 4 –GOODWILL AND INTANGIBLE ASSETS
The carrying amount of goodwill, franchise rights, and other intangible assets as of June 30, 2023 and December 31, 2022 is as follows:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Goodwill | $ | 23,897 | | | $ | 21,142 | |
| | | |
| Other intangible assets | | | |
| Franchise rights - indefinite life | $ | 236,678 | | | $ | 236,723 | |
| Definite lived - non-compete agreements and other | 23,795 | | | 23,750 | |
| 260,473 | | | 260,473 | |
| Less: accumulated amortization | 18,086 | | | 13,060 | |
| Intangible assets, net | $ | 242,387 | | | $ | 247,413 | |
The following summarizes the changes in the carrying amount of goodwill by reportable segment from December 31, 2022 to June 30, 2023. | | | | | | | | | | | | | | | | | | | |
| Powersports | | | | Vehicle Logistics | | Total |
| Balance at December 31, 2022 | $ | 20,294 | | | | $ | 848 | | $ | 21,142 |
| Acquisition of store in Tallahassee, FL | 2,600 | | | | — | | 2,600 |
| Four Wheels purchase accounting adjustments | (106) | | | | — | | (106) |
| Freedom Powersports purchase accounting adjustments | 261 | | | | — | | 261 |
| Balance at June 30, 2023 | $ | 23,049 | | | | $ | 848 | | | $ | 23,897 |
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 June 30, 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 June 30, 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 | $ | 2,886 | |
| 2024 | 2,653 | |
| 2025 | 99 | |
| Thereafter | — | |
| $ | 5,638 | |
NOTE 5 – NOTES PAYABLE AND LINES OF CREDIT
Notes payable consisted of the following as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Term Loan Credit Agreement maturing on August 31, 2026. Amortization payments are required quarterly. Interest rate at June 30, 2023 was 13.41%. | $ | 344,431 | | | $ | 346,066 | |
| ROF Consumer Finance Facility maturing on February 4, 2025. Interest rate at June 30, 2023 was 10.17%. | 18,030 | | | 25,000 | |
| Notes payable for leasehold improvements and other | 752 | | | — | |
| Total principal amount | 363,213 | | | 371,066 | |
| Less: unamortized debt issuance costs | (21,668) | | | (28,572) | |
| Total long-term debt | 341,545 | | | 342,494 | |
| Less: Current portion of long-term debt | (18,186) | | | (3,645) | |
| Long-term debt, net of current portion | $ | 323,359 | | | $ | 338,849 | |
Floor plan notes payable as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Floor plans notes payable - trade | $ | 74,331 | | | $ | 75,387 | |
| Floor plans notes payable - non-trade | 172,107 | | | 144,789 | |
| Floor plan notes payable | $ | 246,438 | | | $ | 220,176 | |
Term Loan Credit Agreement
On the RideNow Closing Date, the Company entered into a new term loan credit agreement (the “Oaktree Credit Agreement”) Topic 260, Earnings per shareamong the Company, as borrower, the lenders party thereto (the "Lenders"), and Oaktree Fund Administration, LLC, as administrative agent and collateral agent (the “Administrative Agent”). Basic earnings per common share (“EPS”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”) calculations are determined by dividing net income (loss) byand a $120,000 in aggregate principal amount of delayed draw term loans (the “Delayed Draw Term Loans Facility”). The proceeds from the weighted average numberInitial Term Loan Facility were used to consummate the RideNow Transaction and to provide for working capital. Loans under the Delayed Draw Term Loans Facility were 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. In connection with providing the debt financing for the RideNow Transaction, and pursuant to the commitment letter executed on March 15, 2021, the Company issued warrants to purchase $40,000 of shares of Class B Common Stock to Oaktree Capital Management, L.P. and its lender affiliates (the “Warrants”).
On February 18, 2022, in conjunction with the Freedom Transaction, the Company drew down $84,500 against the Delayed Draw Term Loans Facility. During the fourth quarter of 2022, the Company made a voluntary principal repayment of $15,000 to the Oaktree Credit Facility. As of June 30, 2023, the Oaktree Credit Agreement does not provide for any available financing under the Delayed Draw Term Loans Facility.
The loan under the Oaktree Credit Agreement is reported on the balance sheet as senior secured debt, net of debt discount and debt issuance costs of $21,668, including the fair value of the 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%, provided that Amendment No. 5 (as defined below) provides that an additional 0.50% of interest will accrue from the
Amendment No 5 Effective Date (as defined below) through June 20, 2024 (which additional interest may be paid in cash or paid-in-kind). At the Company’s option, one percent (1.00%) of such interest may be payable in kind. The interest rate on June 30, 2023, was 13.41%. Interest expense for the three and six months ended June 30, 2023 was $13,353 and $26,295, respectively, which included amortization of $1,672 and $3,260, respectively, related to the discount and debt issuance costs. Interest expense for the three and six months ended June 30, 2022 was $11,009 and $19,700, respectively, which included amortization of $1,960 and $3,236, 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 alternative benchmark had not been selected as of June 30, 2023. The Company selected SOFR as the alternative benchmark effective July 1, 2023.
Obligations under the Oaktree Credit Agreement are secured by a first-priority lien on substantially all of the assets of the Company and its wholly-owned subsidiaries (the “Subsidiary Guarantors”), although certain assets of the Company and Subsidiary Guarantors are subject 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.
At June 30, 2023, the Company was not in compliance with certain leverage ratio financial covenants under the Oaktree Credit Agreement. On August 9, 2023 (the "Amendment No. 5 Effective Date"), the Company, the Subsidiary Guarantors party thereto, the Administrative Agent, and the Lenders party thereto executed Amendment No. 5 to Term Loan Credit Agreement (the “Amendment No. 5”), pursuant to which, among other things: (i) all leverage ratio financial covenants under the Oaktree Credit Agreement were (a) eliminated and not tested for the for the quarters ending June 30, 2023 and September 30, 2023 and (b) made less restrictive for the quarters ending December 31, 2023, March 31, 2024, and June 30, 2024; (ii) additional performance covenants were added requiring the Company and its subsidiaries to use commercially reasonable best efforts to dispose of certain non-core real estate and monetize its consumer loan portfolios (with corresponding requirements to use such proceeds of such sales to pay down the term loans under the Oaktree Credit Agreement); (iii) an additional performance covenant was added requiring the Company raise net cash proceeds of not less than $100,000 from the issuance of common stockequity interests in the Company by December 1, 2023 (with a corresponding requirement to use certain of such equity proceeds to pay down the term loans under the Oaktree Credit Agreement), and (iv) an additional performance covenant was added requiring the Company to issue warrants, exercisable for an anticipated aggregate of 1,212,121 shares at an anticipated price of $12 per share, in a form to be agreed upon, to the Lender.In connection with Amendment No. 5, the Company agreed to pay a nominal fee which may be paid in cash or paid-in-kind.
The elimination of the June 30, 2023 leverage ratio financial covenants was made effective as of June 30, 2023, and the Lenders agreed in Amendment No. 5 that no event of default exists or arises from such leverage ratio financial covenants as of such date.
Based on the amended terms of the Oaktree Credit Agreement, the Company believes that it will be in compliance with all covenants under the Oaktree Credit Agreement, as amended by Amendment No. 5, for the next one year period. As of June 30, 2023, the Company has classified obligations under the Oaktree Credit Agreement as non-current liabilities.
RumbleOn Finance Line of Credit
On February 4, 2022, RumbleOn Finance and ROF SPV I, LLC ("ROF"), an indirect subsidiary of RumbleOn, entered into a consumer finance facility ("ROF Consumer Finance Facility") primarily to provide up to $25,000 for the underwriting of consumer loans underwritten by ROF. Credit Suisse AG, New York Branch (“Credit Suisse”) is the managing agent of the ROF Consumer Finance Facility, and RumbleOn Finance is the borrower. All loans under this agreement are secured by certain collateral including the consumer finance loans purchased by the ROF Consumer Finance Facility.
We provided customary representations and covenants under the related agreements which include financial covenants and collateral performance covenants. Loans sold to or in the ROF Consumer Finance Facility are subject to certain eligibility criteria, concentration limits and reserves.
As of June 30, 2023, RumbleOn Finance did not meet the interest 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 principal balance due under the ROF Consumer Finance Facility as of June 30, 2023. We intend to sell the loan portfolio held at RumbleOn Finance and pay off the outstanding balance during the period. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) bysecond half of 2023. As of June 30, 2023, the weighted average numberoutstanding balance due under the ROF Consumer Finance
Facility was $18,030, which is reflected in the computation.current portion of long-term debt and line of credit in the accompanying Condensed Consolidated Balance Sheets.
The value of the loan receivable assets held by RumbleOn Finance, which approximated $24,883 net of allowance for loan losses, is included in assets held for sale in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2023.
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.
Floor Plan Notes Payable
The Company recognizes revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) the product or service has been providedrelies on its floorplan vehicle financing credit lines (“Floorplan Lines”) to the customer; (iii) the amount to be paid by the customer is fixed or determinable;finance new and (iv) the collection of the Company’s payment is probable.
Used Vehicle Sales
The Company sells used vehicles to consumers, dealers and at auctions. The source 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 frominventory at its retail locations and for the wholesale segment. Floor plan notes payable - trade reflects amounts borrowed to finance the purchase of specific new and, to a lesser extent, used vehicle sales is recognized when the vehicle is deliveredinventory with corresponding manufacturers' captive finance subsidiaries (“trade lenders”). Floor plan notes payable - non-trade represents amounts borrowed to a consumer, dealer or auction, a sales contract is signed,andfinance the purchase price has either been received or collectability has been established. We guarantee the vehicles we sellof specific new and used vehicle inventories with a 3-day, money-back guarantee. Usednon-trade lenders. Changes in vehicle sales revenue is recognized net of a reserve for returns, which is based on historical experiencefloor plan notes payable - trade are reported as operating cash flows and trends.
Online Listing and Sales Fees
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 provideschanges in floor plan notes payable - non-trade are reported as 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 listed for sale and the listing fee has been received. Revenue for selling fees is recognized upon delivery 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.
Retail Merchandise Sales
The Company recognizes sales revenue, net of sales taxes at the time it sells the merchandise or in the case of online sales when the merchandise is delivered to the customer 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 term of their finance contract.
Commission revenue is recognized at the time of sale, net of a reserve for estimated contract cancellations. The reserve for cancellations is estimated based upon historical industry experience and recent trends and is reflected as a reduction of other sales revenueflows in the accompanying Consolidated Statements of OperationsCash 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 October 26, 2022, the Company entered into a Floorplan Line with J.P. Morgan (the “J.P. Morgan Credit Line”). As of June 30, 2023, advances under the J.P. Morgan Credit Line are limited to $75,000 and a componentthe outstanding balance was $27,104. Interest expense on the J.P. Morgan Credit Line for the three and six months ended June 30, 2023 was $421 and $808, respectively.
As of accountsJune 30, 2023, the Company is in compliance with the covenant terms of its floor plan agreements.
NOTE 6 – CONVERTIBLE NOTES
As of June 30, 2023 and December 31, 2022, the outstanding convertible senior notes net of debt discount and issue costs are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Principal Amount | | Debt Discount | | Carrying Amount | | Principal Amount | | Debt Discount | | Carrying Amount |
| Convertible senior notes | $ | 38,750 | | | $ | (5,356) | | | $ | 33,394 | | | $ | 38,750 | | | $ | (6,860) | | | $ | 31,890 | |
| Less: Current portion | — | | | — | | | — | | | — | | | — | | | — | |
| Long-term portion | $ | 38,750 | | | $ | (5,356) | | | $ | 33,394 | | | $ | 38,750 | | | $ | (6,860) | | | $ | 31,890 | |
Convertible Senior Notes
The convertible senior notes (the "Notes") were issued on January 14, 2020 pursuant to an Indenture (the "Indenture"), by and between the Company and the trustee. The Indenture includes customary representations, warranties and covenants by the Company. The Notes bear interest at 6.75% per annum, payable semiannually on January 1 and accrued liabilitiesJuly 1 of each year, beginning on July 1, 2020. The Notes may bear additional interest under specified circumstances relating to the Company's failure to comply with its reporting obligations under the Indenture or if the Notes are not freely tradable as required by the Indenture. The Notes mature on January 1, 2025, unless earlier converted, redeemed or repurchased pursuant to their terms.
The initial conversion rate of the Notes is 25 shares of Class B Common Stock per $1 principal amount of Notes, which is equal to an initial conversion price of $40.00 per share. The conversion rate is subject to adjustment in certain events as set forth in the accompanying Consolidated Balance Sheets. Our risk related to contract cancellations is 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 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 alsoIndenture but will not 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 assumed 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 riskany accrued 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 contingentunpaid interest. In addition, upon the occurrence of a future event are recorded when"make-whole fundamental change", the contingency is resolved.
Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert the Notes in connection with such make-whole fundamental change. Before July 1, 2024, the Notes will be convertible only under circumstances as described in the Indenture. No adjustment to the conversion rate as a result of conversion or a make-whole fundamental change adjustment will result in a conversion rate greater than 62 shares per $1 in principal amount.
The BCFIndenture contains a “blocker provision” which provides that no holder (other than the depository with respect to the Notes) or beneficial owner of a convertible noteNotes shall have the right to receive shares of the Class B Common Stock upon conversion to
the extent that, following receipt of such shares, such holder or beneficial owner would be the beneficial owner of more than 4.99% of the outstanding shares of the Class B Common Stock.
The Notes are subject to events of default typical for this type of instrument. If an event of default, other than an event of default in connection with certain events of bankruptcy, insolvency or reorganization of the Company or any significant subsidiary, occurs and is measuredcontinuing, the trustee by allocating anotice to the Company, or the holders of at least 25% in principal amount of the outstanding Notes by notice to the Company and the Trustee, may declare 100% of the principal of and accrued and unpaid interest, if any, on all the Notes then outstanding to be due and payable. The Notes also contain conversion features related to certain events, which include liquidation or dissolution, as well as fundamental changes to the structure or ownership of the Company.
The Notes were not redeemable by the Company before the January 14, 2023. The Company may redeem for cash all or any portion of the note’s proceeds toNotes, at its option, on or after January 14, 2023 if the last reported sale price of the Class B Common Stock has been at least 130% of the conversion feature, if applicable,price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and asincluding, the trading day immediately preceding the date on which the Company provides notice of redemption at a reductionredemption price equal to 100.0% of the carryingprincipal amount of the convertible note equalnotes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.
The Notes rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the intrinsicNotes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the conversion feature, bothassets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of which are credited to additional paid in capital. The debt discount is amortized to interest expense over the lifecurrent or future subsidiaries of the note usingCompany (including trade payables). Interest expense recognized with respect to 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, respectivelyNotes for the three and nine-month periodssix months ended SeptemberJune 30, 2017. There were no advertising2023 and marketing costs incurred for the same periods in 2016.2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, | | |
| 2023 | | 2022 | 2023 | | 2022 | | | | |
| Contractual interest expense | $ | 657 | | | $ | 657 | | $ | 1,314 | | | $ | 1,313 | | | | | |
| Amortization of debt discount | 765 | | | 644 | | 1,498 | | | 1,262 | | | | | |
| Total interest expense | $ | 1,422 | | | $ | 1,301 | | $ | 2,812 | | | $ | 2,575 | | | | | |
NOTE 7 –STOCKHOLDER'S 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 the Board of Directors. On June 30, 2017,2023, the number of shares authorized for issuance under the Plan was approved by the Company's stockholders at the 2017 Annual Meeting2,700,000 shares of Stockholders. Class B Common Stock. To date, most RSU and Option awards are service/time based vested over a period of up to three years.
