UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
OR
For the quarterly period ended September 30, 2017 |
| OR |
☐
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________
|
For the transition period from to
Commission file number001-38248
| RumbleOn, Inc. |
| (Exact name of registrant as specified in its charter) |
| Nevada | | 46-3951329 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
4521 Sharon Road, Suite 370901 W. Walnut Hill Lane
Charlotte, North CarolinaIrving TX
| | 2821175038 |
| (Address of principal executive offices) | | (Zip Code) |
| | (469) 250-1185 |
| (704) 448-5240 | |
| (Registrant’sRegistrant's telephone number, including area code) |
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
(Former name, former address and former fiscal year, if changed since last report)Class B Common Stock, $0.001 par value
| | RMBL | | The NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☒☐ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☒☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Non-accelerated filer ☒ | ☐
| Accelerated filer | ☐
|
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒
|
| | Emerging growth company | ☒
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☐☒ No ☒
The number of shares of Class B Common Stock, $0.001 par value, outstanding on November 7, 201713, 2020 was 11,928,5412,191,633 shares. In addition, 1,000,00050,000 shares of Class A Common Stock, $0.001 par value, were outstanding on November 7, 2017.13, 2020.
RUMBLEON, INC.
QUARTERLY PERIOD ENDED SEPTEMBERSeptember 30, 20172020
Table of Contents to Report on Form 10-Q
PagePART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
| |
| Page |
| |
| Financial Statements.Statements | 1 |
| Management’s Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations | 1921 |
| Quantitative and Qualitative Disclosure About Market Risk.Risk | 3247 |
| Controls and Procedures.Procedures | 3247 |
PART II - OTHER INFORMATION
| 49 |
PART II - OTHER INFORMATION | 49 |
Item 1. | Legal Proceedings. | 33 |
Item 1A. | Risk Factors. | 33 |
| Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds | 3349 |
| Defaults Upon Senior Securities.Securities | 3349 |
| Mine Safety Disclosures.Disclosures | 3349 |
| Other Information. | 3349 |
| Exhibits50 |
| 3351 |
PART I - FINANCIALFINANCIAL INFORMATION
Item 1.
Financial Statements.Statements
RUMBLEON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| ASSETS | |
| | | |
| Current assets: | | |
| Cash | $656,220 | $1,350,580 |
| Accounts Receivable | 320,575 | - |
| Vehicle Inventory | 1,244,658 | - |
| Prepaid expense | 123,513 | 1,667 |
| Other | 174,419 | - |
| Total current assets | 2,519,385 | 1,352,247 |
| | | |
| Property and Equipment - Net of Accumulated Depreciation | 2,166,326 | - |
| Goodwill | 3,240,000 | - |
| 121,765 | 45,515 |
| | | |
| Total assets | $8,047,476 | $1,397,762 |
| | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| | | |
| Current liabilities: | | |
| Accounts payable and accrued liabilities | $ 1,902,543 | $ 219,101 |
| Accrued interest payable | 17,998 | - |
| Current portion of long term debt | 1,510,274 | - |
| Other current liabilities | - | - |
| Total current liabilities | 3,430,815 | 219,101 |
| | | |
| Long term liabilities: | | |
| Notes payable | 1,414,937 | 1,282 |
Accrued interest payable - related party
| 21,736
| 5,508 |
| Deferred tax liability | - | 78,430 |
| Total long-term liabilities | 1,436,673
| 85,220 |
| | | |
| Total liabilities | 4,867,488
| 304,321 |
| | | |
| Commitments and Contingencies | | |
| | | |
| Stockholders' equity: | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 | - | - |
| Common A stock, $0.001 par value, 1,000,000 shares authorized, 1,000,000 shares issued and outstanding as of September 30, 2017 and none outstanding at December 31, 2016 | 1,000 | - |
| Common B stock, $0.001 par value, 99,000,000 shares authorized, 9,018,541 and 6,400,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016 | 9,019 | 6,400 |
| Additional paid in capital | 8,749,566 | 1,534,015 |
| Subscriptions receivable | (1,000) | (1,000) |
| Accumulated deficit | (5,578,597) | (445,974) |
| Total stockholders' equity | 3,179,988
| 1,093,441 |
| | | |
| Total liabilities and stockholders' equity | $8,047,476 | $1,397,762 |
Condensed Consolidated Balance Sheets
(Unaudited)
| | | |
| ASSETS | | |
| | | |
| Current assets: | | |
| Cash | $3,412,772 | $49,660 |
| Restricted cash | 5,545,892 | 6,676,622 |
| Accounts receivable, net | 11,342,600 | 8,482,707 |
| Inventory | 11,424,094 | 57,381,281 |
| Prepaid expense and other current assets | 2,506,910 | 1,210,474 |
| Total current assets | 34,232,268 | 73,800,744 |
| | | |
| Property and equipment, net | 6,494,940 | 6,427,674 |
| Right-of-use assets | 5,926,393 | 6,040,287 |
| Goodwill | 26,886,563 | 26,886,563 |
| Other assets | 174,457 | 237,823 |
| Total assets | $73,714,621 | $113,393,091 |
| | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| | | |
| Current liabilities: | | |
| Accounts payable and other accrued liabilities | $10,720,627 | $12,421,094 |
| Accrued interest payable | 807,360 | 749,305 |
| Current portion of convertible debt | 960,338 | 1,363,590 |
| Current portion of long-term debt | 17,640,426 | 59,160,970 |
| Total current liabilities | 30,128,751 | 73,694,959 |
| | | |
| Long-term liabilities: | | |
| Note payable | 1,974,218 | 1,924,733 |
| Convertible Debt | 26,681,826 | 20,136,229 |
| Derivative liabilities | 20,345 | 27,500 |
| Other long-term liabilities | 5,399,716 | 4,722,101 |
| Total long-term liabilities | 34,076,105 | 26,810,563 |
| | | |
| Total liabilities | 64,204,856 | 100,505,522 |
| | | |
| Commitments and contingencies (Notes 4, 7, 8, 9, 13, 18) | | |
| | | |
| Stockholders' equity: | | |
| Class B Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 and 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | - | - |
| Common A stock, $0.001 par value, 50,000 shares authorized, 50,000 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | 50 | 50 |
| Common B stock, $0.001 par value, 4,950,000 shares authorized, 2,191,633 and 1,111,681 shares issued and outstanding as of September 30, 2020 and December 31, 2019 | 2,192 | 1,112 |
| Additional paid in capital | 108,396,284 | 92,268,213 |
| Accumulated deficit | (98,888,761) | (79,381,806) |
| Total stockholders' equity | 9,509,765 | 12,887,569 |
| | | |
| Total liabilities and stockholders' equity | $73,714,621 | $113,393,091 |
See Notes to the Condensed Consolidated Financial Statements.
RUMBLEON, INC.RumbleOn, Inc.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCondensed Consolidated Statements of Operations
(unaudited)(Unaudited)
| | Three-months ended September 30, | 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) |
| | | | | |
| Weighted average number of common shares outstanding – basic and fully diluted | 10,018,541 | 5,500,000 | 9,105,429 | 5,500,000 |
| | | | | |
| Net loss per share – basic and fully diluted | $(0.23) | $(0.01) | $(0.56) | $(0.01) |
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | |
| Revenue: | | | | |
| Pre-owned vehicle sales: | | | | |
| Powersports | $7,303,131 | $27,144,202 | $38,641,607 | $84,379,049 |
| Automotive | 99,315,335 | 187,108,303 | 281,242,442 | 611,871,819 |
| Transportation and vehicle logistics | 10,440,367 | 6,058,546 | 25,191,459 | 17,417,846 |
| Other | 198,571 | 9,272 | 672,450 | 9,272 |
| Total revenue | 117,257,404 | 220,320,323 | 345,747,958 | 713,677,986 |
| | | | | |
| Cost of revenue: | | | | |
| Powersports | 5,606,366 | 24,280,599 | 33,691,814 | 74,367,614 |
| Automotive | 86,473,154 | 179,672,614 | 257,045,834 | 585,163,984 |
| Transportation and vehicle logistics | 8,373,829 | 4,352,585 | 19,324,621 | 12,523,281 |
| Cost of revenue before impairment loss | 100,453,349 | 208,305,798 | 310,062,269 | 672,054,879 |
| Impairment loss on automotive inventory | - | - | 11,738,413 | |
| Total cost of revenue | 100,453,349 | 208,305,798 | 321,800,682 | 672,054,879 |
| | | | | |
| Gross profit | 16,804,055 | 12,014,525 | 23,947,276 | 41,623,107 |
| | | | | |
| Selling, general and administrative | 13,279,151 | 19,010,939 | 42,509,865 | 64,458,520 |
| | | | | |
| Insurance recovery proceeds | - | - | (5,615,268) | - |
| | | | | |
| Depreciation and amortization | 536,381 | 473,670 | 1,567,697 | 1,283,333 |
| | | | | |
| Operating income (loss) | 2,988,523 | (7,470,084) | (14,515,018) | (24,118,746) |
| | | | | |
| Interest expense | (1,488,090) | (2,031,697) | (5,187,256) | (5,351,689) |
| | | | | |
| Change in derivative liability | (13,518) | 630,000 | 7,155 | 820,000 |
| | | | | |
| Gain (Loss) on early extinguishment of debt | - | - | 188,164 | (1,499,250) |
| | | | | |
| Income (loss) before provision for income taxes | 1,486,915 | (8,871,781) | (19,506,955) | (30,149,685) |
| | | | | |
| Benefit for income taxes | - | - | - | - |
| | | | | |
| Net income (loss) | $1,486,915 | $(8,871,781) | $(19,506,955) | $(30,149,685) |
| | | | | |
| Weighted average number of common shares outstanding - basic and fully diluted | 2,234,838 | 1,158,915 | 2,165,167 | 1,098,809 |
| | | | | |
| Net income (loss) per share - basic and fully diluted | $.67 | $(7.66) | $(9.01) | $(27.44) |
See Notes to the Condensed Consolidated Financial Statements.
RUMBLEON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 2017
(unaudited)
| | | | | | | | |
| | | | | | | | 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 |
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
| | | | | | | |
| | | | | | | | | | |
| Balance as of June 30, 2020 | - | $- | 50,000 | $50 | 2,179,907 | $2,180 | $107,533,741 | $(100,375,676) | $7,160,295 |
| Issuance of common stock for restricted stock units | - | - | - | - | 11,726 | 12 | (12) | - | - |
| Stock-based compensation | - | - | - | - | - | - | 862,555 | - | 862,555 |
| Net income | - | - | - | - | - | - | - | 1,486,915 | 1,486,915 |
| Balance as of September 30, 2020 | - | $- | 50,000 | $50 | 2,191,633 | $2,192 | $108,396,284 | $(98,888,761) | $9,509,765 |
| | | | | | | |
| | | | | | | | | | |
| Balance, as of December 31, 2019 | - | - | 50,000 | $50 | 1,111,681 | $1,112 | $92,268,213 | $(79,381,806) | $12,887,569 |
| Issuance of common stock, net of issuance cost | - | - | - | - | 1,035,000 | 1,035 | 10,779,045 | - | 10,780,080 |
| Issuance of common stock for restricted stock units | - | - | - | - | 37,821 | 38 | (38) | - | - |
| Convertible note exchange | - | - | - | - | - | - | 2,923,755 | - | 2,923,755 |
| Stock-based compensation | - | - | - | - | - | - | 2,425,316 | - | 2,425,316 |
| Adjust for fractional shares in reverse stock split | - | - | - | - | 7,131 | 7 | (7) | - | - |
| Net loss | - | - | - | - | - | - | - | (19,506,955) | (19,506,955) |
| Balance as of September 30, 2020 | - | $- | 50,000 | $50 | 2,191,633 | $2,192 | $108,396,284 | $(98,888,761) | $9,509,765 |
| | | | | | | |
| | | | | | | | | | |
| Balance as of June 30, 2019 | - | $- | 50,000 | $50 | 1,106,256 | $1,106 | $90,059,932 | $(55,482,657) | $34,578,431 |
| Issuance of common stock for restricted stock units | - | - | - | - | 4,715 | 5 | (5) | - | - |
| Stock-based compensation | - | - | - | - | - | - | 689,130 | - | 689,130 |
| Net loss | - | - | - | - | - | - | - | (8,871,781) | (8,871,781) |
| Balance as of September 30, 2019 | - | $- | 50,000 | $50 | 1,110,971 | $1,111 | $90,749,057 | $(64,354,439) | $26,395,780 |
| | | | | | | |
| | | | | | | | | | |
| Balance, as of December 31, 2018 | 1,317,329 | 1,317 | 50,000 | $50 | 874,315 | $874 | $65,016,379 | $(34,201,114) | $30,817,506 |
| Cumulative effect of accounting change (see Note 1) | - | - | �� - | - | - | - | - | (3,639) | (3,639) |
| Equity component of convertible senior notes, net of issuance costs | - | - | - | - | - | - | 7,745,625 | - | 7,745,625 |
| Issuance of common stock for restricted stock units | - | - | - | - | 11,965 | 12 | (12) | - | - |
| Beneficial conversion feature on convertible notes | - | - | - | - | - | - | 495,185 | - | 495,185 |
| Conversion of preferred shares to common stock | (1,317,329) | (1,317) | - | - | 65,866 | 66 | 1,251 | - | - |
| Issuance of common stock | - | - | - | - | 158,825 | 159 | 15,155,387 | - | 15,155,546 |
| Stock-based compensation | - | - | - | - | - | - | 2,335,242 | - | 2,335,242 |
| Net loss | - | - | - | - | - | - | - | (30,149,685) | (30,149,685) |
| Balance as of September 30, 2019 | - | $- | 50,000 | $50 | 1,110,971 | $1,111 | $90,749,057 | $(64,354,439) | $26,395,780 |
See Notes to the Condensed Consolidated Financial Statement
RumbleOn, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | Nine-Months Ended September 30, |
| | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | |
| Net loss | $(19,506,955) | $(30,149,685) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation and amortization | 1,567,697 | 1,283,333 |
| Amortization of debt discounts | 1,498,690 | 1,308,061 |
| Share based compensation | 2,425,316 | 2,335,242 |
| Impairment loss on inventory | 11,738,413 | - |
| Impairment loss on fixed assets | 177,626 | - |
| Loss from change in value of derivatives | (7,155) | (820,000) |
| Loss (gain) from extinguishment of debt | (188,164) | 1,499,250 |
| Changes in operating assets and liabilities: | | |
| (Increase) in prepaid expenses and other current assets | (1,296,436) | (261,207) |
| Decrease in inventory | 34,218,774 | 5,530,532 |
| (Increase) in accounts receivable | (2,859,892) | (1,564,145) |
| Decrease (increase) in other assets | 63,366 | (18,403) |
| Decrease in accounts payable and accrued liabilities | (1,691,839) | (5,824,733) |
| Increase in accrued interest payable | 58,055 | 888,821 |
| Net cash provided by (used in) operating activities | 26,197,496 | (25,792,934) |
| | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| Cash used for acquisitions; net of cash received | - | (835,000) |
| Purchase of property and equipment | (174,786) | - |
| Proceeds from sales of property and equipment | - | 40,620 |
| Technology development | (1,598,067) | (2,619,551) |
| Net cash used in investing activities | (1,772,853) | (3,413,931) |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| Proceeds from notes payable and convertible debt | 8,272,375 | 27,455,537 |
| Payments on notes payable | (1,713,825) | (11,134,695) |
| Net repayments on lines of credit | (44,707,736) | (4,660,270) |
| Net proceeds from sale of common stock | 10,780,080 | 15,155,547 |
| Proceeds from PPP loan | 5,176,845 | - |
| Net cash (used in) provided by financing activities | (22,192,261) | 26,816,119 |
| | | |
| NET CHANGE IN CASH | 2,232,382 | (2,390,746) |
| | | |
| CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD | 6,726,282 | 15,784,902 |
| | | |
| CASH AND RESTRICTED CASH AT END OF PERIOD | $8,958,664 | $13,394,156 |
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 THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – DESCRIPTION OF BUSINESS DESCRIPTIONAND SIGNIFICANT ACCOUNTING POLICIES
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. The reference to the Company in these financial statements refers to the Company and its subsidiaries.
NatureDescription of OperationsBusiness
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.Overview
In July 2016, Berrard Holdings Limited Partnership (“("Berrard Holdings”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.location and in April 2017, the Company launched its platform. The Company’sCompany's goal is forto transform the platform to be widely recognized as the leading online solution for the sale, acquisition,way pre-owned vehicles are bought and distribution of recreation vehiclessold by providing users with the most efficient, timely and transparent transaction experience. The Company’sWhile the Company's initial focus is the market for 601cccustomer facing emphasis through most of 2018 was on motorcycles 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”), whichpowersports, the Company ownscontinues to enhance its platform to accommodate nearly any VIN-specific vehicle including motorcycles, ATVs, boats, RVs, cars and operates throughlight trucks, via its wholly-owned subsidiary NextGen Pro, LLC (“NextGen Pro”acquisition of Wholesale, Inc. ("Wholesale"). 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.” in October 2018.
Serving both consumers and dealers, through ourits online marketplace platform, we makethe Company makes 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.pre-owned vehicles. In addition, we offerthe Company offers a large inventory of usedpre-owned vehicles for sale along with third-party financing and associated products. OurThe Company's 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 dealerits regional partners, which are primarily auctions. The Company utilizes regional partners in the acquisition of motorcycles as well aspre-owned vehicles to provide inspection, reconditioning and distribution services. Correspondingly, we earn fees and transaction income, and dealerThese regional partners will earn incremental revenue and enhance profitability through increased sales, leads, and fees from inspection, reconditioning and distribution programs.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESOur business model is driven by our proprietary technology platform. Our initial platform was acquired in February 2017, through our acquisition of substantially all of the assets of NextGen Dealer Solutions, LLC ("NextGen"). Since that time, we have expanded the functionality of that platform through a significant number of high-quality technology development projects and initiatives. Included in these new technology development projects and initiatives are modules or significant upgrades to the existing platforms for: (i) Retail and dealer online auctions; (ii) native IOS and Android apps; (iii) new architecture on website design and functionality; (iv) RumbleOn Marketplace; (v) redesigned cash offer tool;(vi) deal-jacket tracking tool; (vii) inventory tracking tool; (viii) CRM and multiple third-party integrations; (ix) new analytics and machine learning initiatives; and (x) IT monitoring infrastructure.
Acquisitions
On February 3, 2019, the Company completed the acquisition (the "Autosport Acquisition") of all of the equity interests of Autosport USA, Inc. ("Autosport"), an independent pre-owned vehicle distributor, pursuant to a Stock Purchase Agreement, dated February 1, 2019 (the "Stock Purchase Agreement"), by and among RMBL Express, LLC (the "Buyer"), a wholly owned subsidiary of Company, Scott Bennie (the "Seller"), and Autosport. Aggregate consideration for the Autosport Acquisition consisted of (i) a closing cash payment of $600,000, plus (ii) a fifteen-month $500,000 promissory note (the "Promissory Note") in favor of the Seller, plus (iii) a three-year $1,536,000 convertible promissory note (the "Convertible Note") in favor of the Seller, plus (iv) contingent earn-out payments payable in the form of cash and/or the Company's Class B Common Stock (the "Earn-Out Shares") for up to an additional $787,500 if Autosport achieves certain performance thresholds. In connection with the Autosport Acquisition, the Buyer also paid outstanding debt of Autosport of $235,000 and assumed additional debt of $257,933 pursuant to a promissory note payable to Seller (the "Second Convertible Note").
Basis of Presentation
The accompanying Condensed Consolidated Financial Statementsunaudited condensed consolidated financial statements of the Company as of September 30, 2020 and December 31, 2019 and for the three and nine-months ended September 30, 2020 and September 30, 2019, have been prepared in accordance with accounting principles generally accepted in the United States generally accepted accounting principles (“GAAP”of 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"). All of the Company's subsidiaries are wholly owned. The condensed consolidated financial statements include the accounts of RumbleOn Inc. and therefore do notits wholly owned subsidiaries. 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 of the information and footnotes required by GAAP and the SEC for annual financial statements. The Company’s Condensed Consolidated Financial Statements reflect allmaterial adjustments, (consisting only of normal recurring adjustments) management believes areexcept as otherwise noted, necessary for the fair presentation of the Company’sCompany'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 atyear-end condensed balance sheet data as of December 31, 2016 in the Company’s Condensed Consolidated Balance Sheets included in this quarterly report2019 was derived from the audited 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. These condensed consolidated financial statements should be read in conjunction with the 2016Consolidated Financial Statements and Notes thereto included in the Company's Annual Report.Report on Form 10-K ("Annual Report") for the fiscal year ended December 31, 2019. The results of operations for the three-month and nine-month periods ended September 30, 2020 are not necessarily indicative of the results expected for the entire fiscal year. All intercompany accounts and material intercompany transactions have been eliminated.
Year-endLiquidity
In October 2016,We have incurred cumulative losses and negative cash flow from operations since inception through September 30, 2020 and expect to incur additional losses and negative cash flow in the future. As we continue to expand our business, build our brand name and awareness, and continue technology and software development efforts, we may need access to additional capital, including through debt and equity financing. Historically, we have raised additional capital to fund our expansion through equity issuances or debt instruments; refer to Note 8 — Notes Payable and Lines of Credit, Note 9 - Convertible Notes, and Note 11 - Stockholder Equity. Also, we have historically funded vehicle inventory purchases through our Line of Credit-Floor Plans. Due to the impact of COVID-19 on the economy, we have a strong focus on preserving liquidity. Our primary liquidity sources are available cash, amounts available under the NextGear Credit Line, proceeds from the Paycheck Protection Program loan, monetization of our retail loan portfolio, insurance recoveries and through rationalizing costs and expenses, including a workforce reduction.
The worldwide spread of the COVID-19 outbreak has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the outbreak is contained. This is impacting the Company's business and the powersport, automotive and transport industries as a whole. The Company has positioned its business today to be lean and flexible in this period of lower demand and higher uncertainty with the goal of preparing the Company changedfor a strong recovery as the crisis is contained. The Company believes its fiscal year-endonline business model allows it to quickly respond to market demand or changes in the businesses it operates as the COVID-19 pandemic continues.
The Company's condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which assumes the continuity of operations, the realization of assets and the satisfaction of liabilities as they come due in the normal course of business. Although the Company believes that it will be able to generate sufficient liquidity from November 30the measures described above, its current circumstances including uncertainties due to December 31.
COVID-19 pandemic raise substantial doubt about the Company's ability to operate as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Certain accounting estimates involve significant judgments, assumptions and estimates by management that affecthave a material impact on the reported amountscarrying value of certain assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities inand the financial statementsreported amounts of revenue and accompanying notes. Estimatesexpenses during the reporting period, which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are used for,based on historical experience, management's experience, and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates. In particular, the novel COVID-19 pandemic and the resulting adverse impacts to global economic conditions, as well as the Company's operations, may impact future estimates including, but not limited to inventory valuation, depreciable lives, carryingvaluations, fair value of intangible assets, sales returns, receivables valuation, restructuring-related liabilities, taxes,measurements, asset impairment charges and contingencies. Actual results could differ materially from those estimates.discount rate assumptions.
Earnings (Loss) Per Share
The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260, Earnings per share. Basic earnings per common share (“EPS”) calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
Revenue Recognition
Revenue is derived from two primary sources:(1)the Company’s online marketplace, which is our largest source of revenue and includes: (i) the sale of used vehicles through consumer, dealers and auction sales channels; (ii) online listing and sales fees; (iii) retail merchandise sales; (iv) vehicle financing; and (v) vehicle service contracts;and (2) subscription and other fees relating to the RumbleOn software solution, which includes: (i) a vehicle appraisal process; (ii) inventory management system; (iii) customer relationship and lead management program; and (iv) equity mining.
The Company 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.