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 and nine-month periodssix months ended SeptemberJune 30, 20172023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Restricted Stock Units | $ | 4,910 | | | $ | 2,753 | | | $ | 7,821 | | | $ | 4,632 | |
| Stock Options | — | | | — | | | — | | | — | |
| Total stock-based compensation | $ | 4,910 | | | $ | 2,753 | | | $ | 7,821 | | | $ | 4,632 | |
As of June 30, 2023, there was $157,763 and $287,550, respectively and is included in selling, general and administrative expenses in951,600 RSUs outstanding. The total unrecognized compensation expense related to outstanding equity awards was approximately $13,346, which the Condensed Consolidated StatementsCompany expects to recognize over a weighted-average period of Operations.approximately 22 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 108 – SUPPLEMENTAL CASH FLOW INFORMATION
The following table includes supplemental cash flow information, including noncash investing and financing activity for the nine-month periodssix months ended SeptemberJune 30, 20172023 and 2016.2022:
| | 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 | $- |
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| Cash paid for interest | $ | 31,125 | | | $ | 21,775 | |
| Cash paid for taxes | $ | 893 | | | $ | 4,875 | |
| Capital expenditures and technology development costs included in accounts payable and other current liabilities | $ | 309 | | | $ | 1,500 | |
| Capital expenditures included in line of credit and notes payable | $ | 752 | | | $ | — | |
| Fair value of 1,048,718 Class B Common Stock issued in the Freedom Transaction | $ | — | | | $ | 26,511 | |
The following table shows the cash and restricted cash reported within the accompanying Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Cash | $ | 44,373 | | | $ | 48,579 | |
Restricted cash (1) | 12,776 | | | 10,000 | |
| Total cash, cash equivalents, and restricted cash | $ | 57,149 | | | $ | 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 ROF Consumer Finance Facility.
NOTE 119 – INCOME TAXES
In projectingThe Company's provision for (benefit from) income taxes on continuing operations for the Company’sthree months and six months ended June 30, 2023 was ($4,573) and ($6,150), respectively, representing effective income tax expense forrates of 26.3% and 17.2%, respectively. The difference between 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 full valuation allowance will be required. As such, noU.S. federal income tax benefit has been recordedrate of 21.0% and RumbleOn’s overall income tax rate for the three and nine-month periodssix months ended SeptemberJune 30, 2017 or 2016.2023 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.
The Company's provision for (benefit from) income taxes on continuing operations for the three months and six months ended June 30, 2022 was $4,852 and $7,487, respectively, representing effective income tax rates of 26.2% and 24.4%, respectively. The difference between the U.S. federal income tax rate of 21.0% and the Company’s overall income tax rate for the three months and six months ended June 30, 2022 was primarily due to income tax expense on non-deductible expenses, valuation allowance expense 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 rate.
NOTE 12 — LOSS10 – 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 periods ended September 30, 2017 did not include 560,000period.
For purposes of restricted stock unitsthis calculation, warrants to purchase 1,212,121 shares of Class B Common Stock as their inclusionhaving an exercise price of $31.50 per share are considered common stock equivalents which are antidilutive for the periods ended June 30, 2023 and 2022. Unvested RSUs have been included in the calculation of diluted earnings per share attributable to common stockholders to the extent the shares would be antidilutive. Theredilutive. Additionally, the Company’s senior unsecured convertible notes were no restricted stock units outstandingantidilutive for the three and nine-month periods ended SeptemberJune 30, 2016.2023 and 2022.
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 50,000 and 16,343,758, and 50,000 and 15,841,346, for the six months ended June 30, 2023 and 2022, respectively.
NOTE 1311 – RELATED PARTY TRANSACTIONS
As of December 31, 2015, the Company had loans of $141,000 and accrued interest of $13,002 due to an entity that is owned and controlled by a family member of an officer and director of the Company. Interest expense on these loans for the three and nine-month period ended September 30, 2016 was $2,878 and $7,431, 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 by a current officer and director of the Company. On March 31, 2017, the Company issued 275,312 shares of Class B Common Stock upon full conversion of the BHLP Note. The accrued interest is included in accrued interest under Long-term liabilities 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. 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. 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 utilize 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.
Promissory Notes
In connection with the NextGen acquisition,RideNow Transaction, the Company entered intoassumed two promissory notes totaling principal and accrued interest of $2,821 as of August 31, 2021 due to entities controlled by a Consulting Agreement (the “Consulting Agreement”) with Kartik Kakarala, who formerly served as the Chief Executive Officer of NextGendirector and now serves as a directoran executive officer of the Company. Pursuant to the Consulting Agreement, Mr. Kakarala servesAmounts due under these two promissory notes have been paid in full 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 threeJune 30, 2023 and nine-month periods ended Septembertotaled $791 as of June 30, 2017, the Company paid $15,000 and $35,000, respectively under the Consulting Agreement. These amounts are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. For additional information, see Note 3 - “Acquisitions.”2022.
RideNow Leases
In connection with the NextGen acquisition,RideNow Transaction, the Company entered into related party leases for 24 properties consisting of dealerships and offices. Each related party lease is with a Services Agreement (the “Services Agreement”) with Halcyon Consulting, LLC (“Halcyon”), to provide development and support services towholly owned subsidiary of the Company. Mr. Kakarala currently servesCompany 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,tenant 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 an executive officer of the Company, as the landlord. The initial aggregate base rent payment for all 24 leases was approximately $1,229 per month, and each lease commenced a new 20-year term on September 1, 2021, with each lease containing annual 2% increases on base rent. Rent expense associated with the leases approximated $4,625 and $9,231, and $4,408 and $8,732, during the three and six months ended June 30, 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 $3 and $6 in payments to RideNow Management LLLP, an entity owned equally by a director and an executive officer during the three and six months ended June 30, 2022. No payments were made during the six months ended June 30, 2023. These payments related to a contract existing at the time of the RideNow Transaction for Sophos Anti-Virus.
In addition, the Company paid off a loan to RideNow Management LLLP of approximately $673 on June 27, 2022.
Payments to Coulter Management Group LLLP
The company made $5 and $10, and $117 and $237 in payments to Coulter Management Group LLLP ("Coulter Management"), an entity owned by a director of the Company. Company, during the three and six months ended June 30, 2023 and 2022. These payments were made to cover certain proportionate costs of the Company, including health plan and IT contract expenses, that were shared among Coulter Management and the RideNow entities for a period of time after the RideNow Transaction date.
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 former 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 June 30, 2023.
The promissory notes were issuedCompany made no cash payments for the license during the three and six months ended June 30, 2023 and $1,080 and $2,160 during the three months and six months ended June 30, 2022, respectively. 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. On June 30, 2023, the Company notified Bidpath of its intent to terminate the contract.
Ready Team Grow, LLC
The Company paid $36 and $100, and $56 and $110 to Ready Team Grow, LLC for employee recruiting services during the three and six months ended June 30, 2023 and 2022. Ready Team Grow, LLC is an entity owned by the domestic partner of the Company’s former 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 connectionan 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 completionCompany’s Executive Incentive Program. A total of $244 and $359, and $281 and $544 in cash payments were made under these awards during the three and six months ended June 30, 2023 and 2022, respectively.
Employment of Immediate Family Members
William Coulter, a director and former executive officer of the 2016 Private Placement on March 31, 2017. Interest expense onCompany, has one immediate family member who was employed by the promissory notesCompany until August 30, 2022. This family member received aggregate gross pay of approximately $75 and $138 for the three and nine-month periodssix months ended SeptemberJune 30, 20172022, respectively. No payments were made during 2023.
Mark Tkach, an executive officer and director of the Company, 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 $29,392employed by the Company until February 21, 2022. This family member received aggregate gross pay of approximately $0 and $63,416, respectively, which included debt discount amortization of $23,321 and $45,335, respectively$81, for the three and nine-monthsix months ended June 30, 2022, respectively. No payments were made during 2023. The other family member has received aggregate gross pay of approximately $105 and $232, and $75 and $150 during the three and six months ended June 30, 2023 and 2022, respectively, and grants of restricted stock units with respect to 42,273 shares of Class B Common Stock.
NOTE 12 - 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 two reportable segments as defined in U.S. GAAP for segment reporting: (1) powersports and (2) vehicle logistics. Our powersports segment consists of the distribution principally of new and used motorcycles and other powersports vehicles. Our vehicle logistics segment provides nationwide transportation brokerage services between dealerships and auctions.
Information about continuing operations by operating segment for the three and six months ended June 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | |
| Powersports | Vehicle Logistics | Eliminations (1) | Total - Continuing Operations | | |
| Three Months Ended June 30, 2023 | | | | | | |
| | | | | | |
| Revenue | $ | 368,308 | | $ | 14,601 | | $ | (178) | | $ | 382,731 | | | |
| Operating income (loss) | $ | (661) | | $ | 1,480 | | $ | — | | $ | 819 | | | |
| Depreciation and amortization | $ | 5,258 | | $ | 11 | | $ | — | | $ | 5,269 | | | |
| Interest expense | $ | (18,326) | | $ | — | | $ | — | | $ | (18,326) | | | |
| | | | | | |
| Three Months Ended June 30, 2022 | | | | | | |
| | | | | | |
Revenue (2) | $ | 396,665 | | $ | 16,636 | | $ | (1,119) | | $ | 412,182 | | | |
| Operating income (loss) | $ | 29,820 | | $ | 1,281 | | $ | (55) | | $ | 31,046 | | | |
| Depreciation and amortization | $ | 5,852 | | $ | 10 | | $ | — | | $ | 5,862 | | | |
| Interest expense | $ | (12,751) | | $ | — | | $ | — | | $ | (12,751) | | | |
| | | | | | |
| Six Months Ended June 30, 2023 | | | | | | |
| Revenue | $ | 687,852 | | $ | 29,600 | | $ | (337) | | $ | 717,115 | | | |
| Operating income (loss) | $ | (2,804) | | $ | 2,910 | | $ | — | | $ | 106 | | | |
| Depreciation and amortization | $ | 9,975 | | $ | 21 | | $ | — | | $ | 9,996 | | | |
| Interest expense | $ | (35,928) | | $ | — | | $ | — | | $ | (35,928) | | | |
| Change in derivative liability | $ | — | | $ | — | | $ | — | | $ | — | | | |
| | | | | | |
| Six Months Ended June 30, 2022 | | | | | | |
Revenue (2) | $ | 718,818 | | $ | 30,248 | | $ | (2,380) | | $ | 746,686 | | | |
| Operating income (loss) | $ | 51,588 | | $ | 2,348 | | $ | (48) | | $ | 53,888 | | | |
| Depreciation and amortization | $ | 10,299 | | $ | 20 | | $ | — | | $ | 10,319 | | | |
| Interest expense | $ | (23,412) | | $ | (1) | | $ | — | | $ | (23,413) | | | |
| Change in derivative liability | $ | 39 | | $ | — | | $ | — | | $ | 39 | | | |
Total assets by operating segment at June 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Powersports | Vehicle Logistics | Eliminations (1) | Continuing Operations | Discontinued Operations | Total |
| Total assets at June 30, 2023 | $ | 1,876,666 | | $ | 23,186 | | $ | (863,300) | | $ | 1,036,552 | | $ | 307 | | $ | 1,036,859 | |
| Total assets at June 30, 2022 | $ | 2,028,815 | | $ | 18,672 | | $ | (824,275) | | $ | 1,223,212 | | $ | 48,345 | | $ | 1,271,557 | |
(1)Intercompany investment balances primarily relate 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. Revenue and costs for these intercompany freight services have been eliminated in the Condensed Consolidated Statements of Operations.
(2)Amount for Powersports for 2022 have been adjusted by $18.1 million and $32.8 million, respectively for three and six months ended June 30, 2022. See "Correction of an Immaterial Misstatement Related to Prior Periods" in Note 1.
NOTE 13 - DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Discontinued Operations
In the fourth quarter of 2022, the Company announced plans to wind down its automotive business. As of June 30, 2023, the Company has completed all substantial activities pertaining to the wind down of its automotive business, which represents a strategic shift having a major effect on our operations and financial results.
We have classified all direct revenues, costs, and expenses related to commercial operations of the wholesale automotive business, within income (loss) from discontinued operations, net of tax, in the Condensed Consolidated Statements of Operations for all periods presented. We have not allocated any amounts for shared general and administrative operating support expenses to discontinued operations.
While ASC 205-20 does not explicitly require assets and liabilities of a discontinued operation to be separately presented in prior periods when the disposal is other than by sale, we have presented related assets and liabilities as assets and liabilities of discontinued operations in our Condensed Consolidated Balance Sheets as of December 31, 2022.
The results of operations from discontinued operations for three and six months ended SeptemberJune 30, 2017. The interest was charged to interest expense2023 and June 30, 2022 have been reflected as discontinued operations in the Condensed Consolidated Statements of Operations and consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2023 | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 |
| Income (loss) from operations of discontinued Automotive segment | | $ | (878) | | | 404 | | | (1,100) | | | $ | (294) | |
| Income tax provision (benefit) | | (123) | | | 18 | | | (149) | | | (237) | |
| Income (loss) from discontinued operations | | $ | (755) | | | $ | 386 | | | $ | (951) | | | $ | (57) | |
The following table presents the carrying amounts of the classes of assets and liabilities of discontinued
operations as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Cash | $ | — | | | $ | 1,816 | |
| Accounts receivable, net | 272 | | | 1,311 | |
| Inventory | — | | | 8,248 | |
| Prepaid expense and other current assets | — | | | 2 | |
| Other assets | 35 | | | 23 | |
| Total assets of discontinued operations | $ | 307 | | | $ | 11,400 | |
| | | |
| Accounts payable and accrued expenses | $ | 714 | | | $ | 3,137 | |
| Vehicle floor plan payable | — | | | 5,254 | |
| Accrued interest payable | — | | | 43 | |
| Total liabilities of discontinued operations | $ | 714 | | | $ | 8,434 | |
Assets Held For Sale
The Company classifies its assets to be sold as held for sale in the period (i) it has approved and committed to a plan to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated; (iv) the sale of the asset is probable; (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale.
In the second quarter of 2023, the board approved a plan to sell the loan portfolio held by RumbleOn Finance. The value of the loan receivable assets, which approximated $24,883 net of allowance for loan losses, is included in accrued interest under long-term liabilitiesassets held for sale in the accompanying Condensed Consolidated Balance Sheets.
On September 5, 2017, the Company executed Senior Secured Promissory Notes (the “Notes”) in favorSheets as of several investors, including certain executive officers and directorsJune 30, 2023. We expect that anticipated proceeds from sale of the Company,loan receivable assets will be used to pay down the RumbleOn Finance line of credit, which approximated $18,030 and is included in current portion of long-term debt and line of credit in the aggregate principal amountaccompanying Condensed Consolidated Balance Sheet as of $1,650,000 (“Principal Amount”), which includes an aggregate original issue discount of $150,000. As of SeptemberJune 30, 2017,2023. We anticipate the Company had Notes of $1,214,144 and accrued interest of $4,144 due to certain executive officers and directorssale of the Company. Interest expense onloan portfolio to completed during 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 $7,534second half of original issue discount amortization. On October 23, 2017, the Company completed a public offering and used $1,661,0752023.
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 1514 – SUBSEQUENT EVENTS
Oaktree Credit Agreement
On October 23, 2017,August 9, 2023, the Company completedentered into 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 proceedsagreement to amend its term loan with Oaktree Capital. See Note 5.
Stock Incentive Plan
At the Company of approximately $14,500,000 after deductingAnnual Shareholder Meeting which took place on July 14, 2023, the underwriting discount and offering fees and expenses payable byshareholders voted to increase 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 Marketshares available 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”)Stock Incentive Plan referred to in theNote 7.Thecurrent 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 advanceshare available under the Credit Line bears interest on a per annum basis fromStock Incentive Plan after the dateincrease is 3,291,461 shares, an increase 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.591,461 shares.
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.
ThisForward-looking statements throughout this Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. The words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions identify some of the forward-looking statements. Forward-looking statements are not guarantees of future performance or future results and may involve risks and uncertainties and assumptions. The factors discussed elsewhere in this Form 10-Q and in subsequent Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-Kthat could also cause actual results to differ materially from those indicatedprojected. Refer to the "Forward-Looking and Cautionary Statements" section below and in our 2022 Form 10-K for a discussion of these risks and uncertainties.
Overview
RumbleOn is the nation's first and largest publicly traded, technology-enhanced dealership group platform in the powersports industry. Headquartered in the Dallas Metroplex, RumbleOn is revolutionizing the customer experience for outdoor enthusiasts across the country and providing more choices in making powersports vehicles accessible to more people in more places than ever before. We strive to build long-term value for our customers, employees, and shareholders with the nation’s largest network of powersports dealerships, service departments, and fulfillment centers operated by our highly-trained and knowledgeable team. We are transforming the Company’s forward-looking statements. The Company undertakes no obligationpowersports customer experience by giving consumers what they want - a wide selection, great value and quality, and an easy transaction. Every element of our business, from inventory procurement, to publicly updatefulfillment, to overall ease of transactions, has been built for a singular purpose – to create an unparalleled customer experience in the powersports industry regardless of whether they are shopping our inventory online or revise any forward-looking statements, except as required by law.
OVERVIEW
in-store.
We operate a capital light disruptive e-commerce platform facilitating the ability of both consumersbuy and dealers to Buy-Sell-Trade-Finance pre-owned motorcyclesell new and other power sport and recreation vehicles (“power/recreation vehicles”) in one online location. Our goal is to transform the way motorcycles and other power/recreation vehicles are bought and sold by providing users with the most efficient, timely and transparent transaction experience. Our initial focus is the market for 601cc and larger on-road motorcycles. We will look to extend to additional power/recreation vehicle types and products as the platform matures, including ATVs, personal watercraft, snowmobiles, side-by-sides, boats, and both towable and motor coach RVs.
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 financingthrough multiple company-owned websites 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 motorcyclesaffiliate channels, as well as to provide inspection, reconditioningvia our proprietary cash offer tool and distribution services. Correspondingly, we earn fees and transaction income, and dealer partners will earn incremental revenue and enhance profitability through increased sales, leads, and fees from inspection, reconditioning and distribution programs.
Our business model is driven by a technology platform we acquired in February 2017, through our acquisitionnetwork of substantially allover 55 company-owned retail locations as of the assets of NextGen. The acquired system provides integrated vehicle appraisal, inventory management, customer relationship and lead management, equity mining, and other key services necessary to drive the online marketplace. Over the past 16 years, the developers of the software have designed and built, for large multi-national clients, a number of dealer and, what we believe to be, high quality applications solutions.
Our business combines a comprehensive online buying and selling experience with a vertically-integrated supply chain that allows us to buy and sell vehicles to consumers and dealer partners transparently and efficiently at a value-oriented price. Using our website or mobile application, consumers and dealers can complete most phases of a used vehicle transaction. Our online buying and selling experience allows consumers to:
●
Sell us a vehicle.We address the lack of liquidity availableJune 30, 2023, primarily located in the market for a cash sale of a vehicle by dealersSunbelt. Deepening our presence in existing markets and consumersexpanding into new markets through strategic acquisitions helps fuel our Sell Us Your Vehicle Program. Dealers and consumers can sell us a vehicle independent of a purchase. Using our free online or mobile appraisal tool, consumers and dealers can complete a short appraisal form and receive a haggle-free, guaranteed 3-day firm cash offer for their vehicle within minutes and, if accepted, receive payment in a few days or less.growth. Our cash offer technology brings in high quality inventory, which attracts more riders and drives volume in used unit sales. This enables us to buy is based on the use of extensive used retailquickly and wholesale vehicleeffectively gain market data. Whenshare. As a consumer accepts our offer, we ship their vehicles to our closest dealer partner where the vehicle is inspected, reconditioned and stored pending sale. We believe buying used vehicles directly from consumers will be the primary driver of our source of supply for sale and a key to our ability to offer competitive pricing to buyers. By being one of the few sources for consumers to receive cash for their vehicle, we have a significant opportunity to buy product at a lower cost since dealer and auction markup is eliminated from these consumer purchases. In addition, we believe our willingness to appraise and purchase a customer’s vehicle, whether or not the customer is buying a vehicle from us, provides a competitive sourcing advantage for vehicles.
●
List a vehicle.The current market for listing motorcycles and other power sport vehicles is inefficient and ineffective in that a majority of the transactions are conducted through peer-to-peer transactions, which do not facilitate making cash offers, accepting trades or providing financing to the buyer. Our listing options and comprehensive transaction support addresses the shortcomings that currently exist in the market for listing a vehicle for sale while allowing dealers and consumers an opportunity to utilize a simple, efficient and effective process. Consumers who do no not accept our cash offer can pay a fee to list their vehicle on RumbleOn.com and other available listing sites. During the listing period, our cash offer is extended, and we manage all sales leads, handle all the documentation necessary to complete a sale and accept a buyer trade and provide a range of third-party finance options and vehicle service contracts to the buyer, if necessary. Upon the sale of a listed vehicle, we earn a fee separate and apart from the listing fee. Dealer partners do not pay a fee to list their vehicles.
●
Purchase a used vehicle.Our 100% online approach to retail and wholesale distribution addresses the many issues currently facing the retail and wholesale distribution marketplace for power/recreation vehicles, a marketplace we believe is primed for a disruptive change. We believe the issues facing the marketplace include: (i) heavy use of inefficient listing sites, (ii) a highly fragmented dealer network; (iii) a limited selection of used vehicles for sale; (iv) negative consumer perception of the current buying experience; and (v) a massive consumer shift to online retail. We offer dealers and consumers a large selection of vehicles at a value-oriented price that can be purchased in a seamless transaction in minutes. In addition to a transparent buying experience, our no haggle pricing, coupled with an inspected, reconditioned and certified vehicle, backed by a fender-to-fender warranty and a 3-day money back guarantee, addresses consumer dissatisfaction with the current buying processes in the marketplace. As of October 31, 2017, including vehicles of our dealer partners, we have approximately 550 vehicles listed for sale on our website, where consumers can select and purchase a vehicle, including arranging financing, directly from their desktop or mobile device. Selling used vehicles to dealers and consumers is the key driver of our business.
●
Finance a purchase.Customers can pay for their vehicle using cash or we will provide a range of finance options from unrelated third parties such as banks or credit unions. Customers fill out a short online application form, and, if approved, apply the financing to their purchase in our online checkout process.
●
Protect a purchase.Customers have the option to protect their vehicle with unrelated third-party branded EPPs and vehicle appearance protection products as part of our online checkout process. EPPs include extended service plans which are designed to cover unexpected expenses associated with mechanical breakdowns and guaranteed asset protection, 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.
To enable a seamless dealer and consumer experience, we are building a vertically-integrated used vehicle supply chain, supported by proprietary software systems and data which include the following attributes:
●
Vehicle sourcing and acquisition.We acquire a significant percentage of our used vehicle inventory directly from consumers and dealers through our Sell Us Your Vehicle Program. We also, to a lesser extent, acquire vehicles from auctions and directly from used vehicle suppliers, including franchise and independent dealers and finance and leasing companies. Using used retail and wholesale vehicle market data obtained from a variety of internal and external sources, we evaluate a significant number of vehicles daily to determine their fit with consumer demand, internal profitability targets and our existing inventory mix. The supply of used vehicles is influenced by a variety of factors, including: the total number of vehicles in operation; the rate of new vehicle sales, which in turn generate used vehicle trade-ins; and the number of used vehicles sold or remarketed through retail channels, wholesale transactions and at auctions. Based on the large number of vehicles remarketed each year, consumer acceptance of our online vehicle appraisal process, our experience and success in acquiring vehicles from auctions and other sources and the large size of the United States market relative to our needs, we believe that sources of used vehicles will continue to be sufficient to meet our current and future needs.
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Inspection, reconditioning and logistics. After acquiring a vehicle, we transport it to one of our dealer partners who is paid to perform an inspection and to recondition the vehicle to meet “RumbleOn Certified” standards. High quality photographs are then taken, the vehicle is listed for sale on Rumbleon.com and the dealer partner stores the vehicle pending delivery to the buyer. This process is supported by a custom used vehicle inventory management system, which tracks vehicles through each stage of the inspection, reconditioning and logistic process. The ability to leverage and provide a high margin source of incremental revenue to the existing network of dealer partners in return for providing inspection, reconditioning, logistics and distribution support reduces our need for any significant investment in retail or reconditioning facilities.
Our Strategy
Our strategy is to provide a complete online, direct, pre-owned motorcycle and power/recreation vehicle marketplace solution for both consumers and dealers, while providing dealers access to additional software solutions and services allowing them to earn incremental revenue and enhance profitability through increased sales leads, and fees earned from inspection, reconditioning and distribution programs. The recognition of the need for our solutions is the result of our management team gaininggrowth to date, RumbleOn enjoys a clear understanding of the key drivers of complete supply chain solutions necessary to create a different and disruptive way to both acquire and distribute cars and trucks online from their deep experienceleading, first-mover position in the automotive sectorhighly fragmented $100 billion+ powersports market.
RumbleOn’s powersports business offers motorcycles, all-terrain vehicles, utility terrain vehicles, personal watercraft, and all other powersports products, parts, apparel, and accessories from a wide range of manufacturers, including those listed below.
| | | | | | | | |
| RumbleOn’s Representative Brands |
| Alumacraft | Huricane Boats | Specialized (bicycles) |
| Argo | Indian Motorcycles | Speed/UTV |
| Benelli | Karavan Trailers | SSR |
| Blazer Boats | Kawasaki | STACYC (electric) |
| BMW | Kayo | Suzuki |
| Can-Am | KTM | Tidewater (Boats) |
| CF Moto | Lynx (Snowmobiles) | Timbersled (Snow) |
| Club Car | MAGICTILT Trailers | Trailmaster (off-road/gocarts) |
| Continental Trailers | Manitou | Triton Trailers |
| Crevalle Boats | Manitou (Boats) | Triumph |
| Cub Cadet | Mercury (Boats) | Vanderhall |
| Ducati | Polaris | Wellcraft (Boats) |
| Gas-Gas | Scarab | Yamaha |
| Hammerhead Off-Road | Sea-Doo | Yamaha Marine |
| Harley-Davidson | Segway Powersports | Zero Motorcycles |
| Hisun | Ski-Doo | Zieman Trailers |
| Honda | Soul E Bikes | |
| | |
RumbleOn leverages technology and data to streamline operations, improve profitability, and drive lifetime engagements with disruptive businesses such as: AutoNation, Auto America,our customers by offering a best-in-class customer experience with unmatched Omnichannel capabilities. Our Omnichannel platform offers consumers the fastest, easiest, and Vroom. We believe that there is a significant opportunity to disrupt the pre-owned marketplacemost transparent transactions available in recreational vehicles as it suffers from many of the same negative consumer sentiments and dealer practices that existed in the automotive sector priorpowersports. RumbleOn customers have access to the advent of and the significant influx of new entrants with improved business models. In addition, the power/recreationmost comprehensive powersports vehicle segment lacks the significant competition that exists in the automotive sector due to its fragmented dealer network, relative size and the niche nature of its products. Management believes consumers prefer to purchase and sell through a well-designed online/mobile solution, with a broad selection of vehicles at highly competitive prices. We believe that our applications will provide appraisal, cash-offer, vehicle listing, financing options, and logistics/delivery solutions designed to provide an exceptional consumer experience. We intend to replicate and improve upon the positive attributes of the various “sell us your car” and other related programs that have proven successful in automotive retail for entities such as AutoNation, CarMax, Carvana, Vroom and others.
Our dealer strategy is focused on creating a synergistic relationship wherein dealers will haveoffering, including the ability to leveragebuy, sell, trade, and finance online, in store at any of our brick-and-mortar locations, or both. RumbleOn offers financing solutions for consumers; trusted physical retail and service locations; online and in-store instant cash offers, and unparalleled access to pre-owned inventory; and apparel, parts, service, and accessories.
Recent Development
Oaktree Credit Agreement
On August 9, 2023 (the “Amendment No. 5 Effective Date”), the RumbleOn marketplace and dealer services offerings to drive increased revenue throughCompany, the purchase or sale of vehicles viaSubsidiary Guarantors party thereto, the online platformAdministrative Agent and the abilityLenders party thereto executed Amendment No. 5 to earn feesTerm Loan Credit Agreement (the “Amendment No. 5”), pursuant to which, among other things, (i) all leverage ratio financial covenants under the Oaktree Credit Agreement were (a) eliminated and not tested for the for the quarters ending June 30, 2023 and September 30, 2023 and (b) made less restrictive for the quarters ending December 31, 2023, March 31, 2024, and June 30, 2024; (ii) additional performance covenants were added requiring the Company and its subsidiaries to use commercially reasonable best efforts to dispose of certain non-core real estate and monetize its consumer loan portfolios (with corresponding requirements to use such proceeds of such sales to pay down the term loans under the Oaktree Credit Agreement); (iii) an additional performance covenant was added requiring the Company to raise net cash proceeds of not less than $100,000 from inspection, reconditioningthe issuance of common equity interests in the Company by December 1, 2023 (with a corresponding requirement to use certain of such equity proceeds to pay down the term loans under the Oaktree Credit Agreement), and distribution programs. Dealer partners will have(iv) an additional performance covenant was added requiring the abilityCompany to showissue warrants, in a form to be agreed upon, to the complete RumbleOn vehicle inventory on their website and will have access to preferred pricing onLenders.In connection with Amendment No. 5, the acquisition of vehicles. Management believes that partners utilizing the platform will significantly enhance their existing online retail strategies. We haveCompany has agreed to add dealers to our networkpay a nominal fee which may be paid in cash or paid-in-kind.
The elimination of the June 30, 2023 leverage ratio financial covenants was made effective as of June 30, 2023, and arethe Lenders agreed in discussions with other dealers regarding joining the network. We believeAmendment No. 5 that our operations, designedno event of default exists or arises from such leverage ratio financial covenants as of such date. The foregoing description of Amendment No. 5 does not purport to be both capitalcomplete and infrastructure light, will leverage the dealer network to provide inspection, reconditioning and distribution, thus minimizing the number of warehouse locations, reconditioning centers and logistics facilities we operate. We plan to primarily operate a centralized headquarter, call center, and limited number of strategically located warehouses as needed.