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 from used vehicle sales is recognized when the vehicle is delivered to a consumer, dealer or auction, a sales contract is signed,and the purchase price has either been received or collectability has been established. We guarantee the vehicles we sell with a 3-day, money-back guarantee. Used vehicle sales revenue is recognized net of a reserve for returns, which is based on historical experience 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 provides financing through third-party providers to the potential buyer, if necessary. Upon a successful sale, the seller pays a fee which is based on the difference between the actual retail sales price of the vehicle sold and the net proceeds agreed to be paid by RumbleOn to the seller when the listing agreement was signed. Revenue from non-refundable online listing fees is recognized once the listing agreement is signed, the vehicle is 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 revenue in the accompanying Consolidated Statements of Operations and a component of accounts payable and accrued liabilities 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 also be charged an initial software installation and training fee. Dealers do not have the contractual right to take possession of the software and may cancel the license for these products and services by providing a 30-day notice. Installation and training do not have value to the user without the license and ongoing support and maintenance. Because the dealer partner has the right to cancel the license with 30 days’ notice, revenue for installation and training is recognized when complete, acceptance has occurred, and collectability of a determinable amount is probable. Revenue recognition of monthly subscription fees commences upon completion of installation, acceptance has occurred, and collectability of a determinable amount is probable.
Purchase Accounting for Business Combinations
The Company accounts for acquisitions by allocating the fair value of the consideration transferred to the fair value of the assets acquired and liabilities 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 risk and size risk premiums. These estimates can be affected by factors such as customer and transaction growth, pricing, and economic conditions that can be difficult to predict.
Intangible Assets
Included in “Intangible Assets” on the Company’s Condensed Consolidated Balance Sheets are identifiable intangible assets including customer relationships, non-compete agreements, trademarks, trade names and internet domain names. The estimated fair value of these intangible assets at the time of acquisition are based upon various valuation techniques including replacement cost and discounted future cash flow projections. Trademarks, trade names and internet domain names are not amortized. Customer relationships are amortized on a straight-line basis over the expected average life of the acquired accounts, which are based upon several factors, including historical longevity of customers and contracts acquired and historical retention rates. Non-compete agreements are amortized on a straight-line basis over the term of the agreement, which will generally not exceed three years. The Company reviews the recoverability of these assets if events or circumstances indicate that the assets may be impaired and periodically reevaluates the estimated remaining lives of these assets.
Trademarks, trade names and internet domain names are considered to be indefinite lived intangible assets unless specific evidence exists that a shorter life is more appropriate. Indefinite lived intangible assets are tested for impairment, at a minimum, on an annual basis using an income approach or sooner whenever events or changes in circumstances indicate that an asset may be impaired.
Long-Lived Assets
Property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used are measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. If such assets or asset groups are considered to be impaired, the impairment to be recognized will be measured by the amount by which the carrying amount of the assets or asset groups exceeds the related fair values. The Company also performs a periodic assessment of the useful lives assigned to the long-lived assets.
Technology Development Costs
Technology development costs are accounted for pursuant to ASC 350, Intangibles — Goodwill and Other. Technology development costs include internally developed software and website applications that are used by the Company for its own internal use and to provide services to its customers, which include consumers, dealer partners and ancillary service providers. Under the terms of these customer arrangements the Company retains the revenue generating technology and hosts the applications on its servers and mobile applications. The customer does not have a contractual right to take possession of the software during the term of the arrangement and are not permitted to run the software itself or contract with another party unrelated to the entity to host the software. Technology development costs consist principally of (i) development activities including payroll and related expenses billed by a third-party contractor involved in application, content, production, maintenance, operation, and platform development for new and existing products and services, (ii) technology infrastructure expenses, and (iii) costs of Company employees devoted to the development and maintenance of software products. Technology and content costs for design, maintenance and post-implementation stages of internal-use software and general website development are expensed as incurred. For costs incurred to develop new website functionality as well as new software products and significant upgrades to existing internally used platforms or modules, capitalization begins during the application development stage and ends when the software is available for general use. Capitalized technology development is amortized on a straight-line basis over periods ranging from 3 to 7 years. The Company will perform periodic assessment of the useful lives assigned to capitalized software applications. Additionally, the Company from time-to-time may abandon additional development activities relating to specific software projects or applications and charge accumulated costs to technology development expense in the period such determination is made.
Vehicle Inventory
Vehicle inventory is accounted for pursuant to ASC 330, Inventory and consists of the cost to acquire and recondition a used vehicle. Reconditioning costs are billed by third-party providers and includes parts, labor, and other repair expenses directly attributable to a specific vehicle. Transportation costs are expensed as incurred. Inventory is stated at the lower of cost or net realizable value. Vehicle inventory cost is determined by specific identification. Net realizable value is the estimated selling price less costs to complete, dispose and transport the vehicles. Selling prices are derived from historical data and trends, such as sales price and inventory turn times of similar vehicles, as well as independent market resources. Each reporting period, the Company recognizes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value through cost of sales in the accompanying Condensed Consolidated Statements of Operations.
Valuation Allowance for Accounts Receivable
The Company estimates the allowance for doubtful accounts for accounts receivable by considering a number of factors, including overall credit quality, age of outstanding balances, historical write-off experience and specific account analysis that projects the ultimate collectability of the outstanding balances. Ultimately, actual results could differ from these assumptions.
Cash and Cash Equivalents
The Company considers all cash accounts and all highly liquid short-term investments purchased with an original maturity of three months or less to be cash or cash equivalents. As of September 30, 2017 and 2016, the Company did not have any investments with maturities greater than three months.
Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation and amortization and consists of capitalized technology development costs, furniture and equipment. Depreciation and amortization is recorded on a straight-line basis over the estimated useful life of the assets. Costs of significant additions, renewals and betterments, are capitalized and depreciated. Maintenance and repairs are charged to expense when incurred.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.
ASC Topic 820, Fair Value Measurement, establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are from sources independent of the Company, whereas unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. Inputs other than quoted market prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, are Level 2 inputs.
Level 3: If inputs from Levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date.” Earlier in the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
Beneficial Conversion Feature
From time to time, the Company may issue convertible notes that may have conversion prices that create an embedded beneficial conversion feature pursuant to the guidelines established by the ASC Topic 470-20, Debt with Conversion and Other Options. The Beneficial Conversion Feature (“BCF”) of a convertible security is normally characterized as the convertible portion or feature of certain securities that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a convertible security when issued and also records the estimated fair value of any conversion feature issued with those securities. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
The BCF of a convertible note is measured by allocating a portion of the note’s proceeds to the conversion feature, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method. The Company calculates the fair value of the conversion feature embedded in any convertible security using either a) the Black Scholes valuation model or b) a discount cash flow analysis tested for sensitivity to key Level 3 inputs using Monte Carlo simulation.
Cost of Revenue
Cost of vehicle sales includes the cost to acquire vehicles and the reconditioning and transportation costs associated with preparing the vehicles for resale. Vehicle acquisition costs are driven by the mix of vehicles the Company acquires, the source of those vehicles, and supply and demand dynamics in the vehicle market. Reconditioning costs are billed by third-party providers and include parts, labor, and other repair expenses directly attributable to specific vehicles. Transportation costs consist of costs incurred to transport the vehicles from the point of acquisition or delivery. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Cost of subscription and other fee revenue includes the (i) various data feeds from third parties; (ii) hosting of the customer facing website; (iii) commissions for new sales; and (iv) implementation and training of new and existing customers. These costs and expenses are charged to cost of revenue as incurred.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses primarily include compensation and benefits, advertising and marketing, professional fees, technology development expenses, rent and other occupancy costs, insurance, travel and other administrative expenses.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. Advertising and marketing expenses were $775,456 and $1,071,398, respectively for the three and nine-month periods ended September 30, 2017. There were no advertising and marketing costs incurred for the same periods in 2016.
Stock-Based Compensation
On January 9, 2017, the Company’s Board of Directors approved, subject to stockholder approval, the RumbleOn, Inc. 2017 Stock Incentive Plan (the “Plan”) under which restricted stock units (“RSUs”) and other equity awards may be granted to employees and non-employee members of the Board of Directors. On June 30, 2017, the Plan was approved by the Company's stockholders at the 2017 Annual Meeting of Stockholders. The Company estimates the fair value of awards granted under the Plan on the date of grant. The fair value of an RSU is based on the average of the high and low market prices of the Company’s Class B Common Stock on the date of grant and is recognized as an expense on a straight-line basis over its vesting period; to date, 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 grants for the three and nine-month periods ended September 30, 2017 was $157,763 and $287,550, respectively and is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
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 all 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, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a fifty percent likelihood 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
Adoption of New Accounting Standards
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASU 2016-13"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as "CECL". In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. On November 15, 2019, the FASB issued ASU No. 2019-10 "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)" ("ASU 2019-10"), which provides a framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. ASU 2019-10 amends the effective dates for ASU 2016-13 for smaller reporting companies with fiscal years beginning after December 15, 2022, and interim periods within those years. The Company is evaluating the level of impact adopting ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that the rights and obligations created by leases with a duration greater than 12 months be recorded as assets and liabilities on the balance sheet of the lessee. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has adopted Accounting Standards Update 2015-11 Inventorythis standard as of January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date. The Company has also elected the option, as permitted in ASU 2018-11, Leases (Topic 330), Simplifying842): Targeted Improvements, whereby initial application of the Measurement of Inventory, which requires inventory to be statednew lease standard would occur at the loweradoption date and a cumulative-effect adjustment, if any, would be recognized to the opening balance of cost or net realizable value. Vehicle inventory cost is determined by specific identification. Net realizable value isretained earnings in 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 timesperiod of similar vehicles, as well as independent, market resources. Each reporting periodadoption. For comparability purposes, the Company recognizes any necessary adjustmentswill continue to reflect vehicle inventory at the lower of cost or net realizable value through cost of revenuecomply with previous disclosure requirements in accordance with existing lease guidance for all periods presented in the accompanying Condensed Consolidated Statementsyear of Operations.
adoption. The Company has elected the practical expedients permitted under the transition guidance which enabled the Company: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and (3) not to reassess the treatment of initial direct costs for existing leases. In addition, the Company has made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. Upon adoption of this standard on January 1, 2019, the Company recognized a total operating lease liability in the amount of $3,118,038, representing the present value of the minimum rental payments remaining as of the adoption date and a right-of-use asset in the amount of $3,114,399. The cumulative effect of this accounting change of $3,639 is included in the accumulated deficit for the nine-months ended September 30, 2019. The standard did not have a material impact on the Company's condensed consolidated statements of operations or statements of cash flows.
NOTE 2 – ACCOUNTS RECEIVABLE, NET
Accounts receivable consists of the following as of:
| | | |
| Trade | $12,585,367 | $9,369,733 |
| Finance | 27,333 | 147,893 |
| Other | 23,326 | - |
| | 12,636,026 | 9,517,626 |
| Less: allowance for doubtful accounts | (1,293,426) | (1,034,919) |
| | $11,342,600 | $8,482,707 |
NOTE 3 – INVENTORY
Inventory consists of the following as of:
| | | |
| Pre-owned vehicles: | | |
| Powersport vehicles | $1,801,234 | $10,365,050 |
| Automobiles and trucks | 12,078,123 | 47,599,433 |
| | 13,879,357 | 57,964,483 |
| Less: Reserve | (2,455,263) | (583,202) |
| | $11,424,094 | $57,381,281 |
Included in the inventory reserve at September 30, 2020 is an impairment loss on automotive inventory of $1,976,525for vehicles that were declared a total loss from the tornado that occurred on March 3, 2020 at the Company’s Nashville, Tennessee facility. The total impairment on inventory related to the tornado was $11,738,413 and is recorded as part of cost of revenue on the statement of operations for the nine-months ended September 30, 2020. See Note 13 – Loss Contingencies and Insurance Recoveries.
NOTE 4 – ACQUISITIONS
On February 8, 2017,3, 2019, the Company acquired substantially allcompleted the Autosport Acquisition pursuant to the Stock Purchase Agreement. Aggregate consideration for the Autosport Acquisition consisted of (i) a closing cash payment of $600,000, plus (ii) the Promissory Note in favor of the assetsSeller, plus (iii) the Convertible Note in favor of NextGenthe Seller, plus (iv) contingent earn-out payments payable in exchange for $750,000 inthe form of cash plus 1,523,809 unregistered shares ofand/or the Company's Class B Common Stock for up to an additional $787,500 if Autosport achieves certain performance thresholds. In connection with the Autosport Acquisition, the Buyer also paid outstanding debt of Autosport of $235,000 and assumed debt of $257,933 pursuant to the Company, which were issued at a negotiatedSecond Convertible Note. The fair value of $1.75 per sharethe contingent earn-out payment was considered immaterial at the date of acquisition and a subordinated secured promissory note issued bywas excluded from the Company in favorpurchase price allocation. As of NextGen inSeptember 30, 2020, there have been no payments earned under the amountperformance threshold. See Note 1 – Description of $1,333,334 (the “NextGen Note”). The NextGen Note maturesBusiness and Significant Accounting Policies for additional information on the third anniversary of the closing date (the “Maturity Date”).
Autosport Acquisition. The following table presentssummarizes the final allocation of the purchase price considerationbased on the estimated fair value of the acquired assets and assumed liabilities of Autosport as of September 30, 2017:December 31, 2019:
Issuance of sharesPurchase price consideration: | |
| Cash | $2,666,666835,000 |
Debt$1,536,000 convertible note | 1,333,3341,536,000 |
Cash paid$500,000 promissory note | 750,000500,000 |
| $257,933 Promissory note | 257,933 |
| Total purchase price consideration | $4,750,0003,128,933 |
| | |
Net tangible assets acquired:Estimated fair value of assets: | |
Technology developmentAccounts receivable | $1,400,0003,177,660 |
Customer contractsInventory | 10,0002,862,004 |
Non-compete agreements | 100,0006,039,664 |
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 paidEstimated fair value of accounts payable and other | 5,875,009 |
| |
| Excess of assets over liabilities | 164,655 |
| |
| Goodwill | 2,964,278 |
| |
| Total net assets acquired | $750,0003,128,933 |
Supplemental pro forma unaudited information
The results of operations of NextGen since the acquisition date are included in the accompanying Condensed Consolidated Financial Statements. (unaudited)
The following unaudited supplemental pro forma information presents the financial results as if the acquisition of NextGenAutosport Acquisition was made as of January 1, 20172019 for both the threethree-months and nine-months ended September 30, 2019.
Pro-forma adjustments for the three-month 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 20162019 primarily include adjustments to reflect additional depreciation andthe: (i) amortization of $29,866stock compensation expense of $0 and $48,788,$18,351, respectively, related to technology development and identifiable intangible assets recorded as part of the acquisition, and(ii) interest expense related to the NextGen Noteon convertible and promissory notes of $27,353$0 and $42,833,$20,174, respectively.
| | Three-Months Ended September 30, 2019 | Nine-Months Ended September 30, 2019 |
| Unaudited | | |
| Pro forma revenue | $220,320,323 | $719,996,595 |
| Pro forma net loss | $(8,871,781) | $(30,186,709) |
| Loss per share - basic and fully diluted | $(7.66) | $(27.06) |
| Weighted-average common shares and common stock equivalents outstanding basic and fully diluted | 1,158,915 | 1,115,735 |
| | 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 45 – PROPERTY AND EQUIPMENT, NET
The following table summarizes property and equipment, net of accumulated depreciation and amortization as of September 30, 20172020 and December 31, 2016:2019:
| | |
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
| $-
|
| | | |
| Vehicles | $316,764 | $158,327 |
| Furniture and equipment | 191,048 | 448,074 |
| Technology development and software | 10,461,314 | 8,863,247 |
| Leasehold improvements | 254,324 | 246,135 |
| Total property and equipment | 11,223,450 | 9,715,783 |
| Less: accumulated depreciation and amortization | (4,728,510) | (3,288,109) |
| Total | $6,494,940 | $6,427,674 |
AtAmortization and depreciation on Property and Equipment is determined on a straight-line basis over the estimated useful lives ranging from 3 to 5 years.
Included in Technology development and software above on September 30, 2017,2020 is capitalized technology development costs were $1,835,097,of $10,253,304, which includes $1,400,000$2,900,000 of software acquired in the NextGen transaction. For additional information, see Note 3 - “Acquisitions.” Total technology development costs incurred for the three-months and nine-month periodperiods ended September 30, 20172020 were $713,766,$1,164,015 and $2,635,286, respectively, of which $435,097$983,954 and $1,598,067, respectively, was capitalized and $278,669$180,061 and $1,037,219, respectively, was charged to expense in the accompanying Condensed Consolidated Statementscondensed consolidated statements of Operations. Theoperations. Depreciation expense for the three-month and nine-month periods ended September 30, 2020 were $536,381 and $1,567,697, respectively, which included the amortization of capitalized technology development costs of $477,420 and $1,366,996, respectively. Total technology development costs incurred for the threethree-month and nine-month periods ended September 30, 20172019 were $1,420,405 and $4,371,267, respectively, of which $699,982 and $2,619,551, respectively, was $89,429capitalized and $219,374, respectively. There were no technology development costs incurred$720,423 and no amortization$1,751,716, respectively, was charged to expense in the accompanying condensed consolidated statements of capitalized development costsoperations. Depreciation expense for the same periods in 2016. Depreciation expense on vehicles, furniture and equipment for the threethree-month and nine-month periods ended September 30, 20172019 was $28,598$473,671 and $49,573,$1,283,334 respectively, which included the amortization of capitalized technology development costs of $386,519 and $1,018,551, 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 – GOODWILL AND INTANGIBLE ASSETS
The following is a summary of the carrying amount of goodwill and other indefinite-lived assets as of December 31, 2019 and September 30, 2020. Due to the significant decline in the Company's stock price and the economic effect of COVID-19, the Company determined a triggering event for Goodwill impairment existed at March 31, 2020. As a result, the Company performed a quantitative impairment analysis for the Automotive segment. The Company's impairment test indicated no impairment existed as the estimated fair value of the reporting unit exceeded its carrying value at March 31, 2020. Management determined no triggering event occurred during the quarters ended June 30, 2020 or September 30, 2020.
| | | |
| Goodwill | $26,886,563 | $26,886,563 |
| | | |
| Indefinite lived intangible asset | $45,515 | $45,515 |
The $45,515 of indefinite lived intangible asset is included in other assets in the Company's condensed consolidated balance sheets.
NOTE 7 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The following table summarizes accounts payable and other accrued liabilities as of September 30, 20172020 and December 31, 2016:2019:
| | | |
| 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 |
| | | |
| Accounts payable | $4,096,927 | $8,730,624 |
| Operating lease liability-current portion | 1,556,705 | 1,423,610 |
| Accrued payroll | 1,275,557 | 715,658 |
| State and local taxes | 633,116 | 912,062 |
| Other accrued expenses | 3,158,322 | 639,140 |
| Total | $10,720,627 | $12,421,094 |
NOTE 78 – NOTES PAYABLE AND LINES OF CREDIT
Notes payable and lines of credit consisted of the following as of September 30, 20172020 and December 31, 2016:2019:
| | | |
| 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
|
| | | |
| Notes payable-NextGen dated February 8, 2017 and exchanged January 14, 2020. Interest payable semi-annually at 6.5% through February 9, 2019 and 10.0% quarterly through maturity, which is January 31, 2021. | $833,334 | $1,333,334 |
| | | |
| Notes payable-private placement dated March 31, 2017 and exchanged January 14, 2020. Interest payable semi-annually at 6.5% through September 30, 2019 and 10.0% quarterly through maturity which is January 31, 2021. | 669,175 | 667,000 |
| | | |
| Line of credit-floor plan-Ally dated February 16, 2018. Facility provides up to $25,000,000 of available credit secured by vehicle inventory and other assets. Principal and interest are payable on demand. | - | 8,419,897 |
| | | |
| Line of credit-floor plan-NextGear dated October 30, 2018. Secured by vehicle inventory and other assets. Interest rate at September 30, 2020 was 5.25%. Principal and interest is payable on demand. | 11,950,284 | 50,741,073 |
| | | |
| PPP Loans dated May 1, 2020. Interest is payable monthly at 1.0% through maturity which is April 30, 2022. Payments of principle and interest is deferred until October 30, 2020. | 5,176,845 | - |
| | | |
| Revolving Line of Credit note secured by the loans and other assets of RumbleOn Finance, LLC. Interest rate at September 30, 2019 was 7.25%. Principal and interest is payable on demand. | 985,006 | - |
| | | |
| Less: Debt discount | - | (75,601) |
| Total notes payable and lines of credit | $19,614,644 | $61,085,703 |
| Less: Current portion | (17,640,426) | 59,160,970 |
| | | |
| Long-term portion | $1,974,218 | $1,924,733 |
Convertible Note Payable-Related PartyLine of Credit-Floor Plan-NextGear
On July 13, 2016,October 30, 2018, Wholesale, as borrower, entered into a $70,000,000 floorplan vehicle financing credit line (the "NextGear Credit Line") with NextGear Capital, Inc. ("NextGear"). During the quarter ended September 30, 2020 the Company and NextGear agreed to reduce the credit line to $55,000,000 with Wholesale and Autosport limiting the aggregate amount of advances under the credit line to $25,000,000 through March 31, 2021, at which time the credit line will be repaid in full.
Advances under the NextGear Credit Line require Wholesale to maintain at least $2,500,000 cash collateral in a reserve account in favor of NextGear, which amount is subject to change in NextGear's sole discretion. Advances under the NextGear Credit Line will bear interest at an initial per annum rate of 5.25%, based upon a 360-day year, and compounded daily, and the per annum interest rate will vary based on a base rate, plus the contract rate, which is currently negative 2.0%, until the outstanding liabilities to NextGear are paid in full. Interest expense on the NextGear Credit Line for the three-month and nine-month periods ended September 30, 2020 was $239,785 and $1,450,944, respectively. Interest expense on the NextGear Credit Line for the three-month and nine-month periods ended September 30, 2019 was $693,024 and $2,203,915, respectively.
Line of Credit-Floor Plan-Ally
On February 16, 2018, the Company, through its wholly-owned subsidiary RMBL MO, entered into an unsecured convertible noteInventory Financing and Security Agreement (the “BHLP Note”"Credit Facility") with Berrard Holdings, an entity ownedAlly Bank ("Ally") and controlled byAlly Financial, Inc., a current officer and director, Mr. Berrard,Delaware corporation ("Ally" together with Ally Bank, the "Lender"), pursuant to which the Lender may provide up to $25,000,000 in financing, or such lesser sum which may be advanced to or on behalf of RMBL MO from time to time, as part of its floorplan vehicle financing program. Advances under the Credit Facility required that the Company was required to repay $191,858 on or before July 13, 2026 plusmaintain 10.0% of the advance amount as restricted cash. Advances under the Credit Facility bore interest at 6%a per annum. The BHLP Noteannum rate designated from time to time by the Lender and were determined using a 365/360 simple interest method of calculation, unless expressly prohibited by law. Advances under the Credit Facility, if not demanded earlier, were due and payable for each vehicle financed under the Credit Facility as and when such vehicle was also convertible into common stock,sold, leased, consigned, gifted, exchanged, transferred, or otherwise disposed of. Interest under the Credit Facility was due and payable upon demand, but, in whole, atgeneral, in no event later than 60 days from the date of request for payment. Upon any time before maturity at the optionevent of default (including, without limitation, RMBL MO's obligation to pay upon demand any outstanding liabilities of the holderCredit Facility), the Lender could, at its option and without notice to the greaterRMBL MO, exercise its right to demand immediate payment of $0.06 per share or 50%all liabilities and other indebtedness and amounts owed to Lender and its affiliates by RMBL MO and its affiliates. The Credit Facility was secured by a grant of a security interest in the vehicle inventory and other assets of RMBL MO and payment was guaranteed by the Company pursuant to a guaranty in favor 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 toLender and secured by the Company pursuant to a General Security Agreement. Interest expense 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 shareCredit Facility for the BHLP Note of $0.75 per share, resultingthree-month and nine-month periods ended September 30, 2020 was $0 and $77,266. Interest expense on the Credit Facility for the three-month and nine-month periods ended September 30, 2019 was $157,343 and $416,017, respectively. The Credit Facility ended 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.February 2020.
Note Payable-NextGenRumbleOn Finance Line of Credit
On June 23, 2020, RumbleOn Finance, LLC, a wholly owned subsidiary of the Company ("RumbleOn Finance"), entered into a loan agreement providing for up to $1,500,000 in proceeds (the "RumbleOn Finance Facility") with CL Rider Finance, L.P. (the "CL Rider") as evidenced by the loan commitment dated as of June 17, 2020. In connection with the loan agreement, RumbleOn Finance pledged its assets to CL Rider to secure the RumbleOn Finance Facility and executed a promissory note in favor of the CL Rider pursuant to which the RumbleOn Finance Facility will accrue interest at an initial rate of 4.0% per annum. Accrued interest is payable monthly. Outstanding accrued interest and the principal balance are payable on demand by CL Rider. On July 16, 2020, the Company received net proceeds of $1,156,632. Interest expense on the Facility was $16,619 for the three and nine-months ended September 30, 2020.
Loan Agreement-Hercules Capital Inc.
On May 14, 2019, the Company made a payment to Hercules Capital Inc. ("Hercules") of $11,134,695, representing the principal, accrued and unpaid interest, fees, costs and expenses outstanding under its Loan and Security Agreement (the "Loan Agreement") with Hercules dated April 30, 2018 (the "Hercules Indebtedness"). Upon the payment, all outstanding indebtedness and obligations of the Company owed to Hercules under the Loan Agreement were paid in full, and the Loan Agreement was terminated. The Company used a portion of the net proceeds from the Note Offering (described below) to pay the Hercules Indebtedness. In accordance with the guidance in ASC 470-50, Debt, the Company accounted for the extinguishment of the Loan Agreement as an extinguishment and recognized a loss on early extinguishment of debt of $1,499,250 during the nine-months ended September 30, 2019. The loss on early extinguishment consisted primarily of the prepayment penalty paid to Hercules and unamortized debt discounts including the remaining portion of warrant values and debt issuance costs. There was no interest expense on the Hercules loan for the three-month and nine-month periods ended September 30, 2020. For the three-month and nine-month periods ended September 30, 2019, interest expense on the Hercules loan was $0 and $758,466, respectively, and included $0 and $343,841, respectively, of debt issuance cost amortization.
Notes 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 (which note was subsequently assigned to Halcyon Consulting LLC ("Halcyon") in February 2018) 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.January 31, 2021 maturity date (the "NextGen Note"). Upon the occurrence of any event of default, the outstanding balance under the NextGen Notenote shall become immediately due and payable upon election of the holder. The Company’sCompany's obligations under the NextGen Note are secured by substantially all the assets of NextGen Pro, LLC, the Company's wholly-owned subsidiary ("NextGen Pro"), pursuant to an Unconditional Guaranty Agreement (the “Guaranty Agreement”"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’sCompany's obligations under the NextGen Note. Interest expense on the NextGen NotesNote for the threethree-month and nine-month periods ended September 30, 20172020 were $21,005 and $66,123, respectively, as compared to $28,566 and $81,818, respectively, for the same periods of 2019. In connection with the Investor Note Exchange Agreement (described below), in January 2020, $500,000 of the NextGen Note was $21,370paid down and $54,849, respectively.the NexGen Note was exchanged for a New Investor Note (as defined below).
Notes Payable-PrivatePrivate Placement
On March 31, 2017, the Company completed funding of the second tranche of thea private placement commenced in 2016 (the "2016 Private Placement (as defined below)Placement"). The investors were issued 1,161,92058,096 shares of Class B Common Stock of the Company and promissory notes (the “Private"Private Placement Notes”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 MarchJanuary 31, 2020.2021. 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 recorded as an addition to paid inpaid-in capital. The debt discount iswas amortized to interest expense until the scheduled maturity of the Private Placement Notes in March 2020 using the effective interest method. Thean effective interest rate at September 30, 2017 wasof 26.0%. Interest expense on the Private Placement Notes for the threethree-month and nine-month periods ended September 30, 20172020 was $94,885$16,867 and $184,943,$125,443, respectively, and included $0 and $75,601, respectively, of debt discount amortization as compared to interest expense of $80,899 and $231,235, respectively, which included $66,608 and $188,831, respectively, of debt discount amortization of $41,979 and $81,603, respectively for the three and nine-monthsame periods ended September 30, 2017.of 2019. In connection with the Investor Note Exchange Agreement (described below) the Private Placement Notes were exchanged for New Investor Notes (as defined below).
Notes Payable-Senior Secured Promissory Notes
On September 5, 2017,Exchange of Notes Payable
Certain of the Company's investors extended the maturity of outstanding promissory notes, and exchanged such notes for new notes (the "New Investor Notes"), pursuant to that certain Note Exchange Agreement, dated January 14, 2020 (the "Investor Note Exchange Agreement"), by and between the Company executed Senior Secured Promissory Notesand each investor thereto (the “Notes”"Investors") in favor of several investors,, including certain executive officers and directorsHalcyon, an entity affiliated with Kartik Kakarala, a former director of the Company, in thesuch New Investor Note for an aggregate principal amount of $1,650,000 (“Principal Amount”$833,333 (after taking account of a $500,000 pay down of the NextGen Note), Blue Flame Capital, LLC ("Blue Flame"), which includesan entity affiliated with Denmar Dixon, a director of the Company, such New Investor Note for an aggregate original issue discountprincipal amount of $150,000.$99,114, and Mr. Dixon, individually, such New Investor Note for an aggregate principal amount of $272,563. The proceedsNew Investor Notes, having an aggregate principal amount of approximately $1,500,000, will mature on January 31, 2021, and will be convertible at any time at the Investor's option at a price of $60.00 per share. Interest under the New Investor Notes accrue on the outstanding and unpaid principal amount at the rate of 10.0% per annum and shall be paid quarterly in arrears on the last day of each of the Company's fiscal quarters beginning on March 30, 2020, and, if applicable, on the January 31, 2021 maturity date.
PPP Loans
On May 1, 2020, the Company, and its wholly-owned subsidiaries Wholesale and Wholesale Express (together, the "Subsidiaries," and with the Company, the "Borrowers"), each entered into loan agreements and related promissory notes (the "SBA Loan Documents") to receive U.S. Small Business Administration Loans (the "SBA Loans") pursuant to the Company fromPaycheck Protection Program (the "PPP") established under 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 definedCARES Act, in the Notes.aggregate amount of $5,176,845 (the "Loan Proceeds"). The Borrowers received the Loan Proceeds on May 1, 2020. Under the SBA Loan Documents, the SBA Loans have The Notes mature on September 5, 2018current terms of two years with maturity dates of April 30, 2022 and bearan annual interest at a rate equal to 5% per annum through December 31, 2017, and a rate of 10% per annum thereafter. Interest is1.0%. Payments of principal and interest on the PPP Loans will be deferred for the first six-months of the term of the PPP Loans until October 30, 2020. Principal and interest are 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 noticewith no prepayment penalties.
Pursuant to the noteholder. Ifterms of the SBA Loan Documents, the Borrowers can apply for and receive forgiveness for all, or a portion of the loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs (collectively, "Qualifying Expenses"), and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loans. The Company has been using the proceeds of the PPP Loans for Qualifying Expenses. However, no assurance is provided that the Company consummates in one or more transactions financing of any nature resulting in net proceeds availablewill be able 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 maturityobtain forgiveness of the NotesPPP Loans in September 2018 using the effective interest method. The effective interest rate at September 30, 2017 was 10.0%.whole or in part. Interest expense on the NotesPPP Note for the threethree-month and nine-month periods ended September 30, 20172020 was $15,925 which included $10,274$11,626 and $19,334, respectively.
NOTE 9 – CONVERTIBLE NOTES
As of originalSeptember 30, 2020, the outstanding convertible promissory notes net of debt discount and issue discount amortization. costs are summarized as follows:
| | | | |
| Convertible senior notes | $38,750,000 | $(12,237,622) | $26,512,378 |
| Convertible notes-Autosport: | | | |
| $1,536,000 unsecured note | 1,088,000 | (336,214) | 751,786 |
| $500,000 unsecured note | 378,000 | - | 378,000 |
| | 40,216,000 | (12,573,836) | 27,642,164 |
| Less: Current portion | (1,146,000) | 185,662 | (960,338) |
| Long-term portion | $39,070,000 | $(12,388,174) | $26,681,826 |
Convertible Senior Notes
On October 23, 2017,May 9, 2019, the Company completedentered into a public offeringpurchase agreement (the "Purchase Agreement") with JMP Securities LLC ("JMP Securities") to issue and used approximately $1,661,075 of the net proceeds of the offering for the repayment of the Notessell $30,000,000 in the aggregate principal amount of $1,650,000, plus accrued interest, which resultedits 6.75% Convertible Senior Notes due 2024 (the "Old Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") (the "2019 Note Offering"). The Company paid JMP Securities a fee of 7.0% of the gross proceeds in the termination of2019 Note Offering. The proceeds for the Notes. For additional information, see2019 Note 15 “Subsequent Events.”Offering after deducting the initial purchaser's discounts, advisory fees, and related offering expenses, were approximately $27,385,500.
NOTE 8 – STOCKHOLDERS’ EQUITYThe Old Notes were issued on May 14, 2019 pursuant to an Indenture (the "Old Indenture") by and between the Company and Wilmington Trust, National Association, as trustee (the "Trustee"). The Purchase Agreement included customary representations, warranties and covenants by the Company and customary closing conditions. Under the terms of the Purchase Agreement, the Company agreed to indemnify JMP Securities against certain liabilities. The Old Notes bore interest at 6.75% per annum, payable semiannually on May 1 and November 1 of each year, beginning on November 1, 2019. The Old Notes could bear additional interest under specified circumstances relating to the Company's failure to comply with its reporting obligations under the Old Indenture or if the Old Notes were not freely tradeable as required by the Old Indenture. The Old Notes would have matured on May 1, 2024, unless earlier converted, redeemed or repurchased pursuant to their terms.
The initial conversion rate of the Old Notes was 8.6956 shares of Class B Common Stock, per $1,000 principal amount of the Old Notes, subject to adjustment (which is equivalent to an initial conversion price of approximately $115.00 per share, subject to adjustment). The conversion rate was subject to adjustment in some events but would not have been adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the Old Indenture), the Company would, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elected to convert its Old Notes in connection with such make-whole fundamental change.
The Old Notes were not redeemable by the Company prior to the May 6, 2022. The Company could have redeemed for cash all or any portion of the Old Notes, at its option, on or after May 6, 2022 if the last reported sale price of the Company's Class B Common Stock had been at least 150.0% of the conversion 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 including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund was provided for the Old Notes. If redeemed, the Company would have made an interest make-whole payment to the converting holder equal to the sum of the present values of the scheduled payments of interest that would have been made on the Old Notes to be converted had such Old Notes remained outstanding from the conversion date through the earlier of the date that is two years after the conversion date and June 15, 2022.
In connection with the 2019 Note Offering, the Company entered into a registration rights agreement with JMP Securities, pursuant to which the Company agreed to file with the SEC a resale shelf registration statement providing for the resale of the Old Notes and the shares of Class B Common Stock issuable upon conversion of the Old Notes. This resale registration statement was filed on August 22, 2019 and declared effective on August 30, 2019.
On November 28, 2016,January 10, 2020, the Company completedentered into a Note Exchange and Subscription Agreement, as amended by a Joinder Agreement (together, the "New Note Agreement"), with the investors in the 2019 Note Offering, pursuant to which the Company agreed to complete (i) a note exchange pursuant to which $30,000,000 of the Old Notes would be cancelled in exchange for a new series of 6.75% Convertible Senior Notes due 2025 (the "New Notes," and together with the Old Notes, the "Notes") and (ii) the issuance of additional New Notes in a private placement in reliance on the exemption from registration provided by Rule 506 of Regulation D of the Securities Act as a sale not involving any public offering (the "2020 Note Offering"). On January 14, 2020, the Company closed the 2020 Note Offering. The proceeds for the 2020 Note Offering after deducting for payment of accrued interest on the Old Notes and offering-related expenses were approximately $8,272,375.
The New Notes were issued on January 14, 2020 pursuant to an Indenture (the "New Indenture"), by and between the Company and the Trustee. The New Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions. The New Notes bear interest at 6.75% per annum, payable semiannually on January 1 and July 1 of each year, beginning on July 1, 2020. The New Notes may bear additional interest under specified circumstances relating to the Company's failure to comply with its reporting obligations under the New Indenture or if the New Notes are not freely tradeable as required by the New Indenture. The New Notes mature on January 1, 2025, unless earlier converted, redeemed or repurchased pursuant to their terms.
The initial conversion rate of the New Notes is 25 shares of Class B Common Stock per $1,000 principal amount of New Notes, which is equal to an initial conversion price of $40.00 per share. The conversion rate is subject to adjustment in certain purchasers,events as set forth in the New Indenture but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a "make-whole fundamental change" (as defined in the New Indenture), the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its New Notes in connection with such make-whole fundamental change. Before July 1, 2024, the New Notes will be convertible only under circumstances as described in the New 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 62.0 shares per $1,000 in principal amount.
The New Indenture contains a "blocker provision" which provides that no holder (other than the depositary with respect to the salenotes) or beneficial owner of an aggregate of 900,000a New Note shall have the right to receive shares of common stockthe 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 New Notes are not redeemable by the Company before the January 14, 2023. The Company may redeem for cash all or any portion of the New Notes, 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 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 including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the New Notes.
The New Notes rank senior in right of payment to any of the Company's indebtedness that is expressly subordinated in right of payment to the New Notes; 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 assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of current or future subsidiaries of the Company (including trade payables).
The New 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 continuing, the Trustee by notice to the Company, or the holders of at a purchase priceleast 25% in principal amount of $1.50 per share for total considerationthe outstanding New Notes by notice to the Company and the Trustee, may declare 100.0% of $1,350,000 (the “2016 Private Placement”). the principal of and accrued and unpaid interest, if any, on all the New Notes then outstanding to be due and payable.
In connection with the 2016 Private Placement,2020 Note Offering, on January 14, 2020, the Company also entered into loan agreements,a registration rights agreement with the Note Investors, pursuant to which the purchasers would loanCompany has agreed to file with the SEC a shelf registration statement registering the sale, on a continuous or delayed basis, of all of the New Notes and to use its commercially reasonable efforts to cause the shelf registration statement to become or be declared effective under the Securities Act no later than May 29, 2020 (which date was adjusted for certain intervening events, including the COVID-19 pandemic). The registration statement was filed on June 19, 2020 and declared effective on June 30, 2020. In connection with the filing of the registration statement, the Company deregistered the Old Notes previously registered for resale.
As of September 30, 2020, the conditions allowing holders of the New Notes to convert have not been met and therefore the New Notes are not yet convertible.
The Company accounted for the exchange of the Old Notes and the issuance of the New Notes in accordance with the conversion guidance in ASC 470-20 "Debt – Debt with Conversion and Other Option" (ASC 470-20) and determined that the exchange of the Old Notes for the New Notes required derecognition of the Old Notes given that the difference in the fair value of the embedded the conversion feature of the New Notes relative to the Company their pro rata shareOld Notes was in excess of up to $1,350,000 in the aggregate upon the request10 percent of the Old Notes conversion feature fair value. In derecognizing the Old Notes, the Company recognized a gain of $188,164 equal to difference between the fair value of the Old Notes liability immediately prior to extinguishment and the carry amount of the liability component of the Old Notes, including any all unamortized debt issuance costs. The remaining consideration of $2,593,163 was allocated to the reacquisition of the equity component and recognized as a reduction of stockholder's equity.
The New Notes were accounted for in accordance with FASB ASC 470, Debt and ASC 815, Derivatives and Hedging, which required bifurcation of the liability and equity components. The Company determined the carrying amount of the liability component was $25,280,430 and represents the present value of the New Notes cash flows using an implied discount rate of 18.7%, which is a yield applicable to similar debt instruments that do not have the conversion feature. After allocation of the initial proceeds to the liability components, the remaining amount was allocated to the equity component and recorded as additional paid in capital. The Company recorded $13,529,141 in total debt discount related to the New Notes which included $59,571 of debt issuance costs. The Company allocates transaction costs related to the issuance of the New Notes to the liability and equity components using the same proportions as the initial carrying value of the New Notes. The $59,571 of transaction costs attributable to the debt component are being amortized to interest expense using the effective interest method over the term of the New Notes. Transaction costs attributable to the equity component were $40,669 and are netted with the equity component of the New Notes in stockholders' equity. The equity component is not remeasured as long as it continues to meet the conditions for equity classification The Company further valued a derivative liability in connection with the interest make-whole provision at any time$20,673 on or after January 31, 2017the issuance date based on a lattice model. This amount was recorded as a debt discount and before November 1, 2020. Onis amortized to interest expense over the term of the New Notes using the effective interest rate. The value of the derivative liability increased to $137,488 as of March 31, 2017,2020. The derivative liability is remeasured at each reporting date with an increase in value of $13,518being recorded in other income for the Company completed the second tranchethree-months ended September 30, 2020. The value of the 2016 Private Placement. For additional information, see Note 7 - “Notes Payable.”derivative liability as of September 30, 2020 was $20,345.
The interest expense recognized with respect to the Convertible Senior Notes was as follows:
| | Three-Months Ended September 30, 2020 | Nine-Months Ended September 30, 2020 |
| Contractual interest expense | $653,906 | $1,912,265 |
| Amortization of debt discounts | 479,077 | 1,367,213 |
| Total | $1,132,983 | $3,279,478 |
Convertible Notes-Autosport USA
On January 9, 2017,February 3, 2019, in connection with the Company’s Board of Directors approved, subject to stockholder approval,Autosport Acquisition, the adoptionCompany issued (i) the Promissory Note and (ii) the Convertible Note in favor of the Plan. Seller. In connection with the Autosport Acquisition, the Buyer also assumed additional debt of $257,933 pursuant to the Second Convertible Note.
The $500,000 Promissory Note has a term of fifteen months and will accrue interest at a simple rate of 5.0% per annum. Interest under the Promissory Note is payable upon maturity. In June 2020, principal payments of $122,000 were made and the promissory note maturity date was extended to October 1, 2020 and the remaining principal balance of $378,000 will be repaid in four equal principal plus interest payments beginning July 1, 2020 through maturity. Any interest and principal due under the Promissory Note is convertible, at the Buyer's option into shares of the Company's Class B Common Stock at a conversion price equal to the weighted average trading price of the Company's Class B Common Stock on the Nasdaq Stock Exchange for the twenty (20) consecutive trading days preceding the conversion date. The number of shares of the Company's Class B Common Stock issuable pursuant to the Promissory Note is indeterminate at this time.
The $1,536,000 Convertible Note matures on January 31, 2022 and accrues interest at a rate of 6.5% per annum. Interest under the Convertible Note is payable monthly for the first 12 months, and thereafter monthly payments of amortized principal and interest will be due. Any interest and principal due under the Convertible Note is convertible into shares of the Company's Class B Common Stock at a conversion price of $115.00 per share, (i) at the Seller's option, or (ii) at the Buyer's option, on any day that (a) any portion of the principal of the Convertible Note remains unpaid and (b) the weighted average trading price of the Company's Class B Common Stock on Nasdaq for the twenty (20) consecutive trading days preceding such day has exceeded $140.00 per share. The maximum number of shares issuable pursuant to the Convertible Note is 15,962 shares of the Company's Class B Common Stock.
The Second Convertible Note had a term of one year and accrued interest at a simple rate of 5.0% per annum. The note was repaid in full during the nine-months ended September 30, 2020.
For the three and nine-months ended September 30, 2020, interest expense on convertible notes was $47,140 and $141,000, respectively, and included $22,442 and $55,876, respectively, of debt discount amortization. Interest Expense for the three-month and nine-months ended September 30, 2019 for the convertible notes was $67,634 and $163,730, respectively, and included $31,045 and $81,084, respectively, of debt discount amortization.
NOTE 10 – EQUITY-BASED COMPENSATION
Share-Based Compensation
On June 30, 2017, the Company's shareholders approved a Stock Incentive Plan was approved by(the "Plan") reserving for issuance under the Company’s stockholders atPlan in the 2017 Annual Meetingform of Stockholders. The purposesrestricted stock units ("RSUs"), stock options ("Options"), Performance Units, and other equity awards (collectively "Awards") for the Company's employees, consultants, directors, independent contractors and certain prospective employees who have committed to become an employee (each an "Eligible Individual") of up to 12% of the shares of Class B Common Stock outstanding from time to time. On June 25, 2018, the Company's shareholders approved an amendment to 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 effortnumber of shares authorized for issuance under the growth and successPlan from 12.0% 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’sCompany's issued and outstanding shares of Class B Common Stock from time to time are reservedto 100,000 shares of Class B Common Stock. On May 20, 2019, the Company's stockholders approved another amendment to the Plan to increase the number of shares authorized for issuance under the Plan. AsPlan from 100,000 shares of September 30, 2017, 9,018,541Class B Common Stock to 200,000 shares are issued and outstanding, resulting in upof Class B Common Stock. On August 25, 2020, the Company's stockholders approved another amendment to 1,082,225the Plan to increase the number of shares availableauthorized for issuance under the Plan. AsPlan from 200,000 shares of September 30, 2017,Class B Common Stock to 700,000 shares of Class B Common Stock. To date, the Company has granted 560,000 RSUs under the Plan to certain officersvesting of RSU and Option awards for most employees of the Company. The aggregate fair value of the RSUs was $2,103,500. The RSUsis service/time based. Substantially all service/time based RSU and Option awards issued typically vest over a three-year period with the following vesting schedule: (i) 20.0% vesting anywhere from eight-months to thirteen month after grant date, (ii) an additional 30.0% during the subsequent twelve months of the initial vesting, and (iii) the final 50.0% during the following twelve months. In 2019 the Company granted to certain members of management an aggregate of (i) 12,213 performance-based awards that vest after two consecutive quarters of $1.00 or greater operating income and trailing four quarter revenue of $900,000,000 at any time through September 30, 2020, and (ii) 36,938 market-based awards; these awards were terminated effective as of December 31, 2019 and the entire expense for the fair-value of the market based awards was recognized in 2019. On July 15, 2020 the Company granted to certain members of management an aggregate of 200,000 market based RSUs (the “2020 Grant”). These RSUs vest as follows: (i) 20%one third shall vest on the first anniversary oftrading day after 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”), whichcloses at a stock price of $50 per share or greater for 30 consecutive trading days; one third shall vest on the first trading day after the Company’s Class B Common Stock is identical tocloses at a stock price of $100 per share or greater for 30 consecutive trading days; and one third shall vest on the first trading day after the Company’s Class AB Common Stock in all material respects, except that holdersstock closes at a stock price of $200 per share or greater for 30 consecutive trading days. The 2020 Grant has a term of 30 months, the fair market value of the 2020 Grant is $650,000 and the derived term is 20 months. The Company estimates the fair value of awards granted under the Plan on the date of grant. Stock-based compensation expense is recognized as an expense on a straight-line basis over the vesting periods described above and is recognized in Selling, General and Administrative expense. A summary of equity-based compensation expense recognized during the three and nine-months ended September 30, 2020 and 2019 is as follows
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | |
| Restricted Stock Units | $847,096 | $956,991 | $2,379,273 | $1,646,112 |
| | | | | |
| Options | 15,459 | - | 46,041 | - |
| | | | | - |
| Total stock-based compensation | $862,555 | $956,991 | $2,425,314 | $1,646,112 |
As of September 30, 2020, the total unrecognized compensation expense related to outstanding equity awards was approximately $4,439,150, which the Company expects to recognize over a weighted-average period of approximately 10 months. Total unrecognized equity-based compensation expense will be adjusted for actual forfeitures.
NOTE 11 – STOCKHOLDER EQUITY
2019 Offerings
On February 11, 2019, the Company completed an underwritten public offering of 63,825 shares of its Class B Common Stock are entitledat a price of $111.00 per share for net proceeds to one vote per sharethe Company of $6,543,655. The completed offering included 8,325 shares of Class B Common Stock issued and outstanding.upon the underwriter's exercise in full of its over-allotment option.
Also on JanuaryOn May 9, 2017,2019, the Company’s BoardCompany entered into a Securities Purchase Agreement with certain accredited investors pursuant to which the Company agreed to sell in a private placement (the "Private Placement") an aggregate of Directors and stockholders holding 6,375,00095,000 shares of its Class B Common Stock, at a purchase price of $100.00 per share. JMP Securities served as the placement agent for the Private Placement. The Company paid JMP Securities a fee of 7.0% of the Company’sgross proceeds in the Private Placement. The Private Placement closed on May 17, 2019. The proceeds for the Private Placement, after deducting commissions and related offering expenses, were $8,665,000.