Our initial focus on pre-owned Harley-Davidson motorcycles provides a targeted, identifiable segment to establish the functionality of the platform and the RumbleOn brand. Harley-Davidson is a highly regarded and dominant brand (representing approximately 50% market share of new 601cc+ on-road motorcycles according to both Harley-Davidson public filings and the Motorcycle Industry Council) in the motorcycle market, with a base of over three million pre-owned motorcycles registered for use in the United States. According to Harley-Davidson, as disclosed in their 2017 investor meeting presentation, and management estimates, each year approximately 400,000 pre-owned Harley-Davidsons are sold, with Harley-Davidson dealers selling approximately 125,000 units, 250,000 units sold in private consumer and independent dealer transactions, and 25,000 sold via other means. Further, as Harley-Davidson discussedqualified in its 2017 investor meeting presentation, their objective is to build two million new Harley-Davidson riders in the United States in the next 10 years, principally, we believe, via brand marketing and product development, estimated at $70 million in 2016, dealer hosted experiences and the Harley-Davidson Riding Academy. We believe such efforts will benefit us as, per Harley-Davidson’s 2017 investor meeting presentation, there are 2.4 million owners of non-Harley-Davidson motorcycles, and 15.0 million people who don’t currently own a motorcycle, who have an interest in Harley-Davidson and are planning to purchase a motorcycle within three years. Further, Harley-Davidson’s estimates that there are 7.8. million motorcycle license holders who do not currently own a motorcycle and that the sale of used Harley-Davidson motorcycles to young adults (ages 18-34) was three times the sale of new Harley-Davidson motorcyclesentirety by reference to the same age group. These statistics support our contention that therefull text of Amendment No. 5 [which is expectedincluded as Exhibit 10.8 to be a growing market for used Harley-Davison transactionsthis report and a more informed buyer.incorporated herein by reference].
KEY OPERATING METRICS
We believe that we may potentially enjoy a halo effect from Harley-Davidson’s advertising as not all young new buyers will purchase new motorcycles. Our extension into the “metric” brands (Honda, Yamaha, Kawasaki, Suzuki, etc.) essentially doubles the available market and is a natural extension as these vehicles are often sold or traded for Harley-Davidson vehicles. The metric market and dealer profile closely mirror that of the Harley-Davidson market although it is more highly fragmented. In addition, many of the metric dealers also retail ATVs, UTVs, snowmobiles and personal watercraft providing the next organic product extension leveraging existing dealer relationships.
Our Growth Strategy
We intend to transform the way recreational vehicles are bought and sold and thereby significantly grow our business and gain market share by targeting the large number of private consumer peer to peer transactions driven by listing only sites such as Craigslist. Management estimates the market for annual used motorcycle sales today at approximately 800,000 units sold, or approximately $7.5 billion of sales. Management believes approximately 50% or more of these transactions are completed on a peer to peer basis. We believe these transactions are highly inefficient and consumers view the process as cumbersome. Our online consumer direct sourcing strategy, wherein we make a cash offer to a consumer or dealer utilizing our website or mobile application allows us to deliver value pricing on our vehicles for sale. We believe our large-scale inventory of vehicles for sale, coupled with our online platform, transparent selling process, certified and reconditioned vehicles and ability to offer financing and ancillary products provides a unique customer experience as compared to current alternatives when purchasing a vehicle. We believe we can aggressively drive RumbleOn brand recognition and awareness at a relatively low expense by utilizing digital, social media and guerrilla marketing techniques, as there are few national competitors and consumers are very brand focused and loyal. For example, approximately 15 key motorcycle events, such as Daytona Bike Week and the Sturgis Bike Rally attract millions of attendees annually, many of whom are both motorcycle enthusiasts and Harley-Davidson consumers. We intend to have a significant presence at these events, with onsite advertising and sales facilities to build brand awareness. In addition, we anticipate engaging with or sponsoring motorcycle groups, providing us a targeted audience to which to market RumbleOn and showcase the ease with which they can buy, sell, or trade motorcycles. Once motorcycle enthusiasts have sampled our website, we believe the unique experience will be compelling and drive organic growth. Over time, management believes we will build a proprietary database of customers and their interests, which will facilitate customer retention and cross sell activities.
Our Market
We operate in a market with significant scale and breadth of products. The Motorcycle Industry Council estimates that in 2014, 9.2 million people owned 10.1 million motorcycles in the United States. 87% of these were on-highway models, our initial targeted segment. According to the Powersports Business 2016 Market Data Book, or the 2016 Market Datebook, used motorcycle registrations were 1.1 million units in 2015 with new unit sales of approximately 573,000 or approximately $7 billion in new vehicle sales. The owner demographic is favorable to the market outlook as millennials and baby boomers are maturing into the median ranges. The owner group is characterized by brand loyal riding enthusiasts. According to the Motorcycle Industry Council, in 2014 the median owner age was 47 years with a median income of $62,200 which is approximately 10% above the United States’ average. The dealer market is fragmented with an estimated 4,600 retail outlets authorized to sell new motorcycles, scooter, and all-terrain vehicles.
The ATV, UTV/side-by-side, snowmobile and personal watercraft vehicle, or PWC, markets, are a logical next extension for our platform, as there is significant overlap in the motorcycle dealer base with dealers of these products. According to data from Power Product Marketing and the 2016 Market Data Book, there were approximately 630,000 sales of ATV/UTV/Side-by-sides in 2015. There are approximately 1.2 million snowmobiles registered in the United States (another 600,000 in Canada) and in 2016, approximately 95,000 snowmobiles were sold in the United States and Canada. Lastly, according the National Marine Manufacturers Association and the Personal Watercraft Industry Association, in 2015 there were more than 54,000 new PWCs sold in the United States and there are currently approximately 1.2 million PWCs registered in the United States.
As we look to further extend the platform, the two largest adjacent segments are represented by the recreational boating and recreational vehicle (motor vehicle or trailer equipped with living space and amenities found in a home) industries. According to the National Marine Manufacturers Association, there were approximately 15.7 million recreational boats in the United States in 2014, and there were approximately 940,000 sales of pre-owned boats in 2014. Correspondingly, the Recreational Vehicle Industry Association estimates that currently more than 8.9 million households own an RV and in 2017 there will be over 470,000 shipments of RVs from manufacturers to dealers.
Competition
We face competition in all our business segments. The United States used recreational vehicle marketplace is highly fragmented, and we face competition from franchised dealers, who sell both new and used vehicles; independent dealers; online and mobile sales platforms; and private parties. We believe that the principal competitive factors in our industry are delivering an outstanding consumer experience, competitive sourcing of vehicles, breadth and depth of product selection, and value pricing. Our competitors vary in size and breadth of their product offerings. We believe that our principal competitive advantages in used vehicle retailing will include our ability to provide a high degree of customer satisfaction with the buying experience by virtue of our low, no-haggle prices and our online platform including our website and mobile application and our ability to make a cash offer to purchase a vehicle or offer listing alternatives coupled with our customer-friendly sales process and our breadth of selection of the most popular makes and models available on our website. In addition, we believe our willingness to appraise and purchase a customer’s vehicle, whether or not the customer is buying a vehicle from us, provides a competitive sourcing advantage for retail vehicles allowing us to offer value-oriented pricing. We believe the principal competitive factors for our ancillary products and services include an ability to offer a full suite of products at competitive prices delivered in an efficient manner to the customer. We will compete with a variety of entities in offering these products including banks, finance companies, insurance and warranty providers and extended vehicle service contract providers. We believe our competitive strengths in this category will include our ability to deliver products in an efficient manner to customers utilizing our technology and our ability to partner with key participants in each category to offer a full suite of products at competitive prices. Lastly, additional competitors may enter the businesses in which we will operate.
Seasonality
Historically, the industry has been seasonal with traffic and sales strongest in the spring and summer quarters which tracks closely with the timing of regional riding seasons. Sales and traffic are typically slowest in the fall quarter but increase in February and March, coinciding with tax refund season.
Key Operation Metrics
As our business expands we will regularly review a number of key operating metrics to evaluate our business,segments, measure our progress, and make strategicoperating decisions. Our key operating metrics reflect what we believe will be the keyprimary drivers of our growth,business, including increasing brand awareness, maximizing the opportunity to source the purchase of low cost used vehicles from consumers and dealers, whileand enhancing the selection and timing of vehicles we make available for sale to our customers.Our key operating metrics also demonstrate our ability
During the first quarter of 2022, the Company completed its acquisition of the Freedom Entities, a retailer group with 13 retail locations in Texas, Georgia, and Alabama. Please note that results of the Freedom Entities prior to translate these drivers into sales and to monetize these retail sales through a variety of product offerings.
| | Three-Months Ended September 30, | Nine- Months Ended September 30, |
| | | | | |
| Units sold: | | | | |
| Consumer | 106 | - | 106 | - |
| Dealer | 165 | - | 175 | - |
| Auction | 42 | - | 42 | - |
| | 313 | - | 323 | - |
| Number of Dealers | 3 | - | 3 | - |
| Average monthly unique users | 71,180 | - | 42,670 | - |
| Inventory units available on website | 588 | - | 588 | - |
| Average days to sale | 39 | - | 38 | - |
| Total average gross margin per unit$ | $ 760 | $- | $736 | $- |
Units Sold
We define units sold as the number of used vehicles sold to consumers, dealers and at auctions in each period, net of returns under our three-day return policy. We view units sold as a key measure of our growth for several reasons. First, units sold is the primary driver of our revenue and, indirectly, gross profit, since unit sales enable multiple complementary revenue streams, including financing, vehicle service contracts and trade-ins. Second, growth in units sold increases the base of available customers for referrals and repeat sales. Third, growth in units sold is an indicator of our ability to successfully scale our logistics, fulfillment, and customer service operations.
Number of Dealers
Our operationsFreedom Closing Date 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 who we refer to as either Select or Appraisal Dealers. We utilize these dealer partnersnot reflected in the acquisitionpresentation below. Increases in line items within the powersports segment are partially the result of motorcycles as well asthe acquisitions and the reader should note that period-over-period dollar comparisons that incorporate the first quarter of 2022 (as opposed to provide inspection, reconditioning and distribution services. Correspondingly, we earn fees and transaction income, and dealer partners will earn incremental revenue and enhance profitability through increased sales, leads, and fees from inspection, reconditioning and distribution programs. We choose Select or Appraisal Dealers based on their geographic location and abilities as a dealer. As Select and Appraisal Dealersper unit amounts) are added throughout the U.S. the cost and time associated with distribution programs will be significantly reduced as the pickup and delivery of motorcycles will become more localized thus lower shipping costs and reduce the average days to sale for vehicles.
Average Monthly Unique Users
We define a monthly unique user as an individual who has visited our website within a calendar month, based on data provided by Google Analytics. We calculate average monthly unique users as the sum of monthly unique users in a given period, dividedimpacted by the number of months in that period. We view average monthly unique users as a key indicatorintroduction of the strength of our brand, the effectiveness of our advertising and merchandising campaigns and consumer awareness.Freedom Powersports businesses (the “Acquisition Effect”).
Inventory Units Available on Website
We define inventory units available on Website as the number of vehicles listed for sale on our website on the last day of a given reporting period. Until we reach an optimal pooled inventory level, we view inventory units available as a key measure of our growth. Growth in inventory units available increases the selection of vehicles available to consumers and dealers on a nationwide basis, which we believe will allow us to increase the number of vehicles we sell
Average Days to Sale
We define average days to sale as the average number of days between vehicle acquisition by us and delivery to a customer for all used units sold in a period. However, this metric does not include any used units that remain unsold at period end. We view average days to sale as a useful metric due to its impact on used vehicle average selling price. We anticipate that that average days to sale will increase in future periods until we reach an optimal pooled inventory level and fully scale our acquisition and sales channel processes.
Total Average Gross Margin per Unit
We define total average gross margin per unit as the aggregate gross margin in a given period divided by units sold in that period. Total gross margin per unit is driven by sales of used vehicles which, in many cases generates finance and vehicle service contracts revenue. We believe gross margin per unit is a key measure of our growth and long-term profitability.
COMPONENTS OF RESULTS OF OPERATIONS
Powersports Segment
Revenue
Revenue is derived from two primary sources: (1) our online marketplace, which is our largest sourcecomprised of revenuevehicle sales, finance and includes: (i) the sale of usedinsurance products bundled with retail vehicle sales (“F&I”), and parts, service and accessories/merchandise (“PSA”). We sell both new and pre-owned vehicles through consumer, dealersretail and auction sales channels; (ii) online listingwholesale channels. F&I and sales fees; (iii)PSA revenue is almost exclusively earned through retail merchandise sales; (iv) vehicle financing; and (v) vehicle service contracts; and (2) subscription and other fees.
The Company recognizes revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) the product or service has been provided to the customer; (iii) the amount to be paid by the customer is fixed or determinable; and (iv) the collection of the Company’s payment is probable.
See Note 2 – “Summary of Significant Accounting Policies – Revenue Recognition” for a further description of the Company’s revenue recognition.
Used Vehicle Sales
We sell used vehicles through consumer, dealers and auction sales channels. These multiple sales channels provide us the opportunity to maximize profitability through increased sales volume and lower average days to sale by selling tothrough the channel where the opportunity is the greatest at any given time based on customer demand, market conditions or inventory availability is the greatest at any given time.availability. The number of used unitsvehicles sold to any given channel may vary from period to period based on these factors.
A material part of our ability to sell vehicles is predicated on being able to have sufficient inventory, both new and used, to satisfy customer demand market conditionsor meet our financial objectives. New inventory is ultimately controlled by our OEMs and available inventory.
Used vehicle sales representtheir willingness to allocate inventory to us and their ability to manufacture and distribute a sufficient number of vehicles given the aggregate salesongoing environment of used vehiclesmanufacturing slowdowns, computer chip shortages, and logistic/transportation challenges (collectively, the “Demand/Supply Imbalances”). Subject to consumers and dealers through our website and sales at auctions. We generate gross profit on used vehicle sales from the difference between the vehicle selling price and our cost of sales associated with acquiring the vehicle and preparing it for sale. Weresulting Demand/Supply Imbalances, we expect usedpre-owned vehicle sales to increase as we begin to utilize a combination of brand building as well asand direct response channels to efficiently source and scale our addressable markets while expanding our suite of product offerings to consumers who may wish to trade-in or to sell us their vehicle independent of a retail sale. Factors primarily affecting usedpre-owned vehicle sales include the number of retail unitspre-owned vehicles sold and the average selling price of these vehicles. At this stage of our development, changes in both retail units sold and in average selling price will drive changes in revenue.
Gross Profit
The number of used vehicles we sell dependsGross profit generated on our volume of website traffic, our inventory selection, the effectiveness of our branding and marketing efforts, the quality of our customer sales experience, our volume of referrals and repeat customers, the competitiveness of our pricing, competition and general economic conditions. On a quarterly basis, the number of used vehicles we sell is also affected by seasonality, with demand for used vehicles reaching the high point in the first half of each year, commensurate with the timing of tax refunds, and diminishing through the rest of the year, with the lowest relative level of used vehicle sales expected to occur in the fourth calendar quarter.
Our average retail selling price depends on the mix of vehicles we acquire and hold in inventory, retail market prices in our markets, our average days to sale, and our pricing strategy. We may opportunistically choose to shift our inventory mix to higher or lower cost vehicles, or to opportunistically raise or lower our prices relative to market to take advantage of supply or demand imbalances, which could temporarily lead to average selling prices increasing or decreasing.
The number of vehicles sold at auctions are determined based on a number of factors including: (i) filling auction sales channel market demand opportunities to maximize sales and gross margin; (ii) a need to balance the Company’s overall inventory mix and quantity levels against days to sales targets; and (iii) a need to liquidate those units that do not meet the Company’s quality standards to list or be sold through Rumbleon.com.
Other Sales and Revenue
We generate other sales and revenue primarily through: (i) online listing and sales fees; (ii) retail merchandise sales; (iii) vehicle financing; and (iv) vehicle service contracts.
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Online Listing and Sales Fees. We charge a non-refundable fee for sellers to list their vehicle on the RumbleOn website. During the listing period, we manage 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 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.
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Retail Merchandise Sales. We sell branded and other merchandise and accessories.
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Vehicle Financing.Customers can pay for their vehicle using cash or we offer a range of finance options through unrelated third-parties such as banks or credit unions. These third-party providers generally pay us a fee 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. We may be charged back for commissions in the event a contract is prepaid, defaulted upon, or terminated.
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Vehicle Service Contracts. At the time of vehicle sale, we provide 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”), which 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. We receive commissions from the sale of these product and service contracts and have no contractual liability to customers for claims under these products. The EPPs and vehicle appearance protection currently offered to consumers provides coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the term of their finance contract. At that time commission revenue will be recognized at the time of sale, net of a reserve for estimated contract cancellations. The reserve for cancellations will be estimated based upon historical industry experience and recent trends and will be reflected as a reduction of other sales revenue in the accompanying Condensed Consolidated Statements of Operations and a component of accounts payable and accrued liabilities in the accompanying Condensed Consolidated Balance Sheets. Our risk related to contract cancellations is limited to the revenue that we receive.
Subscription and other fees
We generate subscription fees from dealer partners under a license arrangement that provides access to our software solution and ongoing support. Select or Appraisal Dealers pay a monthly subscription fee for access to and ongoing support for portions 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.
Cost of Revenue
Cost of revenue is comprised of: (i) cost of vehicle sales and (ii) costs of subscription and other fees.
Cost of vehicle sales to consumers, dealers and auctions, 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 we acquire, 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 consisted of costs incurred to transport the vehicles from the point of acquisition or delivery. Cost of vehicle sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Cost of subscription 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 dealers.
Vehicle Gross Margin
Gross margin is generated on used vehicle sales fromreflects the difference between the vehicle selling price and ourthe cost of salesrevenue associated with acquiring the vehicle and preparing it for sale. Cost of revenue includes the vehicle acquisition cost, inbound transportation cost, and particularly for pre-owned vehicles, reconditioning costs (collectively, we refer to reconditioning and transportation costs as “Recon and Transport”). The aggregate dollar gross margins achieved fromprofit and gross profit per vehicle vary across vehicle type, make, model, etc. as well as through retail and wholesale channels, and with regard to gross profit per vehicle, are not necessarily correlated with the consumer, dealer and auction salessale price. Vehicles sold through retail channels are different. Units sold to consumers through our website generally have the highest dollar gross margin sinceprofit per vehicle, given the unitvehicle is sold directly to the consumer. VehiclesPre-owned vehicles sold through wholesale channels, including directly to other dealers are sold at a price below the retail price offeredor through auction channels, including via our dealer-to-dealer auction market, generally have lower margins and do not include other ancillary gross profit attributable to consumers, thus the dealerfinancing and RumbleOn are sharing the gross margin. The dollar gross margin on units sold at auction are usually the lowest due to auction fees.accessory. Factors affecting gross marginprofit from period to period include the mix of new versus used vehicles sold, the distribution channel through which they are sold, the sources from which we acquire and hold inacquired such inventory, retail market prices, our average days to sale, and our pricing strategy. We may opportunistically choose to shift our inventory mix to higher or lower cost vehicles, or to opportunistically raise or lower our prices relative to market to take advantage of supply or demand imbalancesDemand/Supply Imbalances in our sales channels, which could temporarily lead to average selling prices and gross marginsprofits increasing or decreasing in any given channel.
Vehicles Sold
We define vehicles sold as the number of vehicles sold through both wholesale and retail channels in each period, net of returns. Vehicles sold is the primary driver of our revenue and, indirectly, gross profit. Vehicles sold also enables complementary revenue streams, such as financing. Vehicles sold increases our base of customers and improves brand awareness and repeat sales. Vehicles sold also provides the opportunity to successfully scale our logistics, fulfillment, and customer service operations.
Total Gross Profit per Powersports Vehicle
Total gross profit per vehicle is the aggregate gross profit of the powersports segment in a given period, divided by retail powersports vehicles sold in that period. The aggregate gross profit of the powersports segment includes gross profit generated from the sale of new and used vehicles, income related to the origination of loans originated to finance the vehicle, revenue earned from the sale of F&I products including extended service contracts, maintenance programs, guaranteed auto protection, tire and wheel protection, and theft protection products, gross profit on the sale of PSA products, and gross profit generated from wholesale sales of vehicles.
Vehicle Logistics Segment
Revenue
Revenue is derived from freight brokerage agreements with dealers, distributors, or private party individuals to transport vehicles from a point of origin to a designated destination. The freight brokerage agreements are fulfilled by independent third-party transporters who must meet our performance obligations and standards. Wholesale Express is considered the principal in the delivery transactions since it is primarily responsible for fulfilling the service.
Vehicles Transported
We define vehicles transported as the number of vehicles delivered from a point of origin to a designated destination under freight brokerage agreements with dealers, distributors, or private parties. Vehicles transported are the primary driver of revenue and in turn profitability in the vehicle logistics segment.
Total Gross Profit Per Vehicle Transported
Total gross profit per vehicle transported represents the difference between the price received from non-affiliated customers and our cost to contract an independent third-party transporter divided by the number of third party vehicles transported.
Results of Continuing Operations
Three and Six-months ended June 30, 2023 Compared to June 30, 2022
Total Company Metrics (dollars in thousands except per unit)
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2023 | | 2022 | | YoY
Change | | 2023 | | 2022 | | YoY
Change |
| Financial Overview | | | | | | | | | | | |
| Revenue | | | | | | | | | | | |
| Powersports | $ | 269,721 | | | $ | 294,591 | | | $ | (24,870) | | | $ | 503,004 | | | $ | 534,505 | | | $ | (31,501) | |
| PSA | 65,409 | | | 65,315 | | | 94 | | | 124,478 | | | 120,052 | | | 4,426 | |
| Finance and insurance, net | 33,178 | | | 36,759 | | | (3,581) | | | 60,370 | | | 64,261 | | | (3,891) | |
| Vehicle Logistics | 14,423 | | | 15,517 | | | (1,094) | | | 29,263 | | | 27,868 | | | 1,395 | |
| Total revenue | $ | 382,731 | | | $ | 412,182 | | | $ | (29,451) | | | $ | 717,115 | | | $ | 746,686 | | | $ | (29,571) | |
| Gross Profit | | | | | | | | | | | |
| Powersports | $ | 39,458 | | | $ | 61,845 | | | $ | (22,387) | | | $ | 71,701 | | | $ | 108,246 | | | $ | (36,545) | |
| PSA | 30,411 | | | 31,370 | | | (959) | | | 57,690 | | | 56,652 | | | 1,038 | |
| Finance and insurance, net | 33,178 | | | 36,759 | | | (3,581) | | | 60,370 | | | 64,261 | | | (3,891) | |
| Vehicle Logistics | 3,354 | | | 3,168 | | | 186 | | | 6,941 | | | 5,652 | | | 1,289 | |
| Total Gross Profit | $ | 106,401 | | | $ | 133,142 | | | $ | (26,741) | | | $ | 196,702 | | | $ | 234,811 | | | $ | (38,109) | |
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| Total Operating Expenses | $ | 105,582 | | | $ | 102,095 | | | $ | 3,487 | | | $ | 196,596 | | | $ | 180,924 | | | $ | 15,672 | |
| Operating Income (Loss) | $ | 819 | | | $ | 31,046 | | | $ | (30,227) | | | $ | 106 | | | $ | 53,888 | | | $ | (53,782) | |
| Income (Loss) from Continuing Operations, net | $ | (12,833) | | | $ | 13,647 | | | $ | (26,480) | | | $ | (29,539) | | | $ | 23,231 | | | $ | (52,770) | |
| Net Income (Loss) | $ | (13,588) | | | $ | 14,033 | | | $ | (27,621) | | | $ | (30,490) | | | $ | 23,174 | | | $ | (53,664) | |
Adjusted EBITDA (1) | $ | 23,620 | | | $ | 43,623 | | | $ | (20,003) | | | $ | 34,424 | | | $ | 75,214 | | | $ | (40,790) | |
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(1)Adjusted EBITDA is a non-GAAP measure of operating performance that does not represent and should not be considered an alternative to net income (loss) or cash flow from operations, as determined by U.S. GAAP. We believe that Adjusted EBITDA is a useful measure to us and to our investors because it excludes certain financial and capital structure items that we do not believe directly reflect our core operations and may not be indicative of our recurring operations, in part because they may vary widely across time and within our industry independent of the performance of our core operations. See the section titled “Adjusted EBITDA” for the definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to Net Income (Loss).
Powersports Metrics (dollars in thousands except per unit)
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2023 | | 2022 | | YoY
Change | | 2023 | | 2022 | | YoY
Change |
| Revenue | | | | | | | | | | | |
| New retail vehicles | $ | 185,590 | | | $ | 173,224 | | | $ | 12,366 | | | $ | 341,940 | | | $ | 325,814 | | | $ | 16,126 | |
| Used vehicles: | | | | | | | | | | | |
| Retail | 76,577 | | | 117,496 | | | (40,919) | | | 146,826 | | | 199,028 | | | (52,202) | |
| Wholesale | 7,554 | | | 3,871 | | | 3,683 | | | 14,238 | | | 9,663 | | | 4,575 | |
| Total used vehicles | 84,131 | | | 121,367 | | | (37,236) | | | 161,064 | | | 208,691 | | | (47,627) | |
| Finance and insurance, net | 33,178 | | | 36,759 | | | (3,581) | | | 60,370 | | | 64,261 | | | (3,891) | |
| Parts, service and accessories | 65,409 | | | 65,315 | | | 94 | | | 124,478 | | | 120,052 | | | 4,426 | |
| Total revenue | $ | 368,308 | | | $ | 396,665 | | | $ | (28,357) | | | $ | 687,852 | | | $ | 718,818 | | | $ | (30,966) | |
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| Gross Profit | | | | | | | | | | | |
| New retail vehicles | $ | 28,589 | | | $ | 37,286 | | | $ | (8,697) | | | $ | 52,359 | | | $ | 68,479 | | | $ | (16,120) | |
| Used vehicles: | | | | | | | | | | | |
| Retail | 11,073 | | | 24,136 | | | (13,063) | | | 20,345 | | | 38,876 | | | (18,531) | |
| Wholesale | (203) | | | 422 | | | (625) | | | (1,003) | | | 892 | | | (1,895) | |
| Total used vehicles | 10,870 | | | 24,558 | | | (13,688) | | | 19,342 | | | 39,768 | | | (20,426) | |
| Finance and insurance | 33,178 | | | 36,759 | | | (3,581) | | | 60,370 | | | 64,261 | | | (3,891) | |
| Parts, service and accessories | 30,410 | | | 31,370 | | | (960) | | | 57,690 | | | 56,652 | | | 1,038 | |
| Total gross profit | $ | 103,047 | | | $ | 129,973 | | | $ | (26,926) | | | $ | 189,761 | | | $ | 229,160 | | | $ | (39,399) | |
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| Vehicle Unit Sales | | | | | | | | | | | |
| New retail vehicles | 13,126 | | 11,366 | | | 1,760 | | 23,562 | | 21,043 | | | 2,519 |
| Used vehicles: | | | | | | | | | | | |
| Retail | 6,137 | | 8,619 | | | (2,482) | | 11,918 | | 14,720 | | | (2,802) |
| Wholesale | 1,014 | | 728 | | 286 | | 2,018 | | 1,707 | | 311 |
| Total used vehicles | 7,151 | | 9,347 | | (2,196) | | 13,936 | | 16,427 | | (2,491) |
| Total vehicles sold | 20,277 | | 20,713 | | (436) | | | 37,498 | | 37,470 | | 28 |
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| Revenue per vehicle | | | | | | | | | | | |
| New retail vehicles | $ | 14,139 | | | $ | 15,241 | | | $ | (1,102) | | | $ | 14,512 | | | $ | 15,483 | | | $ | (971) | |
| Used vehicles: | | | | | | | | | | | |
| Retail | 12,478 | | | 13,632 | | | (1,154) | | | 12,320 | | | 13,521 | | | (1,201) | |
| Wholesale | 7,450 | | | 5,317 | | | 2,133 | | | 7,056 | | | 5,661 | | | 1,395 | |
| Total used vehicles | 11,765 | | | 12,985 | | | (1,220) | | | 11,557 | | | 12,704 | | | (1,147) | |
| Finance and insurance, net | 1,722 | | | 1,839 | | | (117) | | | 1,702 | | | 1,797 | | | (95) | |
| Parts, service and accessories | 3,396 | | | 3,268 | | | 128 | | | 3,508 | | | 3,357 | | | 151 | |
| Total revenue per retail vehicle | $ | 18,728 | | | $ | 19,654 | | | $ | (926) | | | $ | 18,986 | | | $ | 19,829 | | | $ | (843) | |
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| Gross Profit per vehicle | | | | | | | | | | | |
| New vehicles | $ | 2,178 | | | $ | 3,280 | | | $ | (1,102) | | | $ | 2,222 | | | $ | 3,254 | | | $ | (1,032) | |
| Used vehicles | $ | 1,804 | | | $ | 2,627 | | | $ | (823) | | | $ | 1,707 | | | $ | 2,421 | | | $ | (714) | |
| Finance and insurance, net | $ | 1,722 | | | $ | 1,839 | | | $ | (117) | | | $ | 1,702 | | | $ | 1,797 | | | $ | (95) | |
| Parts, service and accessories | $ | 1,579 | | | $ | 1,570 | | | $ | 9 | | | $ | 1,626 | | | $ | 1,584 | | | $ | 42 | |
Total gross profit per vehicle (1) | $ | 5,349 | | | $ | 6,504 | | | $ | (1,155) | | | $ | 5,348 | | | $ | 6,408 | | | $ | (1,060) | |
(1) Calculated as total gross profit divided by new and used retail powersports units sold.
Revenue
Three and Six months ended June 30, 2023 Compared to June 30, 2022
Total Powersports revenue for the three months ended June 30, 2023 decreased by $28,357 to $368,308 as compared to $396,665 for the same period in 2022, primarily driven by a 2.1% decrease in total vehicles sold to 20,277, and a (4.7)% decrease in total revenue per retail vehicle sold to $18,728. Revenue from used vehicles decreased 30.7% to $84,131, primarily driven by a 23.5% decrease in used vehicle units sold and a 9.4% decrease in revenue per used vehicle sold, attributable to greater new vehicle inventory and more competitive macroeconomic conditions as compared to the same period in 2022. F&I revenue decreased 9.7% to $33,178, primarily driven by a 3.6% decrease in vehicles sold through retail channels, and a 6.4% decrease in F&I revenue per vehicle sold. The decreases were partially offset by a 7.1% increase in revenue from new retail vehicles to $185,590, primarily driven by a 15.5% increase in new vehicle units sold.
Total Powersports revenue for the six months ended June 30, 2023, decreased by $30,966 to $687,852 as compared to $718,818 for the same period in 2022, primarily driven by a 4.3% decrease in revenue per retail vehicle sold to $18,986. Revenue from used vehicles decreased 17.3% to $161,064, driven by a 15.2% decrease in used vehicle units sold and a 9.0% decrease in revenue per used vehicle sold, attributable to greater new vehicle inventory and more competitive macroeconomic conditions as compared to the same period in 2022. F&I revenue decreased 6.1% to $60,370, driven primarily by a 5.3% decrease in F&I revenue per vehicle sold, and a 0.8% decrease in vehicles sold through retail channels. The decreases were partially offset by a 4.9% increase in revenue from new retail vehicles to $341,940, primarily driven by a 12.0% increase in new vehicle units sold, as well as a 3.7% increase in PSA revenue to $124,478, as compared to the same period in 2022.