2020 Public Offering
On January 14, 2020, pursuant to an underwritten public offering, the Company 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 of900,000 shares of Class B Common Stock held by Mr. Chesrown, and (ii) Steven R. Berrardat a public price of 125,000 shares$11.40 per share (the "2020 Public Offering"). On January 16, 2020, the Company received notice of Class A Common Stockthe Underwriters' intent to exercise the over-allotment option in exchange forfull (the "Over-allotment Exercise"). On January 17, 2020, the Company issued an equal number ofadditional 135,000 shares of Class B Common Stock held by Mr. Berrard, effective atand closed the timeOver-allotment Exercise. The Over-allotment Exercise increased the Certificateaggregate number of Amendment was filed withshares sold in the Secretary2020 Public Offering to 1,035,000. Including the Over-allotment Exercise, net proceeds from the 2020 Public Offering, after deducting the 8.0% underwriter's commission and $75,000 for underwriter expenses, were $10,780,080. Certain of Statethe Company's officers and directors participated in the 2020 Public Offering.
The Company intends to use the net proceeds of Nevada.the 2020 Public Offering for working capital and general corporate purposes, which may include further technology development, increased spending on marketing and advertising and capital expenditures necessary to grow the business. Pending these uses, the Company may invest the net proceeds in short-term interest-bearing investment grade instruments.
Reverse Stock Split
On the Effective Date,May 18, 2020, the Company filed thea Certificate of AmendmentChange to the Company’s Articles of Incorporation with the Secretary of State of the State of Nevada changing the Company’s name to RumbleOn, Inc.effect a one-for-twenty reverse stock split of its issued and creating theoutstanding Class A Common Stock and Class B Common Stock. AlsoStock (the “Reverse Stock Split”). The Reverse Stock Split was effective at 12:01 a.m., Eastern Time, on May 20, 2020. No fractional shares were issued as a result of the Effective Date,Reverse Stock Split. There were 7,131 fractional shares issued as a result of rounding up to the Company issued an aggregate of 1,000,000 shares of Class A Commonnearest whole share in connection with the Reverse 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.
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 directorsSplit. The authorized preferred stock of the Company acquired 175,000 shares of Class B Commonwas not impacted by the Reverse Stock Split. The Company has retrospectively adjusted the per share and share amounts included 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 Statementthis Quarterly Report on Form S-1 (the “Registration Statement”) with10-Q for the SEC covering the resale of 8,993,541 shares of Class B CommonReverse 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.Split.
NOTE 912 – SELLING, GENERAL AND ADMINISTRATIVE
The following table summarizes the detail of selling, general and administrative expense for the threethree-month and nine-month periods ended September 30, 20172020 and 2016:2019:
| | Three-months ended September 30, | Nine-months ended September 30, | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | | | | | |
| Selling, general and administrative: | | |
| Compensation and related costs | $1,028,819 | $- | $1,951,911 | $- | $7,169,435 | $8,056,730 | $20,496,326 | $24,274,523 |
| Advertising and marketing | 752,017 | - | 1,060,195 | - | 839,752 | 3,288,545 | 4,329,830 | 14,740,227 |
| Professional fees | 192,041 | 34,044 | 724,486 | 49,017 | 533,303 | 440,575 | 2,451,837 | 1,730,792 |
| Technology development | 91,967 | - | 278,668 | - | 180,061 | 720,423 | 1,037,219 | 1,751,716 |
| General and administrative | 261,199 | 2,662 | 674,956 | 9,118 | 4,556,600 | 6,504,666 | 14,194,653 | 21,961,262 |
| | $2,326,043 | $36,706 | $4,690,216 | $58,135 | $13,279,151 | $19,010,939 | $42,509,865 | $64,458,520 |
NOTE 13 – LOSS CONTINGENCIES AND INSURANCE RECOVERIES
On March 3, 2020, a severe tornado struck the greater Nashville area causing significant damage to the Company's facilities including contents and inventory held for sale. The Company maintains insurance coverage for damage to its facilities and inventory, as well as business interruption insurance. The Company continues in the process of reviewing damages and coverages with its insurance carriers. The loss comprises three components: (i) inventory loss, currently assessed by the insurance carrier at approximately $13,000,000; (ii) building and personal property loss, primarily impacting the Company's leased facilities, currently assessed by the insurance carrier at $3,801,203; and (iii) loss of business income, for which the Company has coverage in the amount of $6,000,000. All three components of the Company's loss claim have been submitted to its insurers. The Company's inventory claim is subject to a dispute with the carrier as to the policy limits applicable to the loss. However, the insurer has to-date advanced $5,615,268 against the final settlement of the inventory claim. The insurer has agreed to pay $2,778,000 on the building and personal property loss, reflecting limits of $2,783,000 net of a $5,000 deductible and has made an interim payment on the building and personal property loss of $2,269,507 to the landlord. The loss of business income claim is ongoing and remains in the process of negotiation, however, the insurer has advanced $250,000 against the final settlement. The Company believes there will be a recovery of all three loss components, however no assurance can be given regarding the amounts, if any, that will be ultimately recovered or when any such recoveries will be made.
As a result of the damage caused by the tornado, the Company has concluded that the utility of the inventory damaged by the storm is impaired as a result of physical damage sustained. Whether the impairment is caused by physical destruction or an adverse change in the utility of the inventory, entities should assess whether an inventory impairment or write-off is required in accordance with ASC 330-10-35-1 through 35-11, which address adjustments of inventory balances to the lower of cost or net realizable value and requires that when there is evidence that the utility of goods will be less than cost, the difference is recognized as a loss in the current period. For the nine-months ended September 30, 2020, the Company has recorded an impairment loss on inventory of $11,738,413 comprised of $4,453,775 for vehicles that are a total loss and $7,284,638 of value for vehicles that were partially damaged and require repair. The impairment loss is reported in cost of revenue in the September 30, 2020 condensed consolidated statements of operations. On July 23, 2020, the insurer made an advance against the final settlement of the damage claim on inventory of $5,615,268. This recovery has been recorded as a separate component of income from continuing operations for the nine-month ended September 30, 2020.
NOTE 1014 – SUPPLEMENTAL CASH FLOW INFORMATION
The following table includes supplemental cash flow information, including noncash investing and financing activity for the nine-months ended September 30, 2020 and 2019:
| | Nine-months Ended September 30, |
| | | |
| Cash paid for interest | $3,614,922 | $3,154,806 |
| | | |
| Convertible notes payable issued in acquisition | $- | $2,293,933 |
The following table provides a reconciliation of cash and restricted cash reported within the accompanying condensed consolidated balance sheets that sum to the total of the same amounts shown in the accompanying condensed consolidated statements of cash flows as of September 30:
| | | |
| | | |
| Cash and cash equivalents | $3,412,772 | $49,660 |
| Restricted cash (1) | 5,545,892 | 6,676,622 |
| Total cash, cash equivalents, and restricted cash | $8,958,664 | $6,726,282 |
_________________________
(1) Amounts included in restricted cash represent the deposits required under the Company's lines of credit.
NOTE 15 – INCOME TAXES
CARES Act
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in response to the COVID-19 pandemic. The Company does not expect the provisions of the legislation to have a significant impact on the effective tax rate or income tax payable and deferred income tax positions of the Company. No current provision for Federal income taxes was recorded for the three-month and nine-month periods ended September 30, 20172020 and 2016.
| | 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 | $- |
NOTE 1116 – INCOME TAXES(LOSS) PER SHARE
In projectingThe Company computes basic and diluted net income (loss) per share attributable to common stockholders is calculated by dividing the Company’snet income tax expense(loss) attributable to common stockholders by the weighed-average number of shares of common stock outstanding during the period. The diluted net income (loss) per share attributable to common stockholders is computed giving effect to all potential dilutive common stock equivalents outstanding for the year ended December 31, 2017, management has concluded itperiod. For purposes of this calculation, 414,499 of RSUs, 2,436 of stock options, 16,352 of warrants to purchase shares of Class B Common Stock and 770,231 shares of Class B Common Stock issuable in connection with convertible debt are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect is not likelyantidilutive.
In connection with the Company's acquisition of Wholesale, the Company issued 1,317,329 shares of Series B Non-Voting Convertible Preferred Stock. The rights of the holder of the Series B Preferred and Class A and Class B Common Stock are identical, except with respect to recognizevoting. The Series B Preferred automatically converted to Class B Common Stock 21 days after the benefitmailing of its deferred tax asset, netthe definitive information statement prepared in accordance with Regulation 14C of deferred tax liabilities,the Exchange Act, without further action on the part of the Company. The conversion of the Series B Preferred to Class B Common was effected on March 4, 2019. Weighted average number of shares outstanding of Class A Common Stock, Class B Common Stock, and as a result a full valuation allowance will be required. As such, no income tax benefit has been recordedSeries B Preferred for the three and nine-month periods ended September 30, 2017 or 2016.2020 were 50,000, 2,184,838, and 0 and 50,000, 2,115,167, and 0, respectively.
NOTE 12 — LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. The computation of diluted net loss per share for the three-month and nine-month periods ended September 30, 2017 did not include 560,000 of restricted stock units to purchase shares of Class B Common Stock as their inclusion would be antidilutive. There were no restricted stock units outstanding for the three and nine-month periods ended September 30, 2016.
NOTE 1317 – 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.
In connection with the NextGen acquisition, the Company entered into a Consulting Agreement (the “Consulting Agreement”) with Kartik Kakarala, who formerly served as the Chief Executive Officer of NextGen and now serves as a director of the Company. Pursuant to the Consulting Agreement, Mr. Kakarala serves as a consultant to the Company. The Consulting Agreement may be cancelled by either party, effective upon delivery of a written notice to the other party. Mr. Kakarala’s compensation pursuant to the Consulting Agreement is $5,000 per month. For the three and nine-month periods ended September 30, 2017, the Company paid $15,000 and $35,000, respectively under the Consulting Agreement. These amounts are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. For additional information, see Note 3 - “Acquisitions.”
In connection with the NextGen acquisition, the Company entered into a Services Agreement (the “Services Agreement”) with Halcyon Consulting, LLC (“Halcyon”), to provide development and support services to the Company. Mr. Kakarala currently serves as the Chief Executive Officer of Halcyon. Pursuant to the Services Agreement, the Company will pay Halcyon hourly fees for specific services, set forth in the Services Agreement, and such fees may increase on an annual basis, provided that the rates may not be higher than 110% of the immediately preceding year’s rates. The Company will reimburse Halcyon for any reasonable travel and pre-approved out-of-pocket expenses in connection with its services to the Company. For the three and nine-month periods ended September 30, 2017 the Company paid $221,400 and $678,766, respectively under the Services Agreement.
As of September 30, 2017,2020, the Company had promissory notes of $370,556$371,764 and accrued interest of $12,076$9,370 due to an entity controlled by a director and to the director of the Company. The promissory notes were issued in connection with the completion of the 2016 Private Placement on March 31, 2017.2017 and exchanged in January 2020 for New Investor Notes. Interest expense on the promissory notes due to Blue Flame, for the threethree-month and nine-month periods ended September 30, 20172020 was $29,392$9,370 and $63,416,$69,603, respectively. There was no debt discount amortization during the three-month period ended September 30, 2020. For the nine-month period ended September 30, 2020, interest expense included $42,001 of debt discount amortization. Interest Expense on the promissory notes due to Blue Flame, for the three-month and nine-month periods ended September 30, 2019 was $44,944 and $128,464, respectively, which included debt discount amortization of $23,321$37,005 and $45,335, respectively for the three and nine-month periods ended September 30, 2017.$104,906, respectively. The interest was charged to interest expense in the Condensed Consolidated Statementscondensed consolidated statements of Operations and included in accrued interest under long-term liabilities in the Condensed Consolidated Balance Sheets.operations.
On September 5, 2017, the Company executed Senior Secured Promissory Notes (the “Notes”) in favor of several investors, including certain executive officers and directors of the Company, in the aggregate principal amount of $1,650,000 (“Principal Amount”), which includes an aggregate original issue discount of $150,000. As of September 30, 2017, the Company had Notes of $1,214,144 and accrued interest of $4,144 due to certain executive officers and directors of the Company. Interest expense on the Notes due to certain executive officers and directors for the three and nine-month periods ended September 30, 2017 was $11,678, which included $7,534 of original issue discount amortization. On October 23, 2017, the Company completed a public offering and used $1,661,075 of the net proceeds of the offering for the repayment of the Notes in the aggregate principal amount of $1,650,000, plus accrued interest, which resulted in the termination of the Notes. For additional information, see Note 7 - “Notes Payable” and Note 15 “Subsequent Events.”
NOTE 1418 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company determines whether an arrangement is subjecta 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. The Company uses these options in determining its right-of-use assets and lease liabilities. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. As the Company's leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at commencement date in determine the present value of the lease payments.
Operating lease expense is recognized on a straight-line basis over the lease term. Total operating lease expenses for the three and nine-months periods ended September 30, 2020 was $762,927 and $1,626,846, respectively. The current portion of the Company's operating lease liabilities as of September 30, 2020 is $1,556,705 and is included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets. The long-term portion of the Company's operating lease liabilities as of September 30, 2020 is $4,656,572 and is included in other liabilities in the accompanying condensed consolidated balance sheets.
The weighted-average remaining lease term and discount rate for the Company's operating leases are as follows:
| |
| Weighted-average remaining lease term | |
| Weighted-average discount rate | 7.0% |
Supplemental cash flow information related to operating leases for the nine-months ended September 30, 2020 was as follows:
| |
| Cash payments for operating leases | $1,191,472 |
The following table summarizes the future minimum payments for operating leases at September 30, 2020 due in each year ending December 31,
| 2020 | $467,998 |
| 2021 | 1,996,680 |
| 2022 | 1,937,047 |
| 2023 | 1,189,302 |
| 2024 | 801,711 |
| Thereafter | 562,093 |
| Total lease payments | 6,954,831 |
| Less imputed interest | (741,554) |
| Present value of lease liabilities | $6,213,277 |
Legal Matters
From time to time, the Company is involved in various claims and legal proceedings and claims whichactions that arise in the ordinary course of its business. Although occasional adverse decisions (or settlements) may occur,the results of litigation and claims cannot be predicted with certainty, as of September 30, 2020 and December 31, 2019, the Company believesdoes not believe that the final dispositionultimate resolution of such mattersany legal actions, either individually or in the aggregate, will nothave a material adverse effect on its financial position, results of operations, liquidity, and capital resources.
Future litigation may be necessary to defend the Company by determining the scope, enforceability and validity of third-party proprietary rights or to establish its own proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.
NOTE 19 – CONCENTRATIONS
The Company is dependent on third-party providers of wholesale vehicle auctions. The Company is dependent on their ability to provide services on a timely basis and at favorable pricing terms. The loss of these principal providers or a significant reduction in service availability could have a material adverse effect on the Company’s financial position, results of operations or cash flows.Company. The Company believes that its relationships with these providers are satisfactory.
NOTE 15 – SUBSEQUENT EVENTS20 - SEGMENT REPORTING
On October 23, 2017, the Company completedBusiness segments are defined as components of an underwritten public offering of 2,910,000 shares of Class B common stock at a public offering price of $5.50 per share for net proceeds to the Company of approximately $14,500,000 after deducting the underwriting discount and offering fees and expenses payableenterprise about which discrete financial information is available that is evaluated regularly by the Company (the “Offering”).chief operating decision maker in deciding how to allocate resources and in assessing operating performance. The Company's operations are organized by management into operating segments by line of business. The Company also grantedhas determined that it has three reportable segments as defined in U.S. GAAP for segment reporting: (1) powersports, (2) automotive, and (3) vehicle logistics and transportation. The Company's powersports and automotive segments consist of the underwriters a 30-day option,distribution of pre-owned vehicles. The powersports segment consists of the distribution principally of motorcycles, while the automotive segment distributes cars and trucks. Our vehicle logistics and transportation service segment provides nationwide automotive transportation services between dealerships and auctions. The accounting policies of the segments are the same and are described in Note 1 – Description of Business and Significant Accounting Policies.
The following table summarizes revenue, operating income (loss), depreciation and amortization and interest expense which expires on November 19, 2017,are the measure by which management allocates resources to purchase upits segments to an additional 436,500 shareseach of Class B common stock to cover over-allotments.our reportable segments.
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.| | | | | Vehicle Logistics and Transportation | | |
| Three-Months Ended September 30, 2020 | | | | | | |
| Total assets | $46,849,686 | $41,283,620 | $1,934,136 | $10,517,834 | $(26,870,655) | $73,714,621 |
| Revenue | $7,303,131 | $99,315,335 | $198,571 | $11,414,932 | $(974,565) | $117,257,404 |
| Operating income (loss) | $(3,856,158) | $6,246,165 | $(172,274) | $770,790 | $- | $2,988,523 |
| Depreciation and amortization | $506,193 | $28,337 | $- | $1,851 | $- | $536,381 |
| Interest expense | $(1,178,941) | $(292,164) | $(16,619) | $(366) | $- | $(1,488,090) |
| Change in derivative liability | $(13,518) | $- | $- | $- | $- | $(13,518) |
| | | | | | | |
| Three-Months Ended September 30, 2019 | | | | | | |
| Total assets | $62,696,037 | $72,298,170 | $429,542 | $4,768,969 | $(25,268,804) | $114,923,914 |
| Revenue | $27,144,202 | $187,108,303 | $9,272 | $8,191,939 | $(2,133,393) | $220,320,323 |
| Operating income (loss) | $(6,516,385) | $(1,405,542) | $(173,904) | $625,747 | $- | $(7,470,084) |
| Depreciation and amortization | $412,819 | $59,000 | $- | $1,851 | $- | $473,670 |
| Interest expense | $(1,268,835) | $(762,269) | $- | $(593) | $- | $(2,031,697) |
| Change in derivative liability | $630,000 | | | | | $630,000 |
| | | | | | | |
| Nine-Months Ended September 30, 2020 | | | | | | |
| Total assets | $46,849,686 | $41,283,620 | $1,934,136 | $10,517,834 | $(26,870,655) | $73,714,621 |
| Revenue | $38,641,607 | $281,242,442 | $672,450 | $28,656,719 | $(3,465,260) | $345,747,958 |
| Operating income (loss) | $(15,248,938) | $(935,478) | $(483,187) | $2,152,585 | $- | $(14,515,018) |
| Depreciation and amortization | $1,450,403 | $111,740 | $- | $5,554 | $- | $1,567,697 |
| Interest expense | $(3,565,293) | $(1,604,682) | $(16,619) | $(662) | $- | $(5,187,256) |
| Change in derivative liability | $(7,155) | $- | $- | $- | $- | $7,155 |
| Gain on early extinguishment of debt | $188,164 | $- | $- | $- | $- | $188,164 |
| | | | | | | |
| Nine-Months Ended September 30, 2019 | | | | | | |
| Total assets | $62,696,037 | $72,298,170 | $429,542 | $4,768,969 | $(25,268,804) | $114,923,914 |
| Revenue | $84,379,049 | $611,871,819 | $9,272 | $25,197,581 | $(7,779,735) | $713,677,986 |
| Operating income (loss) | $(23,699,987) | $(1,849,690) | $(173,904) | $1,604,835 | $- | $(24,118,746) |
| Depreciation and amortization | $1,100,780 | $176,999 | $- | $5,554 | $- | $1,283,333 |
| Interest expense | $(2,981,693) | $(2,369,255) | $- | $(741) | $- | $(5,351,689) |
| Change in derivative liability | $820,000 | $- | $- | $- | $- | $820,000 |
| Loss on early extinguishment of debt | $(1,499,250) | $- | $- | $- | $- | $(1,499,250) |
_________________________
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(1) Intercompany investment balances related to the Offering.
Also, in connection with the Offering, on October 19, 2017, the Class B Common Stock uplisted from the OTCQBacquisitions of Wholesale and began trading on The NASDAQ Capital Market under the symbol “RMBL.”
On November 2, 2017, the Company through its wholly-owned subsidiary RMBL Missouri,Wholesale Express, LLC (the “Borrower”("Wholesale Express"), entered into a floor plan line and receivables and other balances related intercompany freight services of credit (the "Credit Line") with NextGear Capital, Inc. (the “Lender”)Wholesale Express are eliminated in the amount of $2,000,000, or such lesser sum which may be advanced to or on behalf of the Borrower from time to time, pursuant to that certain Demand Promissory NoteCondensed Consolidated Balance Sheets. Revenue and Loan and Security Agreement. Any advance under the Credit Line bears interest on a per annum basis from the date of the request of such advance (or date of the financed receivable, as applicable), based upon a 360-day year, and such interest shall be compounded daily until such outstanding advances are paid in full at a rate of interest set forth in schedules published by the Lender. As of November 2, 2017, the effective rate of interest is 6.5%. Advances and interest under the Credit Line are due and payable upon demand, but, in general, in no event later than 150 days from the date of requestcosts for the advance (or the date of purchasethese intercompany freight services have been eliminated in the caseCondensed Consolidated Statements 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.Operations.
Item 2.
Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations.Operations
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 ofUnless the forward-looking statements. Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. The factors discussed elsewherecontext requires otherwise, references in this Form 10-Qreport to "RumbleOn," the "Company," "we," "us," and "our" refer to RumbleOn and its consolidated subsidiaries. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided as a supplement to, and should be read in subsequent Quarterly Reports on Form 10-Q,conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our most recent Annual ReportsReport filed on Form 10-K, as well as our condensed consolidated financial statements and Current Reports onthe accompanying notes included in Item 1 of this Form 8-K could also cause actual results to differ materially from those indicated by the Company’s forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law.10-Q.
OVERVIEWOverview
We operateare a capital light disruptivetechnology driven, motor vehicle dealer and e-commerce platform facilitatingprovider disrupting the vehicle supply chain using innovative technology that aggregates, processes and distributes inventory in a faster and more cost-efficient manner.
We operate an infrastructure-light platform that facilitates the ability of bothall participants in the supply chain, including RumbleOn, other dealers and consumers and dealers to Buy-Sell-Trade-FinanceBuy-Sell-Trade-Finance-Transport pre-owned motorcycle and other power sport and recreation vehicles (“power/recreation vehicles”) in one online location.vehicles. Our goal is to transform the way motorcycles and other power/recreationVIN-specific pre-owned vehicles are bought and sold by providing users with the most comprehensive, efficient, timely and transparent transaction experience. Ourexperiences. While our initial focuscustomer facing emphasis through most of 2018 was on motorcycles and other powersports vehicles, we continue to enhance our platform to accommodate nearly any VIN-specific vehicle including motorcycles, ATVs, boats, RVs, cars and trucks. Since our acquisition of Wholesale, Inc. ("Wholesale") in October 2018, we have significantly increased our sales of cars and light trucks ("automotive"). Of the 15,377 vehicles we sold during the nine-months ended September 30, 2020, 71.2% were automotive and 28.8% were powersports vehicles. For the nine-months ended September 30, 2019, we sold 36,925 vehicles of which 70.5% were automotive and 29.5% were powersports vehicles.
COVID-19 Update
COVID-19 is having an impact on businesses nationwide, with local governments, businesses, and consumers increasingly limiting commercial activity and capital markets experiencing instability. The worldwide spread of the COVID-19 outbreak has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the outbreak is contained. This is impacting our business and the powersport, automotive and transportation industries as a whole. We have positioned our business today to be lean and flexible in this period of lower demand and higher uncertainty with the goal of preparing the Company for a strong recovery once the outbreak is contained. To this end, we have reduced discretionary growth expenditures on new hiring, travel, facilities, and information technology investments. We significantly reduced our staff during the first quarter of 2020, we have applied and received PPP loan funds of $5,176,845, and adjusted purchasing levels to align with demand and market for 601ccconditions, while closely monitoring key metrics to determine when and larger on-road motorcycles.how quickly to adjust. We will lookbelieve our 100% online business model allows us to extendquickly respond to additional power/recreation vehicle types and productsmarket demand or changes in the businesses we operate 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 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.COVID-19 pandemic continues.
Our most important priority is the well-being of our employees and customers. We have taken several steps to provide a healthy working environment, including implementing work from home policies for employees who are able to work remotely, eliminating all non-essential travel and group meetings and implementing social distancing policies. For many customers, selling or buying a vehicle is an important component of their business or transportation needs. We believe our online model for buying and selling, which allows dealers and consumers to sell or buy a vehicle without ever coming into physical contact with another person, is driven bythe safest way to sell or buy a technology platform we acquired in February 2017, throughvehicle. Our touchless buying and selling processes allows dealers and consumers to sell or shop for a vehicle from their business or home, complete their transaction on their phone or laptop, and have the vehicle picked up or delivered without coming into physical contact with our acquisition of substantially all 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.personnel.
Our business combines a comprehensive online buyingoperational and selling experience with a vertically-integrated supply chain that allows usfinancial performance will depend on future developments related to buythe continuously evolving COVID-19 pandemic. Future developments include the duration, scope and sell vehiclesseverity of the pandemic, the actions taken to consumerscontain or mitigate its impact, the development of treatments or vaccines, the resumption of widespread economic activity, and dealer partners transparentlychanges in consumer sentiment. Due to the inherent uncertainty of the unprecedented and efficiently at a value-oriented price. Usingrapidly evolving situation, we are unable to predict the impact of the COVID-19 pandemic will have on 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:future operations.
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Sell us a vehicle.We addressOur financial statements reflect estimates and assumptions made by management that affect the lackcarrying values of liquidity available in the market for a cash saleCompany's assets and liabilities, disclosures of a vehiclecontingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. The judgments, assumptions and estimates used by dealers and consumers through 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. Our cash offer to buy ismanagement are based on historical experience, management's experience, and other factors, which are believed to be reasonable under the usecircumstances. Because of extensive used retailthe nature of the judgments and wholesale vehicle market data. Whenassumptions made by management, actual results could differ materially from these judgments and estimates, including as a consumer accepts our offer, we ship their vehiclesresult of the COVID-19 pandemic, which could have a material impact on the carrying values of the Company's assets and liabilities and the results of operations. We will continue to evaluate the nature and extent of the impact to our closest dealer partner where the vehicle is inspected, reconditionedbusiness and stored pending sale. We believe buying used vehicles directly from consumers will be the primary driverour results of our source of supply for saleoperations and financial condition as conditions evolve as a key to our ability to offer competitive pricing to buyers. By being oneresult 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.
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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.
COVID-19 pandemic.
Outlook
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PurchaseThe COVID-19 pandemic effect on commercial activity and the significant damage sustained to our wholesale automotive business from a used vehicle.tornado in early March 2020 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.
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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.
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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:
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Vehicle sourcing and acquisition.We acquirehad a significant percentage ofnegative impact on the growth in unit volume and revenue for our used vehicle inventory directly from consumerspowersports, automotive 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:transportation businesses during 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.nine-months ended September 30, 2020. Based on the large numberevolving aspects of vehicles remarketed each year, consumer acceptance of our online vehicle appraisal process, our experienceCOVID-19 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 willuncertainty surrounding its future development, it may 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 gaining 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 experience in the automotive sector with disruptive businesses such as: AutoNation, Auto America, and Vroom. We believe that there is a significant opportunity to disrupt the pre-owned marketplace in recreational vehicles as it suffers from many of the same negative consumer sentiments and dealer practices that existed in the automotive sector prior to the advent of and the significant influx of new entrants with improved business models. In addition, the power/recreation 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 have the ability to leverage the RumbleOn marketplace and dealer services offerings to drive increased revenue through the purchase or sale of vehicles via the online platform and the ability to earn fees from inspection, reconditioning and distribution programs. Dealer partners will have the ability to show the complete RumbleOn vehicle inventory on their website and will have access to preferred pricing on the acquisition of vehicles. Management believes that partners utilizing the platform will significantly enhance their existing online retail strategies. We have agreed to add dealers to our network and are in discussions with other dealers regarding joining the network. We believe that our operations, designed to be both capital 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 discussed 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 motorcycles to the same age group. These statistics support our contention that there is expected to be a growing market for used Harley-Davison transactions and a more informed buyer.
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 negative impact on unit volumes and revenue in future periods. Since the significant presence at these events, with onsite advertising and sales facilities to build brand awareness. In addition,decrease in demand experienced in early March through mid-April, 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 newseen monthly unit sales of approximately 573,000 or approximately $7 billion in new vehicle sales. The owner demographic is favorable toand revenue increase sequentially month-over-month through July 2020. However, during 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 metrics, to evaluate our business, measure our progress, and make strategic decisions. Our key operating metrics reflect what we believe will be the key drivers of our growth, including increasing brand awareness, maximizing the opportunity to source the purchase of low cost used vehicles from consumers and dealers while enhancing the selection of vehicles we make available to our customers. Our key operating metrics also demonstrate our ability 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, |
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| 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 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 who we refer to as either Select or Appraisal Dealers. We utilize these 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. We choose Select or Appraisal Dealers based on their geographic location and abilities as a dealer. As Select and Appraisal Dealers 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, divided by the number of months in that period. We view average monthly unique users as a key indicator of the strength of our brand, the effectiveness of our advertising and merchandising campaigns and consumer awareness.
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
Revenue
Revenue is derived from two primary sources: (1) our 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.
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 to the channel where the opportunity based on customer demand, market conditions or inventory availability is the greatest at any given time. The number of used units sold to any given channel may vary from period to period based on customer demand, market conditions and available inventory.
Used vehicle sales represent the aggregate sales of used vehicles 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. We expect used vehicle sales to increase as we begin to utilize a combination of brand building as well as 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 affecting used vehicle sales include the number of retail units 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.
The number of used vehicles we sell depends 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,three-months ended September 30, 2020, our average days to sale decreased 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 increasingincreased as dealers saw high industry-wide market prices. The effect of these higher market prices resulted in lower levels of inventory available to purchase for resale causing a decline in unit sales beginning in September as compared to July and August. We believe this supply and demand imbalance will continue to impact the historically seasonally adjusted fourth quarter volume, particularly given the worldwide rise in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or decreasing.exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
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.Nashville Tornado
Other SalesOn March 3, 2020, a severe tornado struck the greater Nashville area causing significant damage to the Company's facilities in Nashville. The Company maintains insurance coverage for damage to its facilities and Revenueinventory, as well as business interruption insurance. The Company continues the process of reviewing damages and coverages with its insurance carriers. The loss comprises three components: (1) inventory loss, currently assessed by the insurance carrier at approximately $13,000,000; (2) building and personal property loss, currently assessed by the insurance carrier at $3,801,203; and (3) loss of business income, for which the Company has coverage in the amount of $6,000,000.
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 chargeAll three components of the Company's loss claim have been submitted to its insurers. The Company's inventory claim is subject to a non-refundable fee for sellersdispute with the carrier as to list their vehiclethe policy limits applicable to the loss, however, the insurer has advanced $5,615,268 against the final settlement. The insurer has agreed to pay $2,778,000 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 tradebuilding 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 pricepersonal property loss, reflecting limits 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, $2,783,000 net of a reserve for estimated contract cancellations.$5,000 deductible and has made an interim payment on the building and personal property loss of $2,269,507 to the landlord. The reserve for cancellationsloss of business income claim is ongoing and remains in the process of negotiation, however, the insurer has advanced $250,000 against the final settlement. The Company believes there will be estimated based upon historical industry experience and recent trends anda recovery of all three loss components, however no assurance can be given regarding the amounts, if any, that 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 feesAcquisition of Autosport
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 portionsOn February 3, 2019 (the "Autosport Acquisition Date"), the Company completed the acquisition (the "Autosport Acquisition") of all of the RumbleOn software solution, which includes: (i)equity interests of Autosport USA, Inc. ("Autosport"), an independent pre-owned vehicle distributor, pursuant to a vehicle appraisal process; (ii) inventory management system; (iii) customer relationshipStock Purchase Agreement, dated February 1, 2019 (the "Stock Purchase Agreement"), by and lead management program;among RMBL Express, LLC (the "Buyer"), a wholly owned subsidiary of Company, Scott Bennie 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 possessionAutosport. The results 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.
Costoperations 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 from the difference between the vehicle selling price and our cost of sales associated with acquiring the vehicle and preparing it for sale. The aggregate dollar gross margins achieved from the consumer, dealer and auction sales channels are different. Units sold to consumers through our website generally have the highest dollar gross margin since the unit is sold directly to the consumer. Vehicles sold to dealers are sold at a price below the retail price offered to consumers, thus the dealer and RumbleOn are sharing the gross margin. The dollar gross margin on units sold at auction are usually the lowest due to auction fees. Factors affecting gross margin from period to period include the mix of vehicles we acquire and hold in 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 imbalances in our sales channels, which could temporarily lead to average selling prices and gross margins increasing or decreasing in any given channel.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expenses include costs and expenses for compensation and benefits, advertising to consumers 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 and the addition 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. SG&A expenses exclude the costs of inspecting, reconditioning and transportation of vehicles, whichAutosport are included in cost of sales.
Depreciation and Amortization
Depreciation and amortization is comprised of the: (i) amortization of capitalized 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 operationsCompany's condensed consolidated financial statements for the three and nine-month periodsnine-months ended September 30, 20172020 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, respectively as compared to the same periods in 2016. The increase in revenue was 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, increased brand awareness 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 for the three and nine-month periods ended September 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.2019. 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, respectively 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
Interest expense consists of interest on the: (i) BHLP Note; (ii) NextGen Note; (iii) Private Placement Notes; and (iv) Senior Secured Promissory Notes. Interest expense for the three and nine-month periods ended September 30, 2017 increased by $87,323 and $366,377, respectively, as compared to the same periods in 2016. The increase resulted from: (i) interest on a higher level of debt outstanding; (ii) 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 balance of the beneficial conversion feature, net of deferred taxes and is included in interest expense for the nine-month period ended September 30, 2017. Interest expense on the Private Placement Notes for the three and nine-month periods ended September 30, 2017 was $94,855 and $183,943, respectively which included $41,979 and $81,603 of debt discount amortization for the three and nine-month periods ended September 30, 2017, respectively. Interest expense on the NextGen Notes for the three and nine-month periods ended September 30, 2017 was $21,370 and $54,849 respectively. Interest 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”4 – "Acquisitions" in the accompanying Notes to the Condensed Consolidated Financial Statements.
Reportable Segments
LiquidityReportable 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 Capital Resourcesin assessing operating performance. Our operations are organized by management into operating segments by line of business. We have determined that we have three reportable segments as defined in generally accepted accounting principles for segment reporting: (1) powersports, (2) automotive and (3) vehicle logistics and transportation. Our powersports and automotive segments consist of the distribution of pre-owned vehicles. The powersports segment consists of the distribution of principally motorcycles, while the automotive segment distributes cars and trucks. Our vehicle logistics and transportation service segment provides nationwide automotive transportation services primarily between dealerships and auctions.
The following table sets forth a summary of our cash flows for the nine-month period ended September 30, 2017 and 2016:
| | 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
Net cash used in operating activities increased $4,327,012 to $4,389,128 for the nine-month period ended September 30, 2017, as compared to the same period in 2016. The increase in net cash used is primarily due to a $5,065,632 increase in our net loss offset by an increase 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 loss for the nine-month period ended September 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, 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.| | For the Three-Months Ended September 30, 2020 | For the Three-Months Ended September 30, 2019 |
| | | | | | | | | |
| Segment | | | | | | | | |
| Powersports | $7,303,131 | 6.2% | $1,696,765 | 23.2% | $27,144,202 | 12.3% | $2,863,603 | 10.5% |
| Automotive | 99,315,335 | 84.7% | 12,842,181 | 12.9% | 187,108,303 | 84.9% | 7,435,689 | 4.0% |
| Transportation | 10,440,367 | 8.9% | 2,066,538 | 19.8% | 6,058,546 | 2.8% | 1,705,961 | 28.2% |
| Other | 198,571 | 0.2% | 198,571 | 100.0% | 9,272 | 0.0% | 9,272 | 100.0% |
| | $117,257,404 | 100.0% | $16,804,055 | 14.3% | $220,320,323 | 100.0% | $12,014,525 | 5.5% |
| | For the Nine-Months Ended September 30, 2020 | For the Nine-Months Ended September 30, 2019 |
| | | | | | | | | |
| Segment | | | | | | | | |
| Powersports | $38,641,607 | 11.2% | $4,949,793 | 12.8% | $84,379,049 | 11.8% | $10,011,435 | 11.9% |
| Automotive | 281,242,442 | 81.3% | 24,196,608 | 8.6% | 611,871,819 | 85.7% | 26,707,835 | 4.4% |
| Transportation | 25,191,459 | 7.3% | 5,866,838 | 23.3% | ��17,417,846 | 2.4% | 4,894,565 | 28.1% |
| Other | 672,450 | 0.2% | 672,450 | 100.0% | 9,272 | 0.0% | 9,272 | 100.0% |
| Subtotal | 345,747,958 | 100.0% | 35,685,689 | 10.3% | 713,677,986 | 100.0% | 41,623,107 | 5.8% |
| Impairment loss (1) | - | - | (11,738,413) | (3.4)% | - | - | - | - |
| | $345,747,958 | 100.0% | $23,947,276 | 6.9% | $713,677,986 | 100.0% | $41,623,107 | 5.8% |
On July 13, 2016,_________________________
(1) Impairment Loss resulting from the Company entered intoNashville Tornado.
Seasonality
Absent the BHLP Note with Berrard Holdings, an entity ownedimpact of COVID-19, the volume of vehicles sold or transported will generally fluctuate from quarter-to-quarter. This seasonality is caused by several factors including weather, the timing of pre-owned vehicles available for sale from selling consumers, the availability and controlled by a current officerquality of vehicles, holidays, 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 optionseasonality 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 definedretail market for pre-owned vehicles. As a result, revenue and operating expenses related to volume will fluctuate accordingly on a quarterly basis. The fourth calendar quarter typically experiences lower used vehicle auction accessibility as $500,000 or greater. Effective August 31, 2016, the principal amount of the BHLP Note was amended to include anwell as 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 $197,358costs associated 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 $2,920holidays 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.
winter weather.
Investment in Growth
As a result 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 asCOVID-19 pandemic we have begunreduced discretionary growth expenditures, however, as the impact of COVID-19 abates over time, and unit sales return to aggressively investor exceed levels experienced in the growthfirst quarter of our business and2020, we expect thiswill take a measured approach to resuming investment to continue. We plan to invest heavily in inventory, marketing, technology and infrastructure to support the growth of the business. These anticipated investments are expected tomay 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, including the impact of COVID-19, expenses and difficulties frequently encountered by companies that are early 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.
Liquidity
We have incurred losses and negative cash flow from operations since inception and expect to incur additional losses and negative cash flow in the future. As we continue to expand our business, build our brand name and awareness, and continue technology and software development efforts, we may need access to additional capital, including through debt and equity financing. Historically, we have raised additional capital to fund our expansion through equity issuances or debt instruments; refer to Note 8 — Notes Payable and Lines of Credit, Note 9 — Convertible Notes, and Note 11 — Stockholder Equity. Also, we have historically funded vehicle inventory purchases through our Line of Credit-Floor Plans. Due to the impact of COVID-19 on the economy and our business, we have a strong focus on preserving liquidity. Our primary liquidity sources are available cash and cash equivalents, amounts available under the NextGear Credit Line (as defined below), proceeds from the Paycheck Protection Program loan, monetization of our retail loan portfolio, insurance recoveries and through rationalizing costs and expenses, including a workforce reduction.
The worldwide spread of the COVID-19 outbreak has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the outbreak is contained. This is impacting the Company's business and the powersport, automotive and transportation industries as a whole. The Company has positioned its business today to be lean and flexible in this period of lower demand and higher uncertainty with the goal of preparing the Company for a strong recovery once the crisis is contained. The Company believes its online business model allows it to quickly respond to market demand or changes in the businesses it operates as the COVID-19 pandemic continues.
The Company's condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which assumes the continuity of operations, the realization of assets and the satisfaction of liabilities as they come due in the normal course of business. Although the Company believes that it will be able to generate sufficient liquidity from the measures described above, its current circumstances including uncertainties due to COVID-19 pandemic raise substantial doubt about the Company's ability to operate as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Key Operation Metrics - Powersports and Automotive Segments
We regularly review a number of metrics, to evaluate our vehicle distribution business, measure our progress, and make strategic decisions. Our key operating metrics reflect what we believe will be the key drivers of our business, including increasing brand awareness, maximizing the opportunity to source the purchase of low cost pre-owned vehicles from consumers and dealers while enhancing the selection of vehicles we make available to our customers. Our key operating metrics also demonstrate our ability to translate these drivers into sales and to monetize these sales through a variety of product offerings.
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| Powersports: | | | | |
| Vehicles sold | 747 | 3,623 | 4,423 | 10,903 |
| Average days to sale | 32 | 34 | 46 | 33 |
| Total vehicle revenue | $7,303,131 | $27,144,202 | $38,641,607 | $84,379,049 |
| Gross Profit | $1,696,765 | $2,903,332 | $5,293,613 | $10,237,356 |
| Gross Profit per vehicle | $2,271 | $801 | $1,197 | $939 |
| Gross Margin | 23.2% | 10.7% | 13.7% | 12.1% |
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
Automotive(1): | | | | |
| Vehicles sold | 3,516 | 7,271 | 10,954 | 26,022 |
| Average days to sale | 55 | 24 | 48 | 23 |
| Total vehicle revenue | $99,315,335 | $187,108,303 | $281,242,442 | $611,871,819 |
| Gross Profit | $12,842,181 | $7,563,097 | $24,992,973 | $26,858,532 |
| Gross Profit per vehicle | $3,652 | $1,040 | $2,282 | $1,032 |
| Gross Margin | 12.9% | 4.0% | 8.9% | 4.4% |
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
Powersports and Automotive(1): | | | | |
| Vehicles sold | 4,236 | 10,894 | 15,377 | 36,925 |
| Average days to sale | 51 | 26 | 48 | 25 |
| Total vehicle revenue | $106,618,466 | $214,252,505 | $319,884,049 | $696,250,868 |
| Gross Profit | $14,538,946 | $10,466,429 | $30,286,586 | $37,095,888 |
| Gross Profit per vehicle | $3,410 | $961 | $1,970 | $1,005 |
| Gross Margin | 13.6% | 4.9% | 9.5% | 5.3% |
_______________________
(1) Excludes the Impairment Loss resulting from the Nashville Tornado and other insignificant indirect costs.
Vehicles Sold
We define vehicles sold as the number of pre-owned vehicles sold to consumers and dealers in each period, net of returns under our various return policies. We view vehicles sold as a key measure for several reasons. First, vehicles sold is the primary driver of our revenue and, indirectly, gross profit, since vehicle sales enable multiple complementary revenue streams, including financing, vehicle service contracts and trade-ins. Second, vehicles sold increases the base of available customers for referrals and repeat sales. Third, vehicles sold is an indicator of our ability to successfully scale our logistics, fulfillment, and customer service operations. The uncertainty and continuously evolving aspects of COVID-19 may continue to impact the number of units sold in future periods.
Critical Accounting PoliciesAverage 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 pre-owned vehicles sold in a period. However, this metric does not include any pre-owned vehicles that remain unsold at period end. We view average days to sale as a useful metric due to its impact on pre-owned vehicle average selling price. The accompanyinguncertainty and continuously evolving aspects of COVID-19 may continue to impact the average days to sale in future periods.
Revenue
Revenue is primarily comprised of pre-owned vehicle sales. We sell pre-owned vehicles through consumer and dealer 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 to the channel where the opportunity is the greatest at any given time based on customer demand, market conditions or inventory availability. The number of pre-owned vehicles sold to any given channel may vary from period to period based on customer demand, market conditions and available inventory. Subject to the impact of COVID-19 on our results, as discussed elsewhere in this MD&A, we expect pre-owned vehicle sales to increase as we begin to utilize a combination of brand building as well as direct response channels to efficiently source and scale our addressable markets while expanding our suite of product offerings to consumers and dealers who may wish to trade-in or to sell us their vehicle independent of a retail or wholesale sale. Factors primarily affecting pre-owned vehicle sales include the number of retail pre-owned vehicles sold and the average selling price of these vehicles. The uncertainty and continuously evolving aspects of COVID-19 may continue to impact our revenue in future periods.
Gross Profit
Gross profit is generated on pre-owned vehicle sales from the difference between the vehicle selling price and our cost of revenue associated with acquiring the vehicle and preparing it for sale. The aggregate dollar gross profit achieved from the consumer and dealer sales channels are different. Pre-owned vehicles sold to consumers through our website generally have the highest dollar gross profit since the vehicle is sold directly to the consumer. Pre-owned vehicles sold to dealers through our website are sold at a price below the retail price offered to consumers, thus the dealer and RumbleOn are sharing the gross profit. Pre-owned vehicles sold to dealers through auctions are sold at market. Gross margin percent is gross profit as a percentage of pre-owned vehicle sales. Factors affecting gross profit and margin from period to period include the mix of pre-owned vehicles we acquire and hold in 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 imbalances in our sales channels, which could temporarily lead to average selling prices and gross profits increasing or decreasing in any given channel. The uncertainty and continuously evolving aspects of COVID-19 may continue to impact our gross profit in future periods.
Key Operations Metrics – Powersports
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | |
| Key Operation Metrics: | | | | |
| Vehicles sold | 747 | 3,623 | 4,423 | 10,903 |
| | | | | |
| Total Powersports Revenue | $7,303,131 | $27,144,202 | $38,641,607 | $84,379,049 |
| Gross Profit | $1,696,765 | $2,903,332 | $5,293,613 | $10,237,356 |
| Gross Profit per vehicle | $2,271 | $801 | $1,197 | $939 |
| Gross Margin | 23.2% | 10.7% | 13.7% | 12.1% |
| Average selling price | $9,777 | $7,492 | $8,737 | $7,739 |
| | | | | |
Consumer: | | | | |
| Vehicles sold | 30 | 209 | 455 | 790 |
| | | | | |
| Total Consumer Revenue | $310,941 | $2,172,152 | $4,426,588 | $7,097,274 |
| Gross Profit | $76,306 | $628,809 | $936,125 | $1,860,730 |
| Gross Profit per vehicle | $2,544 | $3,009 | $2,057 | $2,355 |
| Gross Margin | 24.5% | 28.9% | 21.1% | 26.2% |
| Average selling price | $10,365 | $10,393 | $9,729 | $8,984 |
| | | | | |
| Dealer: | | | | |
| Vehicles sold | 717 | 3,414 | 3,968 | 10,113 |
| | | | | |
| Total Dealer Revenue | $6,992,190 | $24,972,050 | $34,215,019 | $77,281,775 |
| Gross Profit | $1,620,459 | $2,274,523 | $4,357,488 | $8,376,626 |
| Gross Profit per vehicle | $2,260 | $666 | $1,098 | $828 |
| Gross Margin | 23.2% | 9.1% | 12.7% | 10.8% |
| Average selling price | $9,752 | $7,315 | $8,623 | $7,642 |
Key Operations Metrics – Automotive(1)
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | |
| Key Operation Metrics: | | | | |
| Vehicles sold | 3,516 | 7,271 | 10,954 | 26,022 |
| | | | | |
| Total Automotive Revenue | $99,315,335 | $187,108,303 | $281,242,442 | $611,871,819 |
| Gross Profit | $12,842,181 | $7,563,096 | $24,992,973 | $26,858,532 |
| Gross Profit per vehicle | $3,652 | $1,040 | $2,282 | $1,032 |
| Gross Margin | 12.9% | 4.0% | 8.9% | 4.4% |
| Average selling price | $28,247 | $25,734 | $25,675 | $23,514 |
| | | | | |
Consumer: | | | | |
| Vehicles sold | 218 | 603 | 1,161 | 2,115 |
| | | | | |
| Total Consumer Revenue | $7,102,578 | $17,039,127 | $33,164,969 | $56,591,480 |
| Gross Profit | $512,037 | $2,103,975 | $3,761,009 | $6,680,456 |
| Gross Profit per vehicle | $2,349 | $3,489 | $3,239 | $3,159 |
| Gross Margin | 7.2% | 12.3% | 11.3% | 11.8% |
| Average selling price | $32,581 | $28,257 | $28,566 | $26,757 |
| | | | | |
| Dealer: | | | | |
| Vehicles sold | 3,298 | 6,668 | 9,793 | 23,907 |
| | | | | |
| Total Dealer Revenue | $92,212,757 | $170,069,176 | $248,077,474 | $555,280,339 |
| Gross Profit | $12,330,144 | $5,459,121 | $21,231,964 | $20,178,076 |
| Gross Profit per vehicle | $3,739 | $819 | $2,168 | $844 |
| Gross Margin | 13.4% | 3.2% | 8.6% | 3.6% |
| Average selling price | $27,960 | $25,505 | $25,332 | $23,227 |
______________________
(1) Excludes the impairment loss resulting from the Nashville Tornado.