Gross Profit
Three and Six months ended June 30, 2023 Compared to June 30, 2022
Total Powersports gross profit for the three months ended June 30, 2023 decreased by $26,926 to $103,047 as compared to $129,973 for same period in 2022, primarily driven by a 17.7% decrease in gross profit per vehicle sold to $5,349 and a 2.1% decrease in total vehicles sold to 20,277. Gross profit from used vehicles decreased 55.7% to $10,870, primarily driven by a 23.5% decrease in used vehicles sold, and a 31.3% decrease in gross profit per used vehicle sold as market conditions were less favorable as compared to the same period in 2022. Gross profit from new vehicles decreased 23.3% to $28,589, driven by a 33.6% decrease in gross profit per new vehicle sold, and partially offset by a 15.5% increase in new vehicle units sold. F&I and PSA gross profit decreased 9.7% and 3.1% to $33,178 and $30,410, respectively, as compared to the same period in 2022.
Total Powersports gross profit for the six months ended June 30, 2023 decreased by $39,399 to $189,761 as compared to $229,160 for the same period in 2022, primarily driven by a 16.5% decrease in gross profit per vehicle sold to $5,348. Gross profit from used vehicles decreased 51.4%, primarily driven by a 29.5% decrease in gross profit per used vehicle sold, and a 15.2% decrease in used vehicles sold as compared to the same period in 2022. Gross profit from new vehicles decreased 23.5%, primarily driven by a 31.7% decrease in gross profit per new vehicle sold, offset by a 12.0% increase in new vehicle units sold as compared to the same period in 2022. F&I gross profit decreased 6.1%, primarily driven by a 5.3% decrease in F&I gross profit per vehicle sold. The overall decreases were partially offset by a 2.6% increase in PSA gross profit as compared to the same period in 2022.
Other contributing factors to the overall decrease in gross profit include a less favorable product mix of vehicle sales, with a greater skew towards new units sold, and softening demand which resulted in lower pricing during the three and six months ended June 30, 2023 as compared to the same period in 2022.
Vehicle Logistics Metrics (dollars in thousands except per unit)
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2023 | | 2022 | | YoY
Change | | 2023 | | 2022 | | YoY
Change |
| Revenue | $ | 14,423 | | | $ | 15,517 | | | $ | (1,094) | | | $ | 29,263 | | | $ | 27,868 | | | $ | 1,395 | |
| Gross Profit | $ | 3,354 | | | $ | 3,168 | | | $ | 186 | | | $ | 6,941 | | | $ | 5,652 | | | $ | 1,289 | |
| Vehicles transported | 20,990 | | | 23,503 | | | (2,513) | | | 44,598 | | | 43,202 | | 1,396 | |
| Revenue per vehicle transported | $ | 687 | | | $ | 660 | | | $ | 27 | | | $ | 656 | | | $ | 645 | | | $ | 11 | |
| Gross Profit per vehicle transported | $ | 160 | | | $ | 135 | | | $ | 25 | | | $ | 156 | | | $ | 131 | | | $ | 25 | |
Revenue
Three and Six months ended June 30, 2023 Compared to June 30, 2022
Total Vehicle Logistics revenue for the three months ended June 30, 2023 decreased 7.0% to $14,423, driven by a 10.7% decrease in vehicles transported to 20,990, and partially offset by a 4.1% increase in revenue per vehicle transported to $687, as compared to the same period in 2022.
Total Vehicle Logistics revenue for the six months ended June 30, 2023 increased 5.0% to $29,263, driven by a 3.2% increase in vehicles transported to 44,598, and a 1.7% increase in revenue per vehicle transported to $656, as compared to the same period in 2022.
Gross Profit
Three and Six months ended June 30, 2023 Compared to June 30, 2022
Total Vehicle Logistics gross profit for the three months ended June 30, 2023 increased 5.9% to $3,354, driven by an 18.5% increase in gross profit per vehicle transported to $160, and partially offset by a 10.7% decrease in vehicles transported to 20,990, as compared to the same period in 2022.
Total Vehicle Logistics gross profit for the six months ended June 30, 2023 increased 22.8% to $6,941, driven by a 19.0% increase in gross profit per vehicle transported to $156, as well as a 3.2% increase in vehicles transported to 44,598, as compared to the same period in 2022.
Selling, General and Administrative Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | YoY | | Six Months Ended June 30, | | YoY |
| 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
| Advertising, marketing and selling | $ | 8,519 | | | $ | 9,160 | | | $ | (641) | | | $ | 14,368 | | | $ | 15,795 | | | $ | (1,427) | |
| Compensation and related costs | 57,135 | | | 58,589 | | | (1,454) | | | 108,107 | | | 103,487 | | | 4,620 | |
| Facilities | 10,884 | | | 11,865 | | | (981) | | | 22,500 | | | 21,283 | | | 1,217 | |
| General and administrative | 11,009 | | | 8,681 | | | 2,328 | | | 20,772 | | | 15,889 | | | 4,883 | |
| Professional fees | 6,661 | | | 4,220 | | | 2,441 | | | 10,467 | | | 7,920 | | | 2,547 | |
| Stock based compensation | 4,910 | | | 2,753 | | | 2,157 | | | 7,821 | | | 4,632 | | | 3,189 | |
| Technology development and software | 1,195 | | | 965 | | | 230 | | | 2,565 | | | 1,599 | | | 966 | |
| Total SG&A expenses | $ | 100,313 | | | $ | 96,233 | | | $ | 4,080 | | | $ | 186,600 | | | $ | 170,605 | | | $ | 15,995 | |
Selling, general and administrative (“("SG&A”&A") expenses includefrom continuing operations increased by $4,080 and $15,995, respectively, for the three and six months ended June 30, 2023 compared to the same period in 2022. The overall increase was primarily driven by: (1) increased headcount as the Company deployed its growth initiatives; (2) investments in facilities and technologies; (3) professional fees in connection with shareholder proposals for the annual meeting of the shareholder and reorganization of the Board of Directors; (4) executive separation costs; and (5) higher stock based compensation. The increases are partially offset by lower advertising, marketing, and selling costs as the Company focused expenditures on its most effective
initiatives during the three and expenses for compensationsix months ended June 30, 2023 as compared to the same period in 2022. In the case of technology and benefits, advertisingdevelopment, the Company is pursuing strategic technology projects focused on inventory management, infrastructure, and integration efforts which continued to consumersprogress during the three and dealers, development and operating our product procurement and distribution system, managing our logistics system, establishing our dealer partner arrangements, and other corporate overhead expenses, including expenses associated with technology development, legal, accounting, finance, and business development. Selling, general and administrative expenses will increase substantially as we continue to execute and aggressively expand our business through increased marketing spending andsix months ended June 30, 2023.
In the additionfirst quarter of management and support personnel to ensure we adequately develop and maintain operational, financial and management controls as well as our reporting systems and procedures.2023, the Company identified approximately $15,000 of SG&A expenses excludeprimarily related to discontinued operations and insurance costs that we began to remove from the business. Actions to reduce SG&A expenses related to discontinued operations were mostly completed as of June 30, 2023. During the second quarter of 2023, the Company successfully executed its strategy to reduce annualized insurance costs of inspecting, reconditioningby approximately $7,000, and transportation of vehicles,took actions to reduce compensation and professional fees. These reductions were offset increased proxy legal fees and severance costs during the three months ended June 30, 2023, which are includedexpected to be non-recurring SG&A expenses.
During the three months ended June 30, 2023, the Company began implementing a plan expected to further reduce annualized SG&A expenses by an additional $15,000. Since our Interim CEO started in late June 2023, we have identified an additional $12,000 in annualized cost savings, which would bring our total annualized SG&A expense reductions to approximately $42,000. We expect to see the full effects of sales.
these SG&A expense reductions in 2024, driven by additional headcount reductions, subleases of unused facilities, and cost restructuring at our dealerships.
Depreciation and Amortization
Depreciation and amortization is comprised of the: (i) amortization of capitalizeddecreased by $593 and acquired technology development; (ii) amortization of identifiable intangible assets; and (iii) depreciation of vehicle, furniture and equipment. Depreciation and amortization will continue to increase as continued investments are made in connection with the expansion and growth of the business.
Interest Expense
Interest expense includes interest incurred on notes payable and other long-term debt, which was used to fund, startup costs and expenses, technology development, inventory, our transportation fleet, property and equipment and the acquisition of NexGen.
Results of Operations
The following table provides our results of operations$323 for the three and nine-month periodssix months ended SeptemberJune 30, 2017 and September 30, 2016, respectively. This financial information should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
| | For the three-months ended September 30, | For the nine-months ended September 30, |
| | | | | |
Revenue: Used Vehicle Sales: | | | | |
| Consumer | $1,626,864 | $ - | $1,626,864 | $- |
| Dealer | 1,745,948 | - | 1,745,948 | - |
| Auction | 171,560 | - | 253,500 | - |
| Other sales and revenue | 134,573 | - | 134,573 | - |
| Subscription and other fees | 27,197 | - | 100,668 | - |
| Total Revenue | 3,706,142 | - | 3,861,553 | - |
| | | | | |
| Cost of revenue | 3,478,124 | - | 3,627,455 | - |
| Selling, General and administrative | 2,326,043 | 36,706 | 4,690,216 | 58,135 |
| Depreciation and amortization | 129,277 | 475 | 302,697 | 1,425 |
| Total Expenses | 5,933,444 | 37,181 | 8,620,368 | 59,560 |
| | | | | |
| Operating loss | (2,227,302) | (37,181) | (4,758,815) | (59,560) |
| | | | | |
| Interest expense | 90,201 | 2,878 | 373,808 | 7,431 |
| | | | | |
| Net loss before provision for income taxes | $(2,317,503) | $(40,059) | $(5,132,623) | $(66,991) |
| | | | | |
| Benefit for income taxes | - | - | - | - |
| | | | | |
| Net loss | $(2,317,503) | $(40,059) | $(5,132,623) | $(66,991) |
Results of Operations for the Three and Nine-month periods ended September 30, 2017 and September 30, 2016
Revenue
Online Marketplace
Total revenue for the three and nine-month periods ended September 30, 2017 increased by $3,706,142 and $3,861,553,2023, respectively, as compared to the same periods in 2016. The increase in revenue was2022, primarily due to an increase in the number of used vehicles sold to consumers, dealers and at auctions. The increase in unit sales was driven by the launch of the RumbleOn website, expanded inventory selection, enhanced social media, aggressive event marketing efforts,lower amortization expense related to non-compete agreements.
Interest Expense
Interest expense increased brand awarenessby $5,575 and customer referrals. We anticipate that unit sales will continue to grow as we expand our units of available inventory, while continuing to efficiently source and scale our addressable markets of consumers and dealers through brand building and direct response marketing.
Sales of used vehicles to consumers, dealers and auctions$12,515 for the three and nine-month periodssix months ended SeptemberJune 30, 2017 increased by $3,544,372 and $3,626,312, respectively as compared to the same periods in 2016. This increase was driven by the sale of 313 and 323 used units to consumers, dealers and at auctions during the three and nine-month period ending September 30, 2017, respectively. The average selling price of the used units sold for the three and nine-month periods ended September 30, 2017 was $11,324 and $11,227, respectively. The average selling price of used units sold will fluctuate from period to period as a result of changes in the sales mix to consumers, dealers and at auctions in any given period. There were no sales of used vehicles to consumers, dealers or auctions for the three and nine-month periods ended September 30, 2016.
Other sales and revenuefor the three and nine-month periods ended September 30, 2017 increased by $134,573 as compared to the same periods in 2016.This increase was primarily driven by the increase in retail units sold which led to an increase in loans originated and sold, and vehicle service contracts and retail merchandise sales. There were no online listing and sales fee revenue for thethree and nine-month periods ended September 30, 2016.
Subscription and other fees
Subscription and other fee revenue for the three and nine-month periods ended September 30, 2017 increased by $27,197 and $100,668, respectively as compared to the same periods in 2016. There were no subscription or other fee revenue for the three and nine-month periods ended September 30, 2016.
Expenses
Cost of Revenue
Total cost of revenue for the three and nine-month periods ended September 30, 2017 increased by $3,478,124 and $3,627,455, respectively as compared to the same periods in 2016. This increase was driven by the: (i) sale of used units to consumers, dealers and at auctions; and (ii) sale of related products in connection with unit sales to consumers during the three and nine-month period ending September 30, 2017, respectively as compared to the same periods in 2016.
Cost of vehicle sales for the three and nine-month periods ended September 30, 2017 increased by $3,404,480 and 3,489,446, respectively as compared to the same periods in 2016. This increase was driven by the sale of 313 and 323 used units to consumers, dealers and at auctions during the three and nine-month period ending September 30, 2017, respectively as compared to the same periods in 2016. The average cost of the used units sold for the three and nine-month periods ended September 30, 2017 was $10,769 and $10,696, respectively.
Cost of other sales and revenue for the three and nine-month periods ended September 30, 2017 increased by $53,754 as compared to the same periods in 2016.This increase was primarily driven by the increase in units sold to consumers which led to an increase in loans originated and sold, vehicle service contracts.
Cost of subscription and other fee revenue, included 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 dealers. These costs and expenses are charged to cost of revenue as incurred. Cost of subscription and other fee revenue for the three and nine-month periods ended September 30, 2017 increased by $19,890 and $84,255, respectively as compared to the same periods in 2016.
Selling, General and Administrative
| | For the three-months ended September 30, | For the 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 |
| Total Selling, General and Administrative | $2,326,043 | $36,706 | $4,690,216 | $58,135 |
Selling, general and administrative expenses for the three and nine-month periods ended September 30, 2017 increased by $2,289,337 and $4,632,081, respectively as compared to the same periods in 2016. The increase is a result of the significant expansion of our businesses associated with the launch of our website and mobile application which resulted in: (i) an increase in expenses associated with advertising and marketing; (ii) increase headcount associated with the development and operating our product procurement and distribution system, managing our logistics system; (iii) continued investment in technology development; and (iv) other corporate overhead costs and expenses, including legal, accounting, finance, and business development.
Compensation and related costs, which includes all payroll and related costs, including benefits, payroll taxes, and stock-based compensation, for the three and nine-month periods ended September 30, 2017 increased by $1,028,819 and $1,951,911 as compared to the same periods in 2016. The increase was driven by the growth in headcount and related compensation and benefits at our Dallas operations center, and included new hires in our marketing, product and inventory management, accounting, finance, information technology, and administration departments. As our business continues to grow these expenses will increase as we add headcount in all areas of the business.
Advertising and marketing for the three and nine-month periods ended September 30, 2017 increased by $752,017 and $1,060,195 as compared to the same periods in 2016. The increase consists of cost associated with the launch of our website and mobile application, aggressive event marketing and further development of a multi-channel approach to consumers and dealers. We have begun to utilize a combination of brand building as well as direct response channels to efficiently source and scale our addressable markets. Our paid advertising efforts include advertisements through search engine marketing, inventory site listing, retargeting, organic referral, display, direct mail and branded pay-per-click channels. We believe our strong consumer and dealer focus ensures loyalty which will drive both high participation in the buy and selling process while increasing referrals. In addition to our paid channels, we intend to attract new customers through increased media spending and public relations efforts and further investing in our proprietary technology.
Professional fees consist primarily of legal and accounting fees and costs associated with: (i) financing activities; (ii) general corporate matters; (iii) the NextGen acquisition; (iv) the preparation of quarterly and annual financial statements; and (v) the filing of regulatory reports required of the Company for public reporting purposes. Professional fees for the three and nine-month periods ended September 30, 2017 increased by $157,997 and $675,469, respectively as compared to the same periods in 2016. This increase was primarily a result of legal, accounting and other professional fees and expenses incurred in connection with the: (i) NextGen acquisition; (ii) 2017 Private Placement; (iii) second tranche of 2016 Private Placement; (iv) Senior Secured Promissory Notes; (v) the Offering (as defined below); (vi) our Nasdaq listing; and (vii) various corporate matters resulting from the growth and expansion of the RumbleOn business plan. For additional information, see Note 3 - “Acquisitions,” Note 7 - “Notes Payable,” Note 8 - “Stockholders’ Equity,” and Note 15 - “Subsequent Events” in the accompanying Notes to the Condensed Consolidated Financial Statements.
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 development expenses for the three and nine-month periods ended September 30, 2017 increased by $91,967 and $278,668, respectively2023, as compared to the same period in 2016. Total technology costs and expenses incurred for the three and nine-month periods ended September 30, 2017 were $236,400 and $713,766 of which $144,433 and $435,097, respectively were capitalized. For the three and nine-month periods ended September 30, 2017, a third-party contractor billed $221,400 and $678,766 respectively, of the total technology development costs. 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. 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 is 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. We expect our technology development expenses to increase as we continue to upgrade and enhance our technology infrastructure, invest in our products, expand the functionality of our platform and provide new product offerings. We also expect technology development expenses to continue to be affected by variations in the amount of capitalized internally developed technology.
General and administrative expenses for the three and nine-month periods ended September 30, 2017 increased by $258,537 and $665,838 as compared to the same periods in 2016. The increase is a result of the cost and expenses associated with the continued progress made in the development of our business, the establishment of our Dallas operations center and meeting the requirements of being a public company. General and administrative costs and expenses include: (i) insurance; (ii) advisor and various filing fees for equity transactions; (iii) office supplies and process application software; (iv) public and investor relations and (v) travel.
Depreciation and Amortization
Depreciation and amortization is comprised of the: (i) amortization of capitalized technology development; (ii) amortization of identifiable intangible assets; and (iii) depreciation of vehicle, furniture and equipment. Depreciation and amortization for the three and nine-month periods ended September 30, 2017 increased by $131,128 and $303,598, respectively, as compared to the same period in 2016. The increase in depreciation and amortization is a result of the investments made in connection with the expansion and growth of the business which for the three and nine-month periods ended September 30, 2017 included: (i) capitalized technology acquisition and development costs of $144,433 and $435,097, respectively; and (ii) the purchase of vehicles, furniture and equipment of $106,587 and $600,175, respectively. For the three and nine-month periods ended September 30, 2017 amortization of: (i) capitalized technology development was $89,429 and $219,374, respectively; (ii) amortization of identifiable intangible was $11,250 and $33,750, respectively; and (iii) depreciation and amortization on vehicle, furniture and equipment was $28,598 and $49,573, respectively. Depreciation and amortization on furniture and equipment for the same periods in 2016 was $475 and $1,425, respectively.
Interest Expense
2022. Interest expense consists of interest and deferred financing costs on the: (i) BHLP Note;Oaktree Credit Agreement; (ii) NextGen Note;various floorplan facilities; (iii) Private Placement Notes;private placement notes; (iv) convertible senior notes; and (iv) Senior Secured Promissory Notes. Interest expense(v) the ROF Consumer Finance Facility. The increase is primarily driven by higher interest rates and higher floorplan debt balances.
Derivative Liability
In connection with our various financings, we undertake an analysis of each financial instrument to determine the appropriate accounting treatment, including which, if any, require bifurcation into liability and equity components. We have determined that each of our convertible senior notes issued on January 10, 2020 (the “New Notes”) and the Warrants have a liability component that needs to be remeasured each reporting period with the change in value recorded in the Condensed Consolidated Statements of Operations.
The change in value of the derivative liability for the three and nine-month periodssix months ended SeptemberJune 30, 2017 increased by $87,3232023 and $366,377,2022 were $0 and $39, respectively, and is included in change in derivative liability in the Condensed Consolidated Statement of Operations. The value of the derivative liability as comparedof June 30, 2023 and December 31, 2022 was both $26.
Oaktree Warrant
In connection with providing the debt financing for the RideNow Transaction, the Company issued the Warrants at an exercise price of $33.00 per share. The exercise price was adjusted during the third quarter to $31.50 and the expiration date was extended to July 25, 2023. The initial Warrants liability and deferred financing charge recognized was $10,950. The Warrants liability was subject to remeasurement at each balance sheet date and any change in fair value was recognized as a component of change in derivative liability in the Condensed Consolidated Statements of Operations. The fair value of the Warrants was estimated using a Monte Carlo simulation based on a combination of level 1 and level 2 inputs. Upon closing of the RideNow Transaction, the Warrants were considered equity linked contracts indexed to the same periods in 2016. The increase resulted from: (i) interest onCompany’s stock and therefore met the equity classification guidance. As a higher level of debt outstanding; (ii)result, the conversion of the BHLP Note; (iii) the amortization of the beneficial conversion feature on the Private Placement Notes; and (iv) the amortization of the original issue discount on the Senior Secured Promissory Notes. The conversion of the BHLP Note resulted in a $196,076 charge to interest expense for the remaining balancesix month period ended June 30, 2023 of $19,700 was reclassified to additional paid-in-capital. The $10,950 deferred financing charge related to the Warrants was reclassified as part of the beneficial conversion feature,debt discount related to the Oaktree Credit Agreement. The recognition of the Warrants liability and deferred financing charge, and the reclassification of the Warrants liability to additional paid-in capital, and the reclassification of the deferred financing charge to debt discount, are non-cash items. On July 25, 2023, this Warrant expired and was not exercised.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income as a measure of deferred taxesoperating performance or cash flows. Non-GAAP financial measures are not necessarily calculated the same way by different companies and is included inshould not be considered a substitute for or superior to U.S. GAAP.
We define Adjusted EBITDA as net income (loss) adjusted to add back interest expense, fordepreciation and amortization, changes in derivative and warrant liabilities and certain recoveries, charges and expenses, such as an insurance recovery, non-cash stock-based compensation costs, acquisition related costs, litigation expenses, and other non-recurring costs, as these recoveries, charges and expenses are not considered a part of our core business operations and are not an indicator of ongoing, future company performance.
Adjusted EBITDA is one of the nine-month period ended September 30, 2017. Interest expenseprimary metrics used by management to evaluate the financial performance of our business. We present Adjusted EBITDA because we believe it is frequently used by analysts, investors, and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results, because it excludes, among other things, certain results of decisions that are outside the control of management, while other measures can differ significantly depending on the Private Placement Notes forlong-term strategic decisions regarding capital structure and capital investments.
For the three and nine-month periodssix months ended SeptemberJune 30, 2017 was $94,8552023 and $183,943, respectively2022, adjustments to Adjusted EBITDA are primarily comprised of:
•Income associated with the change in value of derivative liability as reported on the Condensed Consolidated Statement of Operations,
•Charges related to the shareholder proposals for the annual meeting of shareholders and reorganization of our Board of Directors, which included $41,979 and $81,603includes the reimbursement of debt discount amortization foradvisor fees incurred by shareholders in connection with the proxy contest of $2,500,
•Lease expense associated with favorable related party leases in excess of contractual lease payments,
•Charges associated with litigation outside of our ongoing operations,
•Loss associated with the fair value of the RumbleOn Finance loan receivables portfolio, which are anticipated to be sold during the second half of 2023,
•Other non-recurring costs, which include one-time expenses incurred. For the three and nine-month periodssix months ended SeptemberJune 30, 2017, respectively. Interest expense on2023, the NextGen Notes forbalance was comprised of integration costs and professional fees associated with acquisitions, and a death benefit to the estate of the Company's former Chief Financial Officer and director. For the three and nine-month periodssix months ended SeptemberJune 30, 20172022, the balance was $21,370primarily related to various integration costs and $54,849 respectively. Interestprofessional fees associated with the Freedom Powersports and RideNow acquisitions, technology implementation, and establishment of the RumbleOn Finance secured loan facility.
•Personnel restructuring costs, comprised of severance and charges associated with the separation of former executives, including the Company's former President and Chief Operating Officer, and former Chief Financial Officer,
•Purchase accounting adjustments, which represent one-time charges related to the Freedom Transaction and RideNow Transaction,
•Non-cash stock-based compensation expense on the Senior Secured Promissory Notes for the three and nine-month periods ended September 30, 2017 was $15,925 which included $10,274 of original issue discount amortization. For additional information, see Note 7 - “Notes Payable”as reported in the accompanying Notes to the Condensed Consolidated Financial Statements.Statement of Operations, and
•Transaction costs associated with the RideNow Transaction and Freedom Transaction, as well as other smaller acquisitions, which primarily include professional fees and third-party costs.
The following tables reconcile Adjusted EBITDA to net income (loss) for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) | $ | (13,588) | | | $ | 14,033 | | | $ | (30,490) | | | $ | 23,174 | |
| Income (loss) from discontinued operations, net | (755) | | | 386 | | | (951) | | | (57) | |
| Income (loss) from continuing operations, net | $ | (12,833) | | | $ | 13,647 | | | $ | (29,539) | | | $ | 23,231 | |
| Add back: | | | | | | | |
| Interest expense | 18,326 | | | 12,751 | | | 35,928 | | | 23,413 | |
| Income tax provision (benefit) | (4,573) | | | 4,852 | | | (6,150) | | | 7,487 | |
| Depreciation and amortization | 5,269 | | | 5,862 | | | 9,996 | | | 10,319 | |
| EBITDA | $ | 6,189 | | | $ | 37,112 | | | $ | 10,235 | | | $ | 64,450 | |
| Adjustments: | | | | | | | |
| Change in derivative liability | — | | — | | | — | | | (39) | |
| Charges related to proxy contest and Board of Directors reorganization | 4,729 | | — | | | 4,729 | | | — | |
| Lease expense associated with favorable related party leases in excess of contractual lease payments | 271 | | — | | | 542 | | | — | |
| Litigation settlement expenses | — | | | — | | | 79 | | | — | |
| Loss associated with RumbleOn Finance loan receivables | 3,342 | | — | | | 5,371 | | — | |
| Other non-recurring costs | 334 | | 2,479 | | | 888 | | | 4,176 | |
| Personnel restructuring costs | 3,833 | | | | 4,725 | | | — | |
| Purchase accounting related | — | | | 592 | | — | | | 592 |
| Stock based compensation | 4,910 | | 2,753 | | 7,821 | | 4,632 |
| Transaction costs - acquisitions | 12 | | | 687 | | 34 | | 1,403 |
| Adjusted EBITDA | $ | 23,620 | | | $ | 43,623 | | | $ | 34,424 | | | $ | 75,214 | |
Liquidity and Capital Resources
Our primary sources of liquidity are available cash, amounts available under our floor plan lines of credit, and monetization of our retail loan portfolio. In 2021, we completed two public offerings that provided net proceeds of $191,000 and we entered into the Oaktree Credit Agreement, which initially provided net proceeds of $261,000 that was used to finance a portion of the cash consideration for the RideNow Transaction. On February 18, 2022, in conjunction the Freedom Transaction, the Company drew down $84,500 against the Oaktree Credit Agreement. As of June 30, 2023, the Oaktree Credit Agreement does not provide for any incremental financing for acquisitions or working capital purposes.
We had the following liquidity resources available as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
| Cash | | $ | 44,373 | | | $ | 46,762 | |
Availability under floorplan facilities (1) | | 45,344 | | 50,651 |
| Committed liquidity resources available | | $ | 89,717 | | | $ | 97,413 | |
(1)Availability under floorplan facilities is the available amount we can borrow under our existing vehicle inventory floor plan credit facilities based on the pledgable value of vehicle inventory on our balance sheet as of June 30, 2023 and December 31, 2022. Availability under floorplan facilities is distinct from the maximum borrowing capacity of these facilities because it represents the current amount available to borrow, rather than amounts available to borrow for future inventory purchases.
At June 30, 2023, the Company was not in compliance with certain leverage ratio financial covenants under the Oaktree Credit Agreement. On the Amendment No. 5 Effective Date, the Company, the Subsidiary Guarantors party thereto, the Administrative Agent, and the Lenders parties thereto executed Amendment No. 5, pursuant to which, among other things, (i) all leverage ratio financial covenants under the Oaktree Credit Agreement were (a) eliminated and not tested for the quarters
ending June 30, 2023 and September 30, 2023 and (b) made less restrictive for the quarters ending December 31, 2023, March 31, 2024, and June 30, 2024; (ii) additional performance covenants were added requiring Company and its subsidiaries to use commercially reasonable best efforts to dispose of certain non-core real estate and monetize its consumer loan portfolios (with corresponding requirements to use such proceeds of such sales to pay down the term loans under the Oaktree Credit Agreement; (iii) an additional performance covenant was added requiring the Company to raise net cash proceeds of not less than $100,000 from the issuance of common equity interests in the Company by December 1, 2023 (with a corresponding requirement to use certain of such equity proceeds to pay down the term loans under the Oaktree Credit Agreement), and (iv) an additional performance covenant was added requiring the Company to issue warrants, in a form to be agreed upon, to the Lenders. In connection with Amendment No. 5, the Company agreed to pay a nominal fee which may be paid in cash or paid-in-kind. The Company believes that it will be in compliance with all covenants under the Oaktree Credit Agreement, as amended by Amendment No. 5, for the next one year period.
Our financial statements reflect estimates and assumptions made by management that affect the carrying values of the Company’s assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. The judgments, assumptions, and estimates used by management are 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, which could have a material impact on the carrying values of the Company’s assets and liabilities and the results of operations.
Management believes that current working capital, results of operations of the Oaktree Credit Agreement, as amended by Amendment No. 5, and existing financing arrangements are sufficient to fund operations for at least one year from the date of the financial statements herein.
Our primary cash requirements include payments related to our debt and lease obligations.As of June 30, 2023, and December 31, 2022, excluding operating lease liabilities and the derivative liability, the outstanding principal amount of indebtedness was $621,377 and $599,815, respectively, summarized in the table below. See Note 5 - Notes Payable and Lines of Credit and Note 7 - Stockholder's Equity to our Condensed Consolidated Financial Statements included above. In addition, for information concerning our lease commitments, see Note 3 – Leases to our Condensed Consolidated Financial Statements included above. | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Asset-Based Financing: | | | |
| Inventory | $ | 246,438 | | | $ | 225,431 | |
| Total asset-based financing | 246,438 | | | 225,431 | |
| | | |
| Term loan facility | 344,431 | | | 346,066 | |
| Unsecured senior convertible notes | 38,750 | | | 38,750 | |
| RumbleOn Finance secured loan facility | 18,030 | | | 25,000 | |
| Note payable for leasehold improvements and other | 752 | | | — | |
| Total debt | 648,401 | | | 635,247 | |
| Less: unamortized discount and debt issuance costs | (27,024) | | | (35,432) | |
| Total debt, net | $ | 621,377 | | | $ | 599,815 | |
Cash Flows
The following table sets forth a summary of our cash flows for the nine-month periodsix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| Net cash provided by (used in) operating activities of continuing operations | $ | (6,294) | | | $ | 28,953 | |
| Net cash used in investing activities of continuing operations | (10,370) | | | (69,114) | |
| Net cash provided by financing activities of continuing operations | 16,821 | | | 64,816 | |
| Net change in cash from continuing operations | $ | 157 | | | $ | 24,655 | |
| | Nine-months ended September 30, |
| | | |
| Net cash used in operating activities | $(4,389,128) | $(62,116) |
| Net cash used in investing activities | (1,785,272) | - |
| Net cash provided by financing activities | 5,480,040 | 63,358 |
| Net change in cash | $(694,360) | $1,242
|
Operating Activities
NetOur primary sources of operating cash flows result from the sales of used vehicles and ancillary products. Our primary use of cash from operating activities are purchases of inventory, cash used to fund operations, and personnel-related expenses. For the six months ended June 30, 2023, net cash used in operating activities increased $4,327,012was $6,294, as compared to $4,389,128net cash provided by operating activities of $28,953 for the nine-monthsix months ended June 30, 2022. The $35,247 decrease in our net cash provided by operating activities was primarily due to a $52,770 decrease in our net income from continuing operations, partially offset by a $15,421 increase in non-cash adjustments and a $2,100 increase in cash provided by other operating assets.