(2) Inclusive only from the Autosport Acquisition Date.
Key Operation Metrics - Vehicle Logistics and Transportation Services Segment
We regularly review a number of metrics, to evaluate our vehicle logistics and transportation business, measure our progress, and make strategic decisions. Our key operating metrics reflect what we believe will be the key drivers of our business, including increasing brand awareness, and maximizing the opportunity to drive increased transportation and logistics unit volume. Our key operating metrics also demonstrate our ability to translate these drivers into revenue and profitability. The revenue information below is before the elimination of intercompany freight services from Wholesale Express and should be read in conjunction with our unaudited Condensed Consolidated Financial Statements are preparedand Notes included in conformityPart I, Item 1 of this Quarterly Report on Form 10-Q.
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | |
| Revenue | $11,414,932 | $8,191,939 | $28,656,719 | $25,197,581 |
| | | | | |
| Vehicles Delivered | 21,238 | 20,008 | 61,314 | 62,015 |
| | | | | |
| Gross Profit | $2,066,538 | $1,705,961 | $5,866,838 | $4,894,565 |
| | | | | |
| Gross Profit Per Vehicle Delivered | $97 | $85 | $96 | $79 |
| | | | | |
Revenue
Revenue is derived from freight brokerage agreements with accounting principles generally accepteddealers, distributors, or private party individuals to transport vehicles from a point of origin to a designated destination. The transaction price is based on the consideration specified in the United States. As such, wecustomer's contract. The freight brokerage agreements are requiredfulfilled by independent third-party transporters who are obligated to make certain estimates, judgmentsmeet our performance obligations and assumptions that we believestandards. Generally, customers are reasonable basedbilled either upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities asshipment of the datevehicle or on a monthly basis, and remit payment according to approved payment terms. Revenue is recognized as risks and rewards of transportation of the financial statements andvehicle is transferred to the reported amountsowner during delivery. Wholesale Express is considered the principal in the delivery transactions since it is primarily responsible for fulfilling the service. As a result, revenue is recorded gross. In the normal course of operations, Wholesale Express also provides transportation services to Wholesale.
Vehicles Delivered
We define vehicles delivered as the number of vehicles delivered from a point of origin to a designated destination under freight brokerage agreements with dealers, distributors, or private party individuals. Vehicles delivered is the primary driver of revenue and expenses duringin turn profitability in the reporting period. We routinely evaluatevehicle logistics and transportation services segment.
Gross Profit
Gross profit is generated on the difference between the price received from a customer under a freight brokerage agreement for the transport of a vehicle from a point of origin to a designated destination minus our estimates based on historical experience and on various other assumptions that management believes are reasonablecost to contract an independent third-party transporter to fulfill our obligation under the circumstances. Actualfreight brokerage agreement with the customer. We define gross profit per vehicle delivered as the aggregate gross profit in a given period divided by the number of pre-owned vehicles delivered in that period. Gross margin percent is gross profit as a percentage of pre-owned vehicle delivered.
RESULTS OF OPERATIONS
The following tables provide our results may differof operations for the three-month and nine-month periods ended September 30, 2020 and 2019 for powersports, automotive and vehicle logistics and transportation services segments, including key financial information relating to these segments. Our powersports and automotive segments consists of the distribution of powersports and automotive vehicles and our vehicle logistics and transportation services segment provides nationwide automotive transportation services primarily between dealerships and auctions. Each of these segments are further described below. 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. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, no comparable information is discussed with respect to Autosport for periods before the Autosport Acquisition Date.
| | For the Three-Months Ended September 30, | For the Nine-Months Ended September 30, |
| | | | | |
| Revenue: | | | | |
| Pre-owned Vehicle Sales: | | | | |
| Powersports | $7,303,131 | $27,144,202 | $38,641,607 | $84,379,049 |
Automotive(1) | 99,315,335 | 187,108,303 | 281,242,442 | 611,871,819 |
| Total revenue from vehicle sales | 106,618,466 | 214,252,505 | 319,884,049 | 696,250,868 |
| Transportation and vehicle logistics | 10,440,367 | 6,058,546 | 25,191,459 | 17,417,846 |
| Other | 198,571 | 9,272 | 672,450 | 9,272 |
| Total Revenue | 117,257,404 | 220,320,323 | 345,747,958 | 713,677,986 |
| | | | | |
| Cost of Revenue: | | | | |
| Powersports | 5,606,366 | 24,280,599 | 33,691,814 | 74,367,614 |
Automotive (1) | 86,473,154 | 179,672,614 | 257,045,834 | 585,163,984 |
Transportation and vehicle logistics | 8,373,829 | 4,352,585 | 19,324,621 | 12,523,281 |
| Total cost of revenue before impairment loss | 100,453,349 | 208,305,798 | 310,062,269 | 672,054,879 |
| Impairment Loss on automotive inventory | - | - | 11,738,413 | - |
| Total Cost of Revenue | 100,453,349 | 208,305,798 | 321,800,682 | 672,054,879 |
| | | | | |
| Gross Profit | 16,804,055 | 12,014,525 | 23,947,276 | 41,623,107 |
| Selling, General and Administrative | 13,279,151 | 19,010,939 | 42,509,865 | 64,458,520 |
| Insurance recovery | - | - | (5,615,268) | - |
| Depreciation and Amortization | 536,381 | 473,670 | 1,567,697 | 1,283,333 |
| Operating income (loss) | 2,988,523 | (7,470,084) | (14,515,018) | (24,118,746) |
| Interest expense | (1,488,090) | (2,031,697) | (5,187,256) | (5,351,689) |
| Change in derivative liability | (13,518) | 630,000 | 7,155 | 820,000 |
| Gain (loss) on early extinguishment of debt | - | - | 188,164 | (1,499,250) |
| Net income (loss) before provision for income taxes | 1,486,915 | (8,871,781) | (19,506,955) | (30,149,685) |
| Benefit for income taxes | - | - | - | - |
| Net income (loss) | $1,486,915 | $(8,871,781) | $(19,506,955) | $(30,149,685) |
_______________________
(1) Inclusive only from these estimates under different assumptionsthe Autosport Acquisition Date.
The following tables provide our results of operations for the three-month and nine-month periods ended September 30, 2020 and 2019, including key financial information relating to our business and operations. 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. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, no comparable information is discussed with respect to Autosport for periods before the Autosport Acquisition Date.
| | For the Three-Months ended September 30, 2020 | |
| | | | Vehicle Logistics and Transportation Services | | | | |
| Revenue: | | | | | | | |
| Pre-owned vehicle sales: | | | | | | | |
| Powersports | $7,303,131 | $- | $- | $- | $- | $7,303,131 | $27,144,202 |
| Automotive | - | 99,315,335 | - | - | - | 99,315,335 | 187,108,303 |
| Transportation and vehicle logistics | - | - | 11,414,932 | - | (974,565) | 10,440,367 | 6,058,546 |
| Other | - | - | - | 198,571 | - | 198,571 | 9,272 |
| Total revenue | 7,303,131 | 99,315,335 | 11,414,932 | 198,571 | (974,565) | 117,257,404 | 220,320,323 |
| | | | | | | | |
| Cost of revenue: | | | | | | | |
| Powersports | 5,606,366 | - | - | - | - | 5,606,366 | 24,280,599 |
| Automotive | - | 86,473,154 | - | - | - | 86,473,154 | 179,672,614 |
| Transportation | - | - | 9,348,394 | - | (974,565) | 8,373,829 | 4,352,585 |
| Total cost of revenue | 5,606,366 | 86,473,154 | 9,348,394 | - | (974,565) | 100,453,849 | 208,305,798 |
| | | | | | | | |
| Gross profit | $1,696,765 | $12,842,181 | $2,066,538 | $198,571 | $- | $16,804,055 | $12,014,525 |
_______________________
(1) Intercompany freight services from Wholesale Express are eliminated in the condensed consolidated financial statements.
| | For the Nine-Months ended September 30, 2020 | |
| | | | Vehicle Logistics and Transportation Services | | | | |
| Revenue: | | | | | | | |
| Pre-owned vehicle sales: | | | | | | | |
| Powersports | $38,641,607 | $- | $- | $- | $- | $38,641,607 | $84,379,049 |
| Automotive | | 281,242,442 | - | - | - | 281,242,442 | 611,871,819 |
| Transportation and vehicle logistics | - | - | 28,656,719 | - | (3,465,260) | 25,191,459 | 17,417,846 |
| Other | - | - | - | 672,450 | - | 672,450 | 9,272 |
| Total revenue | 38,641,607 | 281,242,442 | 28,656,719 | 672,450 | (3,465,260) | 345,747,958 | 713,677,986 |
| | | | | | | | |
| Cost of revenue: | | | | | | | |
| Powersports | 33,691,814 | - | - | - | - | 33,691,814 | 74,367,614 |
| Automotive | - | 257,045,834 | - | - | - | 257,045,834 | 585,163,984 |
| Transportation | - | - | 22,789,881 | - | (3,465,260) | 19,324,621 | 12,523,281 |
| Cost of revenue before impairment loss | 33,691,814 | 257,045,834 | 22,789,881 | - | (3,465,260) | 310,062,269 | 672,054,879 |
| Impairment loss | - | 11,738,413 | - | - | - | 11,738,413 | - |
| Total cost of revenue | 33,691,814 | 268,784,247 | 22,789,881 | - | (3,465,260) | 321,800,682 | 672,054,879 |
| | | | | | | | |
| Gross profit | $4,949,793 | $12,458,195 | $5,866,838 | $672,450 | $- | $23,947,276 | $41,623,107 |
_______________________
(1) Intercompany freight services from Wholesale Express are eliminated in the condensed consolidated financial statements.
Powersports
The following table provides the results of operations for the three-month and nine-month periods ended September 30, 2020 and 2019 for our powersports business segment, including key financial information relating to the powersports business. 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, |
| | | | | |
| Powersports | | | | |
| | | | | |
| Vehicle revenue: | | | | |
| Consumer | $310,941 | $2,172,152 | $4,426,588 | $7,097,274 |
| Dealer | 6,992,190 | 24,972,050 | 34,215,019 | 77,281,775 |
| Total vehicle revenue | $7,303,131 | $27,144,202 | $38,641,607 | $84,379,049 |
| | | | | |
| Vehicle gross profit: | | | | |
| Consumer | $76,306 | $628,809 | $936,125 | $1,860,730 |
| Dealer | 1,620,459 | 2,274,523 | 4,357,488 | 8,376,626 |
| Other | - | (39,729) | (343,820) | (225,921) |
| Total vehicle gross profit | $1,696,765 | $2,863,603 | $4,949,793 | $10,011,435 |
| | | | | |
| Vehicles sold: | | | | |
| Consumer | 30 | 209 | 455 | 790 |
| Dealer | 717 | 3,414 | 3,968 | 10,113 |
| Total vehicles sold | 747 | 3,623 | 4,423 | 10,903 |
| | | | | |
| Gross profit per vehicle: | | | | |
| Consumer | $2,544 | $3,009 | $2,057 | $2,355 |
| Dealer | $2,260 | $666 | $1,098 | $828 |
| Total | $2,271 | $790 | $1,119 | $918 |
| | | | | |
| Gross margin per vehicle: | | | | |
| Consumer | 24.5% | 28.9% | 21.1% | 26.2% |
| Dealer | 23.2% | 9.1% | 12.7% | 10.8% |
| Total | 23.2% | 10.5% | 12.8% | 11.9% |
| | | | | |
| Average vehicle selling price: | | | | |
| Consumer | $10,365 | $10.393 | $9,729 | $8,984 |
| Dealer | $9,752 | $7,315 | $8,623 | $7,642 |
| Total | $9,777 | $7,492 | $8,737 | $7,739 |
Powersports Vehicle Revenue
Three-Months Ended September 30, 2020 Versus 2019.
Total powersports vehicle revenue decreased by $19,841,071 to $7,303,131 for the three-months ended September 30, 2020 compared to $27,144,202 for the same period of 2019. The decline in powersports revenue was primarily due to the decrease in the number of pre-owned vehicles sold to 747 for the three-months ended September 30, 2020 compared to 3,623 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $9,777 for the three-months ended September 30, 2020 from $7,492 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the three-month period ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume and margin growth as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or conditions. Duringexceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total powersports vehicle revenue from the sale to consumers decreased by $1,861,211 to $310,941 for the three-months ended September 30, 2020 compared to $2,172,152 for the same period of 2019. The decline in powersports revenue was primarily due to the decrease in the number of pre-owned vehicles sold to 30 for the three-months ended September 30, 2020 compared to 209 for the same period of 2019. The decrease in vehicles sold for the three-month period ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume and margin growth as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total powersports vehicle revenue from the sale to dealers decreased by $17,979,860 to $6,992,190 for the three-months ended September 30, 2020 compared to $24,972,050 for the same period of 2019. The decline in powersports revenue was primarily due to the decrease in the number of pre-owned vehicles sold to 717 for the three-months ended September 30, 2020 compared to 3,414 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $9,752 for the three-months ended September 30, 2020 from $7,315 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the three-month period ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume and margin growth as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Nine-months ended September 30, 2020 Versus 2019.
Total powersports vehicle revenue decreased by $45,737,442 to $38,641,607 for the nine-months ended September 30, 2020 compared to $84,379,049 for the same period of 2019. The decline in powersports revenue was primarily due to the decrease in the number of pre-owned vehicles sold to 4,423 for the nine-months ended September 30, 2020 compared to 10,903 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $8,737 for the nine-months ended September 30, 2020 from $7,739 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the nine-month period ended September 30, 2017,2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume and margin growth as we did took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total powersports vehicle revenue from the sale to consumers decreased by $2,670,686 to $4,426,588 for the nine-months ended September 30, 2020 compared to $7,097,274 for the same period of 2019. The decline in powersports revenue was primarily due to the decrease in the number of pre-owned vehicles sold to 455 for the nine-months ended September 30, 2020 compared to 790 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $9,729 for the nine-months ended September 30, 2020 from $8,984 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the nine-month period ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume and margin growth as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total powersports vehicle revenue from the sale to dealers decreased by $43,066,756 to $34,215,019 for the nine-months ended September 30, 2020 compared to $77,281,775 for the same period of 2019. The decline in powersports revenue was primarily due to the decrease in the number of pre-owned vehicles sold to 3,968 for the nine-months ended September 30, 2020 compared to 10,113 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $8,623 for the nine-months ended September 30, 2020 from $7,642 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the nine-month period ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; and (ii) our continued disciplined approach to sales volume and margin growth as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Powersports Cost of Revenue
Three-Months Ended September 30, 2020 Versus 2019.
Powersport cost of vehicle revenue decreased by $18,674,233to $5,606,366for the three-month period ended September 30, 2020 as compared to $24,280,599 for the same period in 2019. For the three-month period ended September 30, 2020, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of $5,341,835 from the sale of747pre-owned vehicles at an average acquisition cost of $7,151; and (ii) aggregate reconditioning and transportation costs of $264,531. For the three-month period ended September 30, 2019, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of $23,233,169 from the sale of 3,623 pre-owned vehicles at an average acquisition cost of $6,413; (ii) aggregate reconditioning and transportation cost of $1,007,701; and (iii) other cost of sales of $39,729. The decrease in cost of revenue for the three-month period ended September 30, 2020 as compared to the same period in 2019 was a result of the purchase and sale of fewer powersport units primarily due to: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average acquisition cost per unit due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures.
Powersport cost of vehicle revenue from sale to consumers decreased by $1,308,708 to $234,635 for the three-month period ended September 30, 2020 as compared to $1,543,343 for the same period in 2019. For the three-month period ended September 30, 2020, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers of $203,485 from the sale of 30 pre-owned vehicles at an average acquisition cost of $6,783; and (ii) aggregate reconditioning and transportation costs of $31,150. For the three-month period ended September 30, 2019, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers of $1,477,944 from the sale of 209 pre-owned vehicles at an average acquisition cost of $7,072; and (ii) aggregate reconditioning and transportation costs of $75,713. The decrease in cost of revenue for the three-month period ended September 30, 2020 as compared to the same period in 2019 was a result of the purchase and sale of fewer powersport units due to: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures.
Powersport cost of vehicle revenue from sale to dealers decreased by $17,325,795 to $5,371,732 for the three-month period ended September 30, 2020 as compared to $22,697,527 for the same period in 2019. For the three-month period ended September 30, 2020, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to dealers of $5,138,350 from the sale of 717 pre-owned vehicles at an average acquisition cost of $7,166; and (ii) aggregate reconditioning and transportation costs of $233,382. For the three-month period ended September 30, 2019, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to dealers of $21,755,225 from the sale of 3,414 pre-owned vehicles at an average acquisition cost of $6,372; and (ii) aggregate reconditioning and transportation costs of $931,988. The decrease in cost of revenue for the three-month period ended September 30, 2020 as compared to the same period in 2019 was a result of the purchase and sale of fewer powersport units due to: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average acquisition cost per unit due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures.
Nine-months ended September 30, 2020 Versus 2019.
Powersport cost of vehicle revenue decreased by $40,675,800to $33,691,814for the nine-month period ended September 30, 2020 as compared to $74,367,614 for the same period in 2019. For the nine-month period ended September 30, 2020, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of $31,598,611from the sale of4,423pre-owned vehicles at an average acquisition cost of $7,144; (ii) aggregate reconditioning and transportation costs of $1,749,382;and (iii) other cost of sales of $343,820not experience anyattributed to a specific vehicle sold during the nine-months ended September 30, 2020. For the nine-month period ended September 30, 2019, cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of $71,255,609 from the sale of 10,903 pre-owned vehicles at an average acquisition cost of $6,535; (ii) aggregate reconditioning and transportation costs of $2,886,083; and (iii) other cost of sales of $225,921. The decrease in cost of revenue for the nine-month period ended September 30, 2020 as compared to the same period in 2019 was a result of the purchase and sale of fewer powersport units due to: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average acquisition cost per unit due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures.
Powersport cost of vehicle revenue from the sale to consumers decreased by $1,746,081 to $3,490,463 for the nine-month period ended September 30, 2020 as compared to $5,236,544 the same period in 2019. For the nine-month period ended September 30, 2020, the cost of vehicle revenue consisted of:(i) the acquisition cost of vehicles sold to consumers of $3,168,601 from the sale of 455 pre-owned vehicles at an average acquisition cost of $6,964; and (ii) aggregate reconditioning and transportation costs of $321,862. For the nine-month period ended September 30, 2019, cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers of $5,012,808 from the sale of 790 pre-owned vehicles at an average acquisition cost of $6,345; and (ii) aggregate reconditioning and transportation costs of $338,231. The decrease in cost of revenue for the nine-month period ended September 30, 2020 as compared to the same period in 2019 was a result of the purchase and sale of fewer powersport units due to: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average acquisition cost per unit due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures.
Powersport cost of vehicle revenue from the sale to dealers decreased by $39,047,618 to $29,857,531 for the nine-month period ended September 30, 2020 as compared to $68,905,149 for the same period in 2019. For the nine-month period ended September 30, 2020, the cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to dealers of $28,430,010 from the sale of 3,968 pre-owned vehicles at an average acquisition cost of $7,165; and (ii) aggregate reconditioning and transportation costs of $1,427,521. For the nine-month period ended September 30, 2019, cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to dealers of $66,242,800 from the sale of 10,113 pre-owned vehicles at an average acquisition cost of $6,550; and (ii) aggregate reconditioning and transportation costs of $2,547,853. The decrease in cost of revenue for the nine-month period ended September 30, 2020 as compared to the same period in 2019 was a result of the purchase and sale of fewer powersport units due to: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average acquisition cost per unit due to the supply and demand imbalance; (ii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iii) a reduction in per vehicle advertising expenditures.
Automotive
The following table provides the results of operations for the three-month and nine-month periods ended September 30, 2020 and 2019 for the automotive segment, including key financial information relating to the automotive business. We entered the automotive distribution business in connection with the acquisitions of Wholesale and Autosport. 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. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, no comparable information is discussed with respect to Autosport for periods before the Autosport Acquisition Date.
| | For the Three-Months Ended September 30, | For the Nine-Months Ended September 30, |
| | | | | |
| Automotive | | | | |
| | | | | |
| Vehicle revenue: | | | | |
| Consumer | $7,102,578 | $17,039,127 | $33,164,968 | $56,591,480 |
| Dealer | 92,212,757 | 170,069,176 | 248,077,474 | 555,280,339 |
| Total vehicle revenue | $99,315,335 | $187,108,303 | $281,242,442 | $611,871,819 |
| | | - | | - |
Vehicle Gross Profit(2): | | | | |
| Consumer | $512,037 | $2,103,975 | $3,761,009 | $6,680,456 |
| Dealer | 12,330,144 | 5,459,121 | 21,231,964 | 20,178,079 |
| Other | - | (127,407) | (796,365) | (150,700) |
| Total vehicle gross profit | $12,842,181 | $7,435,689 | $24,196,608 | $26,707,835 |
| | | | | |
| Vehicles sold: | | | | |
| Consumer | 218 | 603 | 1,161 | 2,115 |
| Dealer | 3,298 | 6,668 | 9,793 | 23,907 |
| Total vehicles sold | 3,516 | 7,271 | 10,954 | 26,022 |
| | | | | |
| Gross profit per vehicle: | | | | |
| Consumer | $2,349 | $3,489 | $3,239 | $3,159 |
| Dealer | $3,739 | $819 | $2,168 | $844 |
| Total | $3,652 | $1,023 | $2,209 | $1,026 |
| | | | | |
| Gross margin per vehicle: | | | | |
| Consumer | 7.2% | 12.3% | 11.3% | 11.8% |
| Dealer | 13.4% | 3.2% | 8.6% | 3.6% |
| Total | 12.9% | 4.0% | 8.6% | 4.4% |
| | | | | |
| Average vehicle selling price: | | | | |
| Consumer | $32,581 | $28,257 | $28,566 | $26,757 |
| Dealer | $27,960 | $25,505 | $25,332 | $23,227 |
| Total | $28,247 | $25,734 | $25,675 | $23,514 |
_________________________
(1) Inclusive only from the Autosport Acquisition Date.
(2) Excluding the Impairment Loss resulting from the Nashville Tornado.
Automotive Revenue
Three-Months Ended September 30, 2020 Versus 2019.
Total automotive revenue decreased by $87,792,968 to $99,315,335 for the three-months ended September 30, 2020 compared to $187,108,303 for the same period of 2019. The decline in automotive revenue was primarily due to the decrease in the number of vehicles sold to 3,516 for the three-months ended September 30, 2020 compared to 7,271 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $28,247 for the nine-months ended September 30, 2020 from $25,734 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the three-months ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) a reduction in unit sales resulting from the significant changesdamage to the Company's operating facilities and inventory held for sale in estimatesNashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (iv) a reduction in per vehicle advertising expenditures; and (v) a shift in inventory mix available for sale resulting in higher average sales prices. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or judgments inherentexceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total automotive revenue from the sale to consumers decreased by $9,936,549 to $7,102,578 for the three-months ended September 30, 2020 compared to $17,039,127 for the same period of 2019. The decline in consumer revenue was primarily due to the decrease in the number of vehicles sold to 218 for the three-months ended September 30, 2020 compared to 603 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $32,581 for the three-months ended September 30, 2020 from $28,257 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the three-months ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (iv) a reduction in per vehicle advertising expenditures; and (v) a shift in inventory mix available for sale resulting in higher average sales prices. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total automotive revenue from the sale to dealers decreased by $77,856,419 to $92,212,757 for the three-months ended September 30, 2020 compared to $170,069,176 for the same period of 2019. The decline in dealer revenue was primarily due to the decrease in the number of vehicles sold to 3,298 for the three-months ended September 30, 2020 compared to 6,668 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $27,960 for the three-months ended September 30, 2020 from $25,505 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the three-months ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (iv) a reduction in per vehicle advertising expenditures; and (v) a shift in inventory mix available for sale resulting in higher average sales prices. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Nine-months ended September 30, 2020 Versus 2019.