Investing Activities
Our primary uses of cash for investing activities are business acquisitions, technology development to expand our operations, and capital investments for our stores. Net cash used in investing activities decreased $58,744 to $10,370 for the six months ended June 30, 2023, compared to $69,114 for the same period in 2022. The decrease in our net cash used in investing activities was primarily due to the acquisition of Freedom Powersports, which occurred during the six months ended SeptemberJune 30, 2017,2022. In addition, there was a decrease of $4,540 in outflows for the purchase of property and equipment, offset by an increase of $2,396 in outflows for technology development for the six months ended June 30, 2023 as compared to the same period in 2016.2022.
Financing Activities
Cash flows from financing activities primarily relate to our short and long-term debt activity and proceeds from equity issuances, which have been used to provide working capital and for general corporate purposes, including paying down our short-term revolving facilities. Cash provided by financing activities decreased $47,995 to $16,821 for the six months ended June 30, 2023, compared to $64,816 for the same period of 2022. The increase in net cash useddecrease is primarily dueattributable to a $5,065,632 increasedecrease of $84,500 in our net lossproceeds from the Oaktree Credit Agreement, which were utilized to purchase Freedom Powersports during the six months ended June 30, 2022, as well as a decrease of $13,650 in proceeds from the ROF Consumer Finance Facility, which were utilized to underwrite consumer loans during the six months ended June 30, 2022. The overall decrease was partially offset by an increase of $23,644 in the net change operating assets and liabilities of $138,153 and a $876,775 increase in non-cash expense items. The increase in the net lossnon-trade floor plan borrowings for the nine-month periodsix months ended SeptemberJune 30, 2017 was a result of the continued expansion and progress made on our business plan, including a significant increase in marketing and advertising spend in connection the launch of the Company’s website, www.rumbleon.com, acquire vehicle inventory, continue development of the Company’s business and for working capital purposes.
Investing Activities
Net cash used in investing activities increased $1,785,272 for the nine-month period ended September 30, 2017,2023 as compared to the same period in 2016. The increase in cash used for investment activities was primarily for the purchase of NextGen, $435,097 in costs incurred for technology development and the purchase of $600,175 of vehicles, furniture and equipment.
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 of Class B Common Stock of the Company and a subordinated secured promissory note issued by the Company in favor of NextGen in the amount of $1,333,334. The NextGen Note matures on the third anniversary of the closing date. 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. In connection with the closing of the acquisition, certain investors of the Company accelerated the funding of the second tranche of their investment totaling $1,350,000. The investors were issued 1,161,920 shares of Class B Common Stock and promissory notes in the amount of $667,000. For additional information, see “Financing Activities” in Management’s Discussion and Analysis and Note 7 - “Notes Payable” in the accompanying Notes to the Condensed Consolidated Financial Statements.
Financing Activities
Net cash provided by financing activities increased $5,416,681 to $5,480,040 for the nine-month period ended September 30, 2017, compared with net cash provided by financing activities of $63,358 for the same period in 2016. This increase is primarily a result of the: (i) 2017 Private Placement of $2,630,000 in Class B Common Stock at a price of $4.00 per share; (ii) second tranche of the 2016 Private Placement of $683,040 in Class B Common Stock and $667,000 in promissory notes; and (iii) Senior Secured Promissory Notes proceeds of $1,500,000. Proceeds from the 2017 Private Placement, the second tranche of the 2016 Private Placement and the Senior Secured Promissory Notes were used to complete the launch of the Company’s website, www.rumbleon.com, acquire vehicle inventory, continue development of the Company’s business and for working capital purposes.
On March 31, 2017, the Company completed funding of the second tranche of the 2016 Private Placement. The investors were issued 1,161,920 shares of Class B Common Stock of the Company and 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 amount 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 (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 Private Placement Notes shall become immediately due and payable upon election of the holder. 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 will be amortized to interest expense over the life of the notes using the effective interest method. For additional information, see Note 7 - “Notes Payable” in the accompanying Notes to the Condensed Consolidated Financial Statements.
On July 13, 2016, the Company entered into 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 $5,000 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 one trade in January 2016 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 is amortized to interest expense until the scheduled maturity of the BHLP Note in July 2026 or until it is converted using the effective interest method. The effective interest rate at March 31, 2017 was 7.4%. Interest expense on the BHLP Note for the three-month period ended March 31, 2017 was $2,920 and the amortization of the beneficial conversion feature was $3,558. 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. For additional information, see Note 7 - “Notes Payable” in the accompanying Notes to the Condensed Consolidated Financial Statements.
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 15, 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 $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 8 - “Stockholders Equity” and Note 15 – “Subsequent Events” in the accompanying Notes to the Condensed Consolidated Financial Statements.
Investment in Growth
As of September 30, 2017, the Company had a total of $656,220 in available cash. Our cash requirements for the next twelve months are significant as we have begun to aggressively invest in the growth of our business and we expect this investment to continue. We plan to invest heavily in inventory, marketing, technology and infrastructure to support the growth of the business. These investments are expected to increase our negative cash flow from operations and operating losses at least in the near term, and there is no guarantee that we will be able to realize the return on our investments. Since inception, we have financed our cash flow requirements through debt and equity financing and on October 23, 2017, the Company completed a public offering of 2,910,000 shares of Class B common stock at a public offering price of $5.50 per share (the "Offering") and received approximately $14,500,000 in proceeds, net of underwriting discounts and commissions and offering expenses. The Companyused $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 interestand intend 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. Also, on November 2, 2017, we entered into a floor plan line of credit through our subsidiary, RMBL Missouri, LLC, in the amount of $2,000,000. For additional information on the Offering and floor plan line of credit, see Note 15 – “Subsequent Events” in the accompanying Notes to the Condensed Consolidated Financial Statements.However, our limited operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. Such risks for us include an evolving business model, advancement of technology and the management of growth. To address these risks, we must, among other things, continue our development of relevant applications, stay abreast of changes in the marketplace, as well as implement and successfully execute our business and marketing strategy. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.
Critical Accounting Policies
The accompanying unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We routinely evaluate our estimates based on historical experience and on various other assumptions that management believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. During the nine-month period ended September 30, 2017, we did not experience any significant changes in estimates or judgments inherent in the preparation of our financial statements. A summary of our significant accounting policies is contained in Note 1 to our financial statements included in our 2016 Annual Report.
2022.Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2017,2023, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Emerging Growth CompanySee Note 1 - Description of Business and Significant Accounting Policies, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for accounting pronouncements and material changes to our critical accounting policies since December 31, 2022. There have been no other material changes to our critical accounting policies and use of estimates from those described under "Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2022 Form 10-K.
We
Forward-Looking and Cautionary Statements
This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are an “emerging growth company”any statements other than statements of historical fact. Forward-looking statements represent our current judgment about possible future events and generally can be identified by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” and similar expressions. In making forward-looking statements, we rely on assumptions and analysis based on our experience and perception of historical trends, current conditions and expected future developments as well as other factors we consider appropriate under the federal securities lawscircumstances. We believe these judgments are reasonable, but forward-looking statements are not guarantees of any future events or financial results, and will be subjectour actual results may differ materially due to reduced public company reporting requirements. In addition, Section 107a variety of important factors, many of which are beyond our control. Factors that could cause or contribute to such differences include the following:
•our significant indebtedness and the covenants in our debt agreements;
•increasing interest rates in connection with our debt agreements;
•our ability to acquire additional financing;
•the material weakness in our internal control over financial reporting;
•changes in general economic conditions and demand for our products and services;
•consumers acceptance of our business model;
•our ability to acquire vehicles that satisfy consumer demand;
•the results of investments made in the development, growth and expansion of our business;
•any diversion of management’s attention in connection with acquisitions;
•difficulties integrating acquired businesses;
•any inability to retain or attract qualified personnel;
•any inability to develop, maintain or market our brands;
•any inability to drive traffic to our website and mobile applications;
•any inability to grow our complementary product offerings;
•any failure of third parties to provide financing, extended protection products, or other products or services to our customers;
•any failure of third parties to provide certain operating or administrative functions for us;
•changes to the supply or prices of new or pre-owned vehicles;
•competitive pressures from existing and new companies;
•climate change legislation or regulations restricting emission of greenhouse gases;
•any failure to adequately protect personal information;
•any failure to adequately protect our intellectual property;
•any failure to obtain or maintain adequate insurance coverage;
•adverse conditions affecting one or more of the JOBS Act also provides that an “emerging growth company” can take advantagepowersports manufacturers with which we hold franchises;
•any change or deterioration in the relationship with the manufacturers of vehicles we sell;
•any reduction or discontinuing of sales incentive, warranty, or other promotional programs by manufacturers; and
•other factors discussed in Part I, Item 1A in our 2022 Form 10-K [and Part II, Item 1A of this Quarterly Report on Form 10-Q].
Given these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933,date they are made, and we undertake no obligation to publicly update or revise or any forward-looking statements, except as amended, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing not to take advantage of the extended transition period for complying with new or revised accounting standards.required by law.
Item 3.
Quantitative and Qualitative DisclosureDisclosures About Market Risk.
This item is not applicable as we are currently considered a smaller reporting company.
Item 4.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2017. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based onOur management, with the evaluationparticipation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), the Company’s as of June 30, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’sour disclosure controls and procedures were not effective as of SeptemberJune 30, 2017.2023, based on the ongoing remediation
of a material weakness identified in the 2022 Form 10-K.The material weakness existing in our internal control over financial reporting relates to:
•Insufficient number of accounting resources to facilitate an effective control environment following the integration of the RideNow business and incorporation of the acquired business into the Company’s control environment. Consequently, the Company did not effectively operate process-level control activities related to the elimination of intercompany transactions, review and approval of certain reconciliations, accounting estimates accounting for non-routine transactions, and management review controls.
As set forth below, management has taken and will continue to take steps to remediate the identified material weakness. Notwithstanding the material weakness, we have performed additional analyses and procedures to enable management to conclude that our consolidated financial statements included in this Form 10-Q fairly present in all material respects our financial condition and results of operations as of and for the periods presented.
Management’s Remediation Plan
In response to the material weakness discussed above, we plan to continue efforts already underway to remediate internal control over financial reporting, which include the following:
•We are committed to hiring additional accounting resources with the required technical expertise and clearly defined roles & responsibilities.
•We are evaluating system enhancements to automate the consolidation and elimination of intercompany transactions.
•We are enhancing the overall review and approval process relating to elimination of intercompany transactions.
•We are enhancing the review and approval controls related to reconciling certain accruals and accounting estimates.
•We are in the process of implementing proper governance and reporting over the execution of these remediation action items, including expansion of mitigating controls where appropriate.
Management and our Audit Committee will monitor these specific remedial measures and the effectiveness of our overall control environment. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We can provide no assurance as to when the remediation of the material weakness will be completed to provide for an effective control environment.
Changes in Internal Control Over Financial Reporting
SinceOther than incorporating the acquisitioncontrols and procedures of NextGen, the Company is evaluating its internal control over financial reporting; however,acquired Freedom entities and addressing the remediation actions described above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent fiscalthe quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that require management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings.
We are not a party to any material legal proceedings.proceedings as set forth in Item 103 of Regulation S-K, other than ordinary routine litigation incidental to our business.
As previously disclosed, the Company is conducting an investigation of certain allegations surrounding Marshall Chesrown’s use of Company resources. The investigation is still ongoing and as of the date of this filing, the Company has made no determination as to what action to take in response to the allegations. On July 7, 2023, Mr. Chesrown provided the Board a letter of resignation (the “Resignation Letter”) describing Mr. Chesrown’s disagreement with several recent corporate governance, disclosure and other actions taken by the Company, the Board and certain of its members, and indicated his intent to pursue legal claims. The Company disagrees with the characterization of the allegations and assertions described in the Resignation Letter. As of the date of this filing, there have been no release or other agreements with Mr. Chesrown, nor has a lawsuit been filed by Mr. Chesrown against the Company, and the Company and Mr. Chesrown are proceeding to mediation.
Item 1A.
Item1A. Risk Factors.
Our business, financial condition, operating results, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our Annual Report on2022 Form 10-K. Except as disclosed below, there have been no material changes to the risk factors previously disclosed in our 2022 Form 10-K, for the year ended December 31, 2016, filed on February 14, 2017, the occurrence of any one of which could have a material adverse effect on our actual results.
There have been no material changes Restrictive covenants and certain obligations in our debt agreements, including our most recent Amendment No. 5 to the Risk Factors previously disclosedOaktree Credit Agreement, could limit our growth initiatives and implementation of our business strategy. Any breach of those covenants could result in an event of default under our debt agreements, which could adversely impact our business, financial condition and results of operations.
Our debt agreements impose operating and financial restrictions on us. These restrictions limit our ability and that of our subsidiaries to, among other things: (i) incur additional indebtedness; (ii) make investments or loans; (iii) create liens; (iv) consummate mergers and similar fundamental changes; (v) make restricted payments; (vi) make investments in unrestricted subsidiaries; (vii) enter into transactions with affiliates; and (viii) use proceeds from asset sales.
We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our debt agreements. The restrictions contained in the covenants could: (i) limit our ability to plan for or react to market conditions, to meet capital needs, or otherwise to restrict our activities or business strategy; and (ii) adversely affect our ability to finance our operations, enter into acquisitions or divestitures to engage in other business activities that would be in our Annual Reportinterest.
In addition, we are subject to certain covenants under the Oaktree Credit Agreement, as amended by Amendment No. 5, including, but not limited to, requirements to (i) consummate an issuance of common equity interests of the Company resulting in net cash proceeds of not less than $100,000 (the “Equity Contribution”) by December 1, 2023, (ii) use commercially reasonable best efforts to dispose of certain non-core real estate and monetize its consumer loan portfolios, and (iii) issue warrants, in a form to be agreed upon, to the Lenders, in each case, which may restrict our ability to undertake future activities. There is no guarantee that we will be able to meet such covenants, including that such Equity Offering will be successful or that we will be able to consummate dispositions of such non-core real estate assets and monetize our consumer loan portfolios, and issuing any common equity interests may result in substantial dilution to our current stockholders.
In the absence of a waiver from our lenders, a breach of any of these covenants, including the Equity Contribution covenant, or our inability to comply with the required financial covenants could result in a default under our debt agreements that, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder and cross-default rights under our other debt. In addition, in the event of an event of default under our credit facilities, the affected lenders could foreclose on Form 10-K for the year ended December 31, 2016.collateral securing such credit facility and require repayment of all borrowings outstanding thereunder. If the amounts outstanding under the credit facilities or any of our other indebtedness were to be accelerated, our assets may not be sufficient to repay in full the amounts owed to the lenders or to our other debt holders.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