Total automotive revenue decreased by $330,629,377 to $281,242,442 for the nine-months ended September 30, 2020 compared to $611,871,819 for the same period of 2019. The decline in automotive revenue was primarily due to the decrease in the number of vehicles sold to 10,954 for the nine-months ended September 30, 2020 compared to 26,022 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $25,675 for the three-months ended September 30, 2020 from $23,514 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the nine-months ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (iv) a reduction in per vehicle advertising expenditure; and (v) a shift in inventory mix available for sale resulting in higher average sales prices. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total automotive revenue from the sale to consumers decreased by $23,426,512 to $33,164,968 for the nine-months ended September 30, 2020 compared to $56,591,480 for the same period of 2019. The decline in consumer revenue was primarily due to the decrease in the number of vehicles sold to 1,161 for the nine-months ended September 30, 2020 compared to 2,115 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $28,566 for the nine-months ended September 30, 2020 from $26,757 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the nine-months ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (iv) a reduction in per vehicle advertising expenditure; and (v) a shift in inventory mix available for sale resulting in higher average sales prices. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Total automotive revenue from the sale to dealers decreased by $307,202,866 to $248,077,473 for the nine-months ended September 30, 2020 compared to $555,280,339 for the same period of 2019. The decline in dealer revenue was primarily due to the decrease in the number of vehicles sold to 9,793 for the nine-months ended September 30, 2020 compared to 23,907 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to $25,332 for the nine-months ended September 30, 2020 from $23,227 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit for the nine-months ended September 30, 2020 as compared to the same period in 2019 resulted from: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average selling prices and gross margins due to the supply and demand imbalance; (ii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (iv) a reduction in per vehicle advertising expenditures; and (v) a shift in inventory mix available for sale resulting in higher average sales prices. We believe this supply and demand imbalance will continue throughout the historically seasonally low volume fourth quarter, particularly given the recent spikes in COVID-19 cases. As the impact of COVID-19 abates over time, we anticipate that unit purchasing levels and sales will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Automotive Cost of Revenue
Three-Months Ended September 30, 2020 Versus 2019.
Total automotive cost of vehicle revenue decreased by $93,199,460 to $86,473,154 for the three-months ended September 30, 2020 compared to $179,672,614 for the same period of 2019. The decrease was primarily due to a decrease in vehicles sold for the three-month period ended September 30, 2020 compared to the same period of 2019 and consisted of:(i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales higher average acquisition cost per unit due to the supply and demand imbalance; (ii) a reduction in vehicle sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iv) a reduction in per vehicle advertising expenditures. Total cost of vehicle revenue for units sold to consumers and dealers for the three-month period ended September 30, 2020 consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of $84,321,881 from the sale of 3,516 pre-owned vehicles at an average acquisition cost of $23,982; and (ii) aggregate reconditioning and transportation costs of $2,151,273. Total cost of vehicle revenue for units sold to consumers and dealers for the three-month period ended September 30, 2019 consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of $176,436,888 from the sale of 7,271 pre-owned vehicles at an average acquisition cost of $24,266; (ii) aggregate reconditioning and transportation costs of $3,108,319; and (iii) other costs of sales of $127,407.
The cost of vehicle revenue from sales to consumers decreased by $8,344,611 to $6,590,541 for the three-month period ended September 30, 2020 compared to $14,935,152 for the same period of 2019. The decrease was primarily due to a decrease in vehicles sold which was partially offset by an increase in the average acquisition cost per vehicle for the three-month period ended September 30, 2020 compared to the same period of 2019. The decrease in vehicles sold was a result of: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales but higher average acquisition cost per unit due to the supply and demand imbalance; (ii) a reduction in vehicle sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iv) a reduction in per vehicle advertising expenditures. Total cost of vehicle revenue for units sold to consumers for the three-months ended September 30, 2020 consisted of: (i) the acquisition cost of vehicles sold to consumers of $6,375,632 from the sale of 218 pre-owned vehicles at an average acquisition cost of $29,246; and (ii) aggregate reconditioning and transportation costs of $214,909. Total cost of vehicle revenue for units sold to consumers for the three-months ended September 30, 2019 consisted of: (i) the acquisition cost of vehicles sold to consumers of $14,587,006 from the sale of 603 pre-owned vehicles to consumers at an average acquisition cost of $24,191; and (ii) aggregate reconditioning and transportation costs of $348,146.
The cost of vehicle revenue from sales to dealers decreased by $84,727,442 to $79,882,613 for the three-month period ended September 30, 2020 compared to $164,610,055 for the same period of 2019. The decrease was primarily due to a decrease in vehicles sold and a decrease in the average acquisition cost price per vehicle for the three-month period ended September 30, 2020 compared to the same period of 2019. The decrease in vehicles sold was a result of: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales due to the supply and demand imbalance; (ii) a reduction in vehicle sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iv) a reduction in per vehicle advertising expenditures. Total cost of vehicle revenue for units sold to dealers for the three-months ended September 30, 2020 consisted of: (i) the acquisition cost of vehicles sold to dealers of $77,946,249 from the sale of 3,298 pre-owned vehicles at an average acquisition cost of $23,634; and (ii) aggregate reconditioning and transportation costs of $1,936,364. Total cost of vehicle revenue for units sold to dealers for the three-months ended September 30, 2019 consisted of: (i) the acquisition cost of vehicles sold to dealers of $161,849,882 from the sale of 6,668 pre-owned vehicles at an average acquisition cost of $24,273; and (ii) aggregate reconditioning and transportation costs of $2,760,173.
Nine-months ended September 30, 2020 Versus 2019.
Total automotive cost of vehicle revenue before impairment loss decreased by $328,118,150 to $257,045,834 for the nine-months ended September 30, 2020 compared to $585,163,984 for the same period of 2019. The decrease was primarily due to a decrease in vehicles sold for the nine-month period ended September 30, 2020 compared to the same period of 2019. The decrease in vehicles sold was a result of: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales due to the supply and demand imbalance; (ii) a reduction in vehicle sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iv) a reduction in per vehicle advertising expenditures. Total cost of vehicle revenue for units sold for the nine-month period ended September 30, 2020 consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of $250,145,201 from the sale of 10,954 pre-owned vehicles at an average acquisition cost of $22,836; (ii) aggregate reconditioning and transportation costs of $6,104,268; and (iii) other cost of sales of $796,365 not attributed to a specific vehicle sold during the nine-months ended September 30, 2020, which primarily consisted of the write down of $878,542 of vehicle inventory to the lower of cost or net realizable value resulting from the negative impact on our sales channels from COVID-19, which resulted in reduced commercial activity. Total cost of vehicle revenue for units sold for the nine-months ended September 30, 2019 consisted of: (i) the acquisition cost of vehicles sold of $574,527,904 from the sale of 26,022 pre-owned vehicles at an average acquisition cost of $22,079; (ii) aggregate reconditioning and transportation costs of $10,485,381; and (iii) other costs of sales of $150,697.
The cost of vehicle revenue from sales to consumers decreased by $20,507,064 to $29,403,960 for the nine-month period ended September 30, 2020 compared to $49,911,024 for the same period of 2019. The decrease was primarily due to a decrease in vehicles sold which was partially offset by an increase in the average acquisition cost per vehicle for the nine-month period ended September 30, 2020 compared to the same period of 2019. The decrease in vehicles sold was a result of: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales due to the supply and demand imbalance; (ii) a reduction in vehicle sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (iv) a reduction in per vehicle advertising expenditures. Total cost of vehicle revenue for units sold to consumers for the nine-months ended September 30, 2020 consisted of: (i) the acquisition cost of vehicles sold to consumers of $28,492,634 from the sale of 1,161 pre-owned vehicles at an average acquisition cost of $24,541; and (ii) aggregate reconditioning and transportation costs of $911,326. Total cost of vehicle revenue for units sold to consumers for the nine-months ended September 30, 2019 consisted of: (i) the acquisition cost of vehicles sold to consumers of $48,856,097 from the sale of 2,115 pre-owned vehicles at an average acquisition cost of $23,100; and (ii) aggregate reconditioning and transportation costs of $1,054,927.
The cost of vehicle revenue from sales to dealers decreased by $308,256,754 to $226,845,509 for the nine-month period ended September 30, 2020 compared to $535,102,263 for the same period of 2019. The decrease was primarily due to a decrease in vehicles sold which was partially offset by an increase in the average acquisition cost per vehicle for the nine-month period ended September 30, 2020 compared to the same period of 2019. The decrease in vehicles sold was a result of: (i) the adverse impact of the COVID-19 pandemic on commercial activity resulting in lower levels of inventory available for purchase causing lower unit sales due to the supply and demand imbalance (ii) a net realizable value adjustments to reflect: (1) impairment loss on inventory for vehicles that were a total loss and for loss in value of vehicles partially damaged and subject to repair; and (2) the write down of vehicle inventory to the lower of cost or net realizable value resulting from the negative impact on our sales channels from COVID-19; (iii) a reduction in vehicle sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 2020 tornado; (iv) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (v) a reduction in per vehicle advertising expenditures. Total cost of vehicle revenue sold to dealers for the nine-months ended September 30, 2020 consisted of: (i) the acquisition cost of vehicles sold to dealers of $221,652,567 from the sale of 9,793 pre-owned vehicles at an average acquisition cost of $22,634; and (ii) aggregate reconditioning and transportation costs of $5,192,942. Total cost of vehicle revenue sold to dealers for the nine-months ended September 30, 2019 consisted of: (i) the acquisition cost of vehicles sold to dealers of $525,671,807 from the sale of 23,907 pre-owned vehicles at an average acquisition cost of $21,988; and (ii) aggregate reconditioning and transportation costs of $9,430,456.
Vehicle Logistics and Transportation Services Segment
The following table provides our results of operations for the three-month and nine-month periods ended September 30, 2020 and 2019 for our vehicle logistics and transportation services segment, including key financial information relating to this segment. The financial information below is before the elimination of intercompany freight services from Wholesale Express and 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, |
| | | | | |
| Vehicle Logistics and Transportation Services | | | | |
| Total revenue | $11,414,932 | $8,191,939 | $28,656,719 | 25,197,581 |
| Cost of revenue | 9,348,393 | 6,485,978 | 22,789,881 | 20,303,016 |
| Gross profit | $2,066,539 | $1,705,961 | $5,866,838 | $4,894,565 |
| Vehicles delivered | 21,238 | 20,008 | 61,314 | 62,015 |
| Revenue per delivery | $537 | $409 | $467 | $406 |
| Gross profit per delivery | $97 | $85 | $96 | $79 |
| Gross margin per delivery | 18.1% | 20.8% | 20.5% | 19.4% |
Vehicle Logistics and Transportation Services Revenue
Three-Months Ended September 30, 2020 Versus 2019.
Total revenue increased by $3,222,993 to $11,414,932 for the three-months ended September 30, 2020 compared to $8,191,939 for the same period of 2019. The increase in total revenue for the three-month period ended September 30, 2020 resulted from the increase in average revenue per vehicle delivered of $537 compared to $409 for the same period of 2019. The increase in average revenue per vehicle delivered was a result of: (i) our more disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; and (ii) an increase in commercial activity during the three-months ended September 30, 2020 as compared to the same period of 2019 resulting in a greater demand for transportation services, as sales channels, marketing activities and supply chains progressed towards normalized activity levels. The greater demand resulted in a significant increase in the market rates charged per unit delivered; and (iii) increased emphasis on sales through implementation of sales performance improvement plans. As the impact of COVID-19 abates over time, we anticipate that vehicles transported and revenue will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add new dealers, distributors, or private party individuals, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
In the normal course of operations, the Company utilizes transportation services of Wholesale Express. For the three-months ended September 30, 2020 and 2019 intercompany freight services provided by Express to the Company were $974,565 and $2,133,393, respectively and was eliminated in the condensed consolidated financial statements.
Nine-months ended September 30, 2020 Versus 2019.
Total revenue increased by $3,459,138 to $28,656,719 for the nine-months ended September 30, 2020 compared to $25,197,581 for the same period of 2019. The increase in total revenue for the nine-month period ended September 30, 2020 resulted from the increase in average revenue per vehicle delivered of $467 compared to $406 for the same period of 2019. The increase in average revenue per vehicle delivered was a result of: (i) our more disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (ii) the increase in commercial activity during the three-months ended September 30, 2020 as compared to the same period of 2019 resulting in a greater demand for a transportation services, as sales channels, marketing activities and supply chains progressed towards normalized activity levels. The greater demand resulted in a significant increase in the market rates charged per unit delivered; and (iii) increased emphasis on sales through implementation of sales performance improvement plans. As the impact of COVID-19 abates over time, we anticipate that vehicles transported and revenue will return to or exceed levels experienced in the first quarter of 2020 as we increase penetration in existing markets and add dealers, distributors, or private party individuals, however we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
In the normal course of operations, the Company utilizes transportation services of Wholesale Express. For the nine-months ended September 30, 2020 and 2019 intercompany freight services provided by Express to the Company were $3,465,260 and $7,779,735, respectively and was eliminated in the condensed consolidated financial statements.
Vehicle Logistics and Transportation Services Cost of Revenue
Three-Months Ended September 30, 2020 Versus 2019.
Total cost of revenue increased by $2,862,416 to $9,348,393 for the three-months ended September 30, 2020 compared to $6,485,978 for the same period of 2019. The increase in total cost of revenue for the three-month period ended September 30, 2020 resulted from the increase in average cost per vehicle delivered to $440 compared to $324 for the same period of 2019. The increase in average cost per vehicle delivered was a result of the increase in commercial activity during the three-months ended September 30, 2020 as compared to the same period of 2019 which gave rise to greater demand for a transportation services, as sales channels, marketing activities and supply chains progressed towards normalized activity levels. The greater demand resulted in a significant increase in the market rates charged by transporters to deliver a vehicle.
Included in cost of revenue for the three-months ended September 30, 2020 and 2019 was freight services purchases by the Company from Wholesale Express of $974,565 and $2,133,393, respectively that was eliminated in the condensed consolidated financial statements.
Nine-months ended September 30, 2020 Versus 2019.
Total cost of revenue increased by $2,486,865 to $22,789,881 for the nine-months ended September 30, 2020 compared to $20,303,016 for the same period of 2019. The increase in total cost of revenue for the three-month period ended September 30, 2020 resulted from the increase in average cost per vehicle delivered of $371 compared to $327 for the same period of 2019. The increase in average cost per vehicle delivered was a result of the increase in commercial activity during the three-months ended September 30, 2020 as compared to the same period of 2019 which gave rise to greater demand for a transportation services, as sales channels, marketing activities and supply chains progressed towards normalized activity levels. The greater demand resulted in a significant increase in the market rates charged by transporters to deliver a vehicle.
Included in cost of revenue for the three-months ended September 30, 2020 and 2019 was freight services purchases by the Company from Wholesale Express of $3,465,260 and $7,779,735, respectively and was eliminated in the condensed consolidated financial statements.
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 | $7,169,435 | $8,056,730 | $20,496,326 | $24,274,523 |
| Advertising and marketing | 839,752 | 3,288,545 | 4,329,830 | 14,740,227 |
| Professional fees | 533,303 | 440,575 | 2,451,837 | 1,730,792 |
| Technology development | 180,061 | 720,423 | 1,037,219 | 1,751,716 |
| General and administrative | 4,556,600 | 6,504,666 | 14,194,653 | 21,961,262 |
| | $13,279,151 | $19,010,939 | $42,509,865 | $64,458,520 |
Selling, general and administrative expenses decreased by $5,731,788 and $21,948,655, respectively, for the three-month and nine-month periods ended September 30, 2020, as compared to the same periods of 2019. The decrease was a result of: (i) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability, which resulted in the sale of fewer vehicles and a corresponding reduction in related selling expenses, sales related compensation, and marketing spend for the three-month and nine-month periods ended September 30, 2020; (ii) a reduction in automotive vehicle sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 3, 2020 tornado; and (iii) a reduction in staffing levels and adjusted purchasing levels to align with demand and market conditions and a deferral of discretionary growth expenditures such as travel, facilities, information technology investments due to the adverse impact of COVID-19 on commercial activity.
Compensation and related costs decreased by $887,295 and $3,778,197, respectively, for the three-month and nine-month periods ended September 30, 2020, as compared to the same periods of 2019. The decrease is primarily due to a reduction in headcount associated with our response to the impact of COVID-19 on our business. In early April 2020 we significantly reduced our staffing in an effort to position our business to be lean and flexible in this period of lower demand and higher uncertainty with the goal of preparing the Company for a strong recovery when the outbreak is contained. The company had 159 employees at September 30, 2020 as compared to 329 employees on September 30, 2019. As the impact of COVID-19 abates over time, we anticipate that unit volume levels and sales will return to or exceed levels experienced in the first quarter of 2020. At that time, we will take a measured approach to increasing our headcount, which will result in an increase in sales related and marketing compensation in absolute dollar terms but a decrease in these expenses as a percentage of total revenue. However, we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Advertising and marketing decreased by $2,448,793 and $10,410,397, respectively, for the three-month and nine-month periods ended September 30, 2020, as compared to the same periods of 2019. The decrease was a result of: (i) the adverse impact of the COVID-19 pandemic resulting in significantly reduced commercial activity, including a decrease in unit purchases and sales of vehicles; (ii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 3, 2020 tornado; and (iii) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability; (iv) a reduction in per vehicle advertising expenditures. As the impact of COVID-19 abates over time, we anticipate that unit volume levels and sales will return to or exceed levels experienced in the first quarter of 2020. At that time, we will take a measured approach to increasing our marketing spend, which will result in an increase in marketing expenses in absolute dollar terms but a decrease in marketing expense as a percentage of total revenue. However, we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Professional fees increased by $92,728 and $721,045, respectively, for the three-month and nine-month periods ended September 30, 2020, as compared to the same periods of 2019. The increase was primarily a result of professional fees and costs incurred in connection with our insurance claims and other matters attributed to the Nashville Tornado, and legal, accounting and other professional fees and expenses incurred in connection with the activities associated with the expansion of the business. Fees and expenses were incurred for: (i) equity financings; (ii) debt financings; (iii) general corporate matters; (iv) the preparation of quarterly and annual financial statements; and (v) the preparation and filing of regulatory reports required of the Company for public reporting purposes. For additional information, see Note 4 - "Acquisitions," Note 8 - "Notes Payable and Lines of Credit," Note 9 - "Convertible Notes," and Note 11 - "Stockholders' Equity," in the accompanying Notes to the Condensed Consolidated Financial Statements.
Technology development expenses decreased $540,362 and $714,497, respectively, for the three-month and nine-month periods ended September 30, 2020, as compared to the same periods of 2019. The decrease was a result of the negative impact of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity, resulting in a temporary reduction in discretionary growth expenditures on information technology spending. Total technology costs and expenses incurred for three-month and nine-month periods ended September 30, 2020 were $1,164,015 and $2,635,286, respectively, of which $983,954 and $1,598,067, respectively, was capitalized. Total technology costs and expenses incurred for the three-month and nine-month periods ended September 30, 2019 were $1,420,405 and $4,371,267, respectively, of which $699,982 and $2,619,551, respectively, was capitalized. The amortization of capitalized technology development costs for the three-month and nine-month periods ended September 30, 2020 were $477,420 and $1,366,996, respectively, as compared to $386,519 and $1,018,551, respectively for the same period of 2019. In response to the impact of COVID-19 on our business in early April 2020 we temporarily reduced discretionary growth expenditures, which included information technology investments. As the impact of COVID-19 abates over time, we anticipate that unit volume levels and sales will return to or exceed levels experienced in the first quarter of 2020. At that time, we will take a measured approach to increasing our technology development expenses 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 decreased by $1,948,066 and $7,766,609, respectively, for the three-month and nine-month periods ended September 30, 2020, as compared to the same periods of 2019. The decrease was primarily a result of the sale of fewer vehicle sales for the three-month and nine-month periods ended September 30, 2020 as compared to the same periods of 2019, which resulted in a reduction of $1,985,160 and $6,132,738, respectively, in auction and floor plan fees for the three-month and nine-month periods ended September 30, 2020 as compared to the same periods of 2019. The decrease in vehicle sales was primarily a result of our continued approach to taking prescriptive steps to accelerate profitability, the adverse impact of the COVID-19 pandemic resulting in significantly reduced commercial activity, including a decrease in unit purchases and sales of vehicles, and the significant damage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 3, 2020 tornado. In addition, travel and other related business expenses, including office supplies decreased $395,754 and $2,280,311, respectively, for the three-month and nine-month periods ended September 30, 2020 as compared to the same periods of 2019. Rent and lease expense increased $432,848 and $646,440, respectively for the three and nine-month periods ended September 30, 2020 as compared to the same periods of 2019. The increase in rent expense is primarily attributable to opening two new fulfillment centers. One was opened in the fourth quarter of 2019 and the other in March 2020. As the impact of COVID-19 abates over time, we anticipate that unit volume levels and sales will return to or exceed levels experienced in the first quarter of 2020. At that time, we will take a measured approach to increasing our general and administrative spending, which will result in an increase in in general and administrative expenses in absolute dollar terms but decrease as a percentage of total revenue. However, we can provide no assurance as to when and how quickly COVID-19 impacts will continue to abate or if spikes in COVID-19 infections will further negatively impact the economy generally or our business.
Depreciation and Amortization
Depreciation and amortization increased by $62,711 and $284,363, respectively, for the three-month and nine-month periods ended September 30, 2020, as compared to the same periods of 2019. The increase in depreciation and amortization is a result of the cumulative investments made in connection with the expansion and growth of the business which for the three-month and nine-month periods ended September 30, 2020 included capitalized technology acquisition and development costs of $983,954 and $1,598,067, respectively. For the three-month and nine-month periods ended September 30, 2020, amortization of capitalized technology development was $477,420 and $1,366,996, respectively, as compared to $386,519 and $1,018,551, respectively, for the same periods of 2019. Depreciation and amortization on vehicle, furniture, equipment and leasehold improvements was $58,961 and $200,701, respectively, as compared to $87,152 and $264,782, respectively, for the same periods of 2019.
Interest Expense
Interest expense decreased by $543,607 and $164,433, respectively for the three and nine-month periods ended September 30, 2020 as compared to the same periods of 2019. Interest expense consists of interest on the: (i) Hercules Loan; (ii) Private Placement Notes; (iii) the subordinated secured promissory note issued to NextGen (the "NextGen Note"); (iv) the Credit Facility and the NextGear Credit Line (each as defined below) (together, the "Line of Credit-Floor Plans"); (v) PPP Loans; (vi) convertible senior notes; and (vii) the notes issued in connection with the Autosport Acquisition (the "Convertible Notes-Autosport"). The decrease for the three-month period ended September 30, 2020 as compared to the same period of 2019 was a result of a reduction in outstanding indebtedness under the NextGear and Ally floor plan lines of credit resulting from the decrease in the number of vehicles sold to 4,263 for the three-months ended September 30, 2020 compared to 10,894 for the same period of 2019. Interest expense on the Private Placement Notes for the three-month and nine-month periods ended September 30, 2020 were $16,867 and $125,443, including $0 and $75,601 of discount amortization, respectively, compared to interest expense of $80,899 and $231,235, respectively, which included $66,608 and $188,831, respectively, of debt discount amortization for the same periods of 2019. Interest expense on the NextGen Note for three-month and nine-month periods ended September 30, 2020 were $21,005 and $66,123, respectively, as compared to $28,566 and $81,918, respectively, for the same periods of 2019. Interest expense on the Line of Credit-Floor Plans for the three-month and nine-month periods ended September 30, 2020 were $239,785 and $1,528,210, respectively, as compared to $711,147 and $2,231,639, respectively, for the same periods of 2019. For the three-month and nine-month periods ended September 30, 2020, interest expense on the PPP Loans was $11,626 and $19,334, respectively. For the three-month and nine-month periods ended September 30, 2020, interest expense on convertible senior notes was $1,132,983 and $3,279,478, respectively, and included $479,077 and $1,367,213, respectively, of debt discount amortization. For the three-month and nine-month periods ended September 30, 2020, interest expense on the Convertible Notes-Autosport USA was $47,140 and $141,000, respectively, and included $22,442 and $55,876, respectively, of debt discount amortization as compared to interest expense for the three-month and nine-month periods ended September 30, 2019 of $67,634 and 163,730, respectively, including $88,950 and $146,607, respectively of debt discount amortization. There was no interest expense on the Hercules loan for the three-month and nine-month periods ended September 30, 2020. Interest expense on the Hercules Loan for the three-month and nine-month periods ended September 30, 2019 was $0 and $758,466, respectively and included $0 and $342,841, respectively of debt issuance cost amortization. On May 14, 2019, the Company made a payment to Hercules Capital Inc. ("Hercules") of $11,134,695, representing the principal, accrued and unpaid interest, fees, costs and expenses outstanding under its Loan and Security Agreement (the "Loan Agreement") with Hercules. In accordance with the guidance in ASC 470-50, Debt, the Company accounted for the extinguishment of the Hercules Loan Agreement as an extinguishment and recognized a loss on early extinguishment of debt of $1,499,250 for the year ended December 31, 2019 in the Consolidated Statements of Operations included in the Company's Form 10-K for the year ended December 31, 2019.
Loss Contingencies and Insurance Recoveries
On March 3, 2020, a severe tornado struck the greater Nashville area causing significant damage to the Company's facilities including contents and inventory held for sale. The Company maintains insurance coverage for damage to its facilities and inventory, as well as business interruption insurance. The Company continues in the process of reviewing damages and coverages with its insurance carriers. The loss comprises three components: (1) inventory loss, currently assessed by the insurance carrier at approximately $13,000,000; (2) building and personal property loss, primarily impacting our leased facilities, currently assessed by the insurance carrier at $3,801,203; and (3) loss of business income, for which the company has coverage in the amount of $6,000,000. All three components of the Company's loss claim have been submitted to its insurers. The Company's inventory claim is subject to a dispute with the carrier as to the policy limits applicable to the loss however, the insurer has advanced $5,615,268 against the final settlement. The insurer has agreed to pay $2,778,000 on the building and personal property loss, reflecting limits of $2,783,000 net of a $5,000 deductible. The insurer has made an interim payment on the building and personal property loss of $2,269,507 to the landlord. The loss of business income claim is ongoing and remains in the process of negotiation, however, the insurer has advanced $250,000 against the final settlement. The Company believes there will be a recovery of all three loss components, however no assurance can be given regarding the amounts, if any, that will be ultimately recovered.
As a result of the damage caused by the tornado the Company has concluded that the utility of the inventory damaged by the storm is impaired as a result of physical damage sustained. Whether the impairment is caused by physical destruction or an adverse change in the utility of the inventory, entities should assess whether an inventory impairment or write-off is required in accordance with ASC 330-10-35-1 through 35-11, which address adjustments of inventory balances to the lower of cost or market and requires that when there is evidence that the utility of goods will be less than cost, the difference is recognized as a loss of the current period. For the nine-months ended September 30, 2020 the Company recorded an impairment loss on inventory of $11,738,413 comprised of $4,453,775 for vehicles that are a total loss and $7,284,638 in loss in value for vehicle partially damaged and subject to repair. The impairment loss is reported in cost of revenue in the September 30, 2020 condensed consolidated statements of operations. On July 23, 2020, the insurer made an advance against the final settlement of the damage claim on inventory of $5,615,268. This recovery has been recorded as a separate component of income from continuing operations for the nine-month ended September 30, 2020.
Derivative Liability
In connection with the issuance of the Old Notes (as defined below), a derivative liability was recorded at issuance with an interest make-whole provision of $1,330,000. The derivative liability is remeasured at each reporting date with any change in value being recorded in the Statement of Operations; as of December 31, 2019, the derivative liability was valued at $27,500. On January 14, 2020, the Company completed the 2020 Note Offering (as defined below), whereby the $30,000,000 of Old Notes were cancelled and exchanged for $30,000,000 New Notes. Also, in the 2020 Note Offering, the Company sold an additional $8,750,000 of New Notes (as defined below), yielding the Company net proceeds of $8,272,375. Pursuant to ASC 470 the Company accounted for the exchange as a note extinguishment where the remaining $27,500 liability was written off and the Company recorded a new Make Whole Derivative Liability of $137,488 as calculated under the Lattice Model. The lattice model used using a "with-and-without method," where the value of the convertible senior notes including the embedded derivative, is defined as the "with", and the value of the convertible senior notes excluding the embedded derivative, is defined as the "without"; the inputs used include a range of prices around the Company's stock price on the date of valuation ($0.73 on January 14, 2020 and $0.23 on March 31, 2020), as well as the Note conversion rate, maturity date, U.S. Treasury risk-free interest rates over the entire 10-year yield curve, and estimated stock price volatility (55% on January 14, 2020 and 95% on March 31, 2020). The derivative liability is remeasured at each reporting date with the change in value of recorded in the Statements of Operations. The change in value of the derivative liability for the three-months ended September 30, 2020 was $13,518. The value of the derivative liability as of September 30, 2020 is $20,345.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial statements. Ameasure and should not be considered as an alternative to operating income or net income as a measure of operating performance or cash flows or as a measure of liquidity. Non-GAAP financial measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior to U.S. GAAP.
Adjusted EBITDA is defined as net income (loss) adjusted to add back interest expense including debt extinguishment and depreciation and amortization, and certain charges and expenses, such as non-cash compensation costs, acquisition related costs, derivative income, impairment charges, litigation expenses, severance, new business development costs, and insurance recoveries as these 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 primary 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 long-term strategic decisions regarding capital structure and capital investments.
The following tables reconcile Adjusted EBITDA to net income (loss) for the periods presented:
| | Three-Months Ended September 30, | Nine-Months Ended September 30, |
| | | | | |
| Net income (loss) | $1,486,915 | $(8,871,781) | $(19,506,955) | $(30,149,685) |
| Add back: | | | | |
| Interest expense (including debt extinguishment) | 1,488,090 | 2,031,697 | 4,999,092 | 6,850,939 |
| Depreciation and amortization | 536,381 | 473,670 | 1,567,697 | 1,283,333 |
| EBITDA | 3,511,386 | (6,366,414) | (12,940,166) | (22,015,413) |
| | | | | |
| Adjustments | | | | |
| Impairment loss on automotive inventory | - | - | 11,738,413 | - |
| Impairment loss on fixed assets | - | - | 177,626 | - |
| Insurance recovery proceeds | - | - | (5,615,268) | - |
| Non-cash-stock-based compensation | 862,555 | 689,130 | 2,425,316 | 2,335,242 |
| Acquisition related costs | - | - | - | 378,208 |
| Change in derivative liability | 13,518 | (630,000) | (7,155) | (820,000) |
| Severance | - | 1,079,438 | - | 1,079,438 |
| New business development | - | 426,885 | - | 1,173,928 |
| Litigation expenses | 280,842 | - | 1,027,689 | 61,446 |
| Other non-reoccurring costs | 51,387 | 48,676 | 51,387 | 1,441,603 |
| Adjusted EBITDA | $4,719,688 | $(4,752,285) | $(3,142,158) | $(16,365,548) |
Liquidity and Capital Resources
We generate cash from the sale of used retail vehicles, the sale of wholesale vehicles, and providing vehicle logistics and transportation services for used vehicles. We generate additional cash flows through our financing activities including our short-term revolving inventory floor plan facilities, the issuance of long-term notes, and new issuances of equity. Historically, cash generated from financing activities has funded growth and expansion and strategic initiatives and we expect this to continue in the future.
Our ability to service our debt and fund working capital, capital expenditures, and business development efforts will depend on our ability to generate cash from operating and financing activities, which is subject to our future operating performance, as well as to general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our future capital requirements will depend on many factors, including our rate of revenue growth, our expansion of our various lines of business and the timing and extent of our spending to support our marketing, technology and software development efforts.
The Company's condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which assumes the continuity of operations, the realization of assets and the satisfaction of liabilities as they come due in the normal course of business. Although the Company believes that it will be able to generate sufficient liquidity from the measures described above, its current circumstances including uncertainties due to COVID-19 pandemic raise substantial doubt about the Company's ability to operate as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We had the following liquidity resources available as of September 30, 2020 and December 31, 2019:
| | | |
| Cash and cash equivalents | $3,412,772 | $49,660 |
Restricted cash (1) | 5,545,892 | 6,676,622 |
| Total cash, cash equivalents, and restricted cash | 8,958,664 | 6,726,282 |
| Availability under short-term revolving facilities | 43,049,716 | 35,839,030 |
| Committed liquidity resources available | $52,008,380 | $42,565,312 |
_________________________
(1) Amounts included in restricted cash represent the deposits required under the Company's line of credit-floor plan.
On May 9, 2019, the Company entered into a purchase agreement with JMP Securities LLC to issue and sell $30,000,000 in aggregate principal amount of its 6.75% Convertible Senior Notes due 2024 (the "Old Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") (the "2019 Note Offering"). The proceeds for the 2019 Note Offering after deducting the initial purchaser's discounts, advisory fees, and related offering expenses, were approximately $27,385,500.
On January 14, 2020, the Company closed a public offering at a public price of $11.40 per share (the "2020 Public Offering"). On January 16, 2020, the Company received notice of the underwriters' intent to exercise the over-allotment option in full (the "Over-allotment Exercise"). On January 17, 2020, the Company closed the Over-allotment Exercise. The Over-allotment Exercise increased the aggregate number of shares sold in the 2020 Public Offering to 1,035,000. Including the Over-allotment Exercise, proceeds from the 2020 Public Offering, after deducting the 8.0% underwriter's commission and $75,000 for underwriter expenses, were $10,780,080.
Also on January 10, 2020, the Company entered into a Note Exchange and Subscription Agreement, as amended by the Joinder Agreement, with the investors in the 2019 Note Offering , pursuant to which the Company agreed to complete (i) a note exchange pursuant to which $30,000,000 of the Old Notes would be cancelled in exchange for a new series of 6.75% Convertible Senior Notes due 2025 (the "New Notes"), and (ii) the issuance of additional New Notes in a private placement in reliance on the exemption from registration provided by Rule 506 of Regulation D of the Securities Act as a sale not involving any public offering. On January 14, 2020, the Company closed the 2020 Note Offering. The proceeds for the 2020 Note Offering, after deducting for the payment of accrued interest and offering-related expenses, but exclusive of company costs were $8,272,375.
As of September 30, 2020, and December 31, 2019, excluding operating lease liabilities and the derivative liability, the outstanding principal amount of indebtedness was $47,256,808 and $82,585,522, respectively, summarized in the table below. See Note 8 — Notes Payable and Lines of Credit, Note 9 –Convertible Notes, and Note 11 – Stockholders' Equity to our condensed consolidated financial statements included above.
| Asset-Based Financing: | | |
| Inventory | $11,950,284 | $59,160,970 |
| Convertible senior notes | 39,583,334 | 31,333,334 |
| Senior unsecured notes | 8,297,025 | 2,568,843 |
| Total debt | 58,830,644 | 93,063,147 |
| Less: unamortized discount and debt issuance costs | (12,573,836) | (10,477,625) |
| Total debt, net | $47,256,808 | $82,585,522 |
The following table sets forth a summary of our cash flows for the nine-months ended September 30, 2020 and 2019:
| | Nine-Months Ended September 30, |
| | | |
| Net cash provided by (used in) operating activities | $26,197,496 | $(25,792,934) |
| Net cash used in investing activities | (1,772,853) | (3,413,931) |
| Net cash provided by financing activities | (22,192,261) | 26,816,119 |
| Net increase in cash | $2,232,382 | $(2,390,746) |
Operating Activities
Our primary sources of operating cash flows result from the sales of used vehicles and ancillary products. Our primary uses of cash from operating activities are purchases of inventory, cash used to acquire customers, and personnel-related expenses. For the nine-months ended September 30, 2020, net cash provided by operating activities was $26,197,496, an increase of $51,990,430 compared to net cash used in operating activities of $25,792,934 for the nine-months ended September 30, 2019. The increase in our net cash provided by operating activities was primarily due to a $22,558,769 decrease in our net loss, excluding the impairment losses on inventory and fixed assets of $11,738,413 and $177,626, respectively that were incurred due to the Nashville tornado, the insurance recovery of $5,615,268 as well as $23,816,393 of changes in operating assets and liabilities during each period, primarily vehicle inventory, accounts receivable and accounts payable. The change in net income was a result of: (i) our continued disciplined approach to sales volume as we took prescriptive steps to accelerate profitability, which resulted in the sale of fewer vehicles and a corresponding reduction in related selling expenses, sales related compensation, and marketing spend for the nine-month periods ended September 30, 2020; (ii) a reduction in automotive vehicle sales resulting from the significant accounting policiesdamage to the Company's operating facilities and inventory held for sale in Nashville as a result of the March 3, 2020 tornado; and (iii) a reduction in staffing levels, adjusted purchasing levels to align with demand and market conditions and a deferral of discretionary growth expenditures such as travel, facilities, information technology investments due to the adverse impact of the COVID-19 pandemic on commercial activity.
Investing Activities
Our primary use of cash for investing activities is containedfor technology development and acquisitions to expand our operations. Cash used in Note 1investing activities was $1,772,853 and $3,413,931 during the nine-months ended September 30, 2020 and 2019, respectively, a decrease of $1,641,078. The decrease primarily relates to a reduction in technology spending and no acquisition activities during the nine-month period ended September 30, 2020 as compared to the same period in 2019. The Company acquired Autosport in February 2019 which included a cash payment of $835,000. The decrease in technology spending was a result of a reduction in staffing levels, adjusted purchasing and a deferral of discretionary growth expenditures due to the adverse impact of the COVID-19 pandemic on commercial activity.
Financing Activities
Cash flows from financing activities primarily relate to our financial statements includedshort 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 used in our 2016 Annual Report.financing activities was $22,192,261 for the nine-months ended September 30, 2020 as compared to net cash provided by financing activities of $26,816,119 for the same period of 2019. The $49,008,380 decrease in cash provided by financing activities was a result of paying down the floor plan lines of credit offset by the proceeds from the 2020 Public Offering.
Off-Balance Sheet Arrangements
As of September 30, 2017,2020, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future 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.
Emerging Growth CompanyCritical Accounting Policies and Estimates
Refer to 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, 2019. 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 most recent Annual Report on Form 10-K.
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 neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as "anticipate," "believe," "envision," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," "ongoing," "contemplate," and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:
●
We have a limited operating history and we cannot assure you we will achieve or maintain profitability;
●
Our annual and quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline;
●
The initial development and progress of our business to date may not be indicative of our future growth prospects and, if we continue to grow rapidly, we may not be able to manage our growth effectively;
●
There is substantial doubt about our ability to continue as a going concern;
●
We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If capital is not available on terms acceptable to us or at all, we may not be able to develop and grow our business as anticipated and our business, operating results and financial condition may be harmed;
●
We may fail to maintain our listing on The Nasdaq Stock Market;
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The success of our business relies heavily on our marketing and branding efforts, especially with respect to the RumbleOn website and our branded mobile applications, and these efforts may not be successful;
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The failure to develop and maintain our brand could harm our ability to grow unique visitor traffic and to expand our regional partner network;
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We rely on Internet search engines to drive traffic to our website, and if we fail to appear prominently in the search results, our traffic would decline, and our business would be adversely affected;
●
A significant disruption in service on our website or of our mobile applications could damage our reputation and result in a loss of consumers, which could harm our business, brand, operating results, and financial condition;
●
We may be unable to maintain or grow relationships with information data providers or may experience interruptions in the data feeds they provide, which may limit the information that we are able to provide to our users and regional partners as well as adversely affect the timeliness of such information and may impair our ability to attract or retain consumers and our regional partners and to timely invoice all parties;
●
If we are unable to provide a compelling vehicle buying experience to our users, the number of transactions between our users, RumbleOn and dealers will decline, and our revenue and results of operations will suffer harm;
●
If key industry participants, including powersports and recreation vehicle dealers and regional auctions, perceive us in a negative light or our relationships with them suffer harm, our ability to operate and grow our business and our financial performance may be damaged;
●
The growth of our business relies significantly on our relationships with regional partners in our network;
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Our ability to grow our complementary product offerings may be limited, which could negatively impact our development, growth, revenue and financial performance;
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We rely on third-party financing providers to finance a portion of our customers' vehicle purchases;
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Our sales of powersports/recreation vehicles may be adversely impacted by increased supply of and/or declining prices for pre-owned vehicles and excess supply of new vehicles;
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We rely on a number of third parties to perform certain operating and administrative functions for the Company;
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We participate in a highly competitive market, and pressure from existing and new companies may adversely affect our business and operating results;
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Seasonality or weather trends may cause fluctuations in our unique visitors, revenue and operating results;
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We collect, process, store, share, disclose and use personal information and other data, and our actual or perceived failure to protect such information and data could damage our reputation and brand and harm our business and operating results;
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Failure to adequately protect our intellectual property could harm our business and operating results;
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We may in the future be subject to intellectual property disputes, which are costly to defend and could harm our business and operating results;
●
We operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations. Failure to comply with these laws and regulations could have a material adverse effect on our business, results of operations and financial condition;
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We provide transportation services and rely on external logistics to transport vehicles. Thus, we are subject to business risks and costs associated with the transportation industry. Many of these risks and costs are out of our control, and any of them could have a material adverse effect on our business, financial condition and results of operations;
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We depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed;
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We may acquire other companies or technologies, which could divert our management's attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results;
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The recent outbreak of COVID-19 may continue to have a significant negative impact on our business, sales, results of operations, financial condition, and liquidity;
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We may be unable to realize the anticipated synergies related to the Acquisitions, which could have a material adverse effect on our business, financial condition and results of operations;
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Our business relationships, those of the Wholesale Entities or the combined company may be subject to disruption due to uncertainty associated with the Acquisitions;
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If we are unable to maintain effective internal control over financial reporting for the combined companies, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial statements;
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As a result of the Acquisitions, we and the Wholesale Entities may be unable to retain key employees;
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The trading price for our Class B Common Stock may be volatile and could be subject to wide fluctuations in per share price;
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Our principal stockholders and management own a significant percentage of our stock and an even greater percentage of the Company's voting power and will be able to exert significant control over matters subject to stockholder approval;
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If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline;
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Because our Class B Common Stock may be deemed a low-priced "penny" stock, an investment in our Class B Common Stock should be considered high risk and subject to marketability restrictions;
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We do not currently or for the foreseeable future intend to pay dividends on our common stock;
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We are subject to reduced reporting requirements so long as we are considered a "smaller reporting company" and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors;
●
If we fail to maintain an “emerging growth company” undereffective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the federaltrading price of our common stock;
●
Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline;
●
Although the Notes are referred to as convertible senior Notes, the Notes are effectively subordinated to any of our future secured debt and structurally subordinated to any liabilities of our subsidiaries;
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The Notes are our obligations only and a substantial portion of our operations are conducted through, and a substantial portion of our consolidated assets are held by, our subsidiaries;
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Operating our business requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay the Notes and any other debt;
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Recent and future regulatory actions and other events may adversely affect the trading price and liquidity of the Notes;
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The trading price for our Class B Common Stock may be volatile and could be subject to wide fluctuations in per share price which could adversely impact the trading price of the Notes;
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We may incur substantially more debt in the future or take other actions which would intensify the risks discussed in these risk factors;
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We may not have the ability to raise the funds necessary to settle the Notes in cash on a conversion, to repurchase the Notes on a fundamental change, or to repay the Notes at maturity. In addition, the terms of our future debt may contain limitations on our ability to pay cash on conversion or repurchase of the Notes;
●
Redemption may adversely affect the return on the Notes;
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The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results;
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Conversion of the Notes may dilute the ownership interest of our stockholders or may otherwise depress the market price of our Class B Common Stock;
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Future sales of our Class B Common Stock or equity-linked securities lawsin the public market could lower the market price for our Class B Common Stock and adversely impact the trading price of the Notes;
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Holders of Notes are not entitled to any rights with respect to our Class B Common Stock, but they will be subject to reduced public company reporting requirements. In addition, Section 107all changes made with respect to them to the extent our conversion obligation includes shares of our Class B Common Stock;
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The conditional conversion feature of the JOBS Act also providesNotes could result in holders receiving less than the value of our Class B Common Stock into which the Notes would otherwise be convertible;
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On conversion of the Notes, holders may receive less valuable consideration than expected because the value of our Class B Common Stock may decline after holders exercise their conversion rights but before we settle our conversion obligation;
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The increase in the conversion rate for Notes converted in connection with a make-whole fundamental change or a notice of redemption may not adequately compensate holders for any lost value of their Notes as a result of such transaction or redemption;
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The conversion rate of the Notes may not be adjusted for dilutive events;
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Some significant restructuring transactions may not constitute a fundamental change, in which case we would not be obligated to offer to repurchase the Notes;
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Certain provisions in the indenture governing the Notes may delay or make it more expensive for a third party to acquire us;
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Holders of Notes are not entitled to receive any shares of our Class B Common Stock otherwise deliverable upon conversion of the Notes to the extent that such receipt would cause such holders to become, directly or indirectly, a beneficial owner of shares of our Class B Common Stock in excess of 4.99% of the total number of the shares of our Class B Common Stock then issued and outstanding;
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We cannot assure you that an “emerging growth company” can take advantageactive trading market will develop for the Notes;
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Any adverse rating of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, 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 applyNotes may cause their trading price to private companies. We are choosing not to take advantage of the extended transition period for complying with new or revised accounting standards.fall; and
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Other statements regarding our future operations, financial condition and prospects, and business strategies.
Item 3.
QuantitativeQuantitative and Qualitative Disclosure About Market Risk.Risk
This item is not applicable as we are currently considered a smaller reporting company.
Item 4.
ControlsControls and Procedures.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, 2017.2020. 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC'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 on the evaluation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), the Company’sCompany's Chief Executive Officer and Chief Financial Officer concluded that the Company’sCompany's disclosure controls and procedures were effective as of September 30, 2017.2020.
Changes in Internal Control Over Financial Reporting
Since the acquisition of NextGen, the Company is evaluating its internal control over financial reporting; however, thereThere were no changes in our internal control over financial reporting that occurred during our most recent fiscalthe quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the potential impact of COVID-19 on our internal control to minimize the impact on their design and operating effectiveness.
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 management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II -– OTHER INFORMATION
We are not a party to any material legal proceedings.
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 on 10-K for the year ended December 31, 2016,2019, filed on February 14, 2017,May 29, 2020, the occurrence of any one of which could have a material adverse effect on our actual results.
There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Item 2.
UnregisteredUnregistered Sales of Equity Securities and Use of Proceeds.
None. On September 16, 2020, the Company issued 2,506 shares of Class B Common Stock to Joseph Reece in connection with Mr. Reece’s departure from the Board. These shares were issued in reliance on the exemption from registration provided by Rule 506 of Regulation D of the Securities Act as a sale not involving any public offering.
Item 3.
DefaultsDefaults Upon Senior Securities.
None.
Item 4.
MineMine Safety Disclosures.
Not applicable.
None.
| Exhibit No. | | Description |
| | Form of Senior Secured Promissory Note, dated September 5,Amendment to the RumbleOn, Inc. 2017 (incorporatedStock Incentive Plan. + (Incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K, filed September 11, 2017). |
| | Amendment to Amended and Restated Stockholders’ Agreement of RumbleOn, Inc., dated September 29, 2017 (incorporated by reference to Exhibit 10.1 in the Company’sCompany's Current Report on Form 8-K, filed on October 5, 2017)August 26, 2020). |
| | Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| | Certifications of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
| | Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |
| 101.INS | | XBRL Instance Document* |
| 101.SCH | | XBRL Taxonomy Extension Schema* |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase* |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase* |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase* |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase* |
_________________________
*
Filed herewithherewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | RumbleOn,RUMBLEON, INC. |
| | | |
Date: November 9, 2017 16, 2020 | By: | /s/ Marshall Chesrown
|
| | | Marshall Chesrown |
| | | Chief Executive Officer (Principal Executive Officer) |
| | |
| | | |
Date: November 9, 2017 16, 2020 | By: | /s/ Steven R. Berrard
|
| | | Steven R. Berrard |
| | | Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) |
