RideNow Group, Inc 10-K for FY2020
RideNow Group, Inc. (RDNW)
10-K
2021-03-31
For: 2020-12-31
View Original
Added on
April 12, 2026
About this 10-K
RideNow Group, Inc filed this 10-K on March 31, 2021, covering the fiscal year ended December 31, 2020 (FY2020).
Headline figures
Fiscal year ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $416.43M
- down 50.5% from $840.63M a year earlier
- Net loss
- $25M
- compared with a net loss of $45.18M a year earlier
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
☒ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2020
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________
to________________
Commission file number 001-38248
RumbleOn, Inc.
(Exact
name of registrant as specified in its charter)
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Nevada
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46-3951329
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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901 W Walnut Hill Lane
Irving TX
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75038
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(Address of Principal Executive Offices)
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(Zip
Code)
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(214) 771-9952
(Registrant's
telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading
Symbol(s)
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Name of exchange on which registered
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Common Stock, $0.001 par value
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RMBL
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The Nasdaq Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
☐ No
☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant 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 accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☒
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Smaller reporting company
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☒
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Emerging growth
company
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☐
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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 Act). Yes ☐ No ☒
As of
June 30, 2020, the aggregate market value of shares of common stock
held by non-affiliates of the registrant was approximately
$17.5 million.
The
number of shares of Class B Common Stock, $0.001 par value,
outstanding on March 26, 2021 was 2,286,404 shares. In addition,
50,000 shares of Class A Common Stock, $0.001 par value, were
outstanding on March 26, 2021.
RUMBLEON, INC.
Table
of Contents to Annual Report on Form 10-K
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PART
I
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Item
1.
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Business.
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1
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments.
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34
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Item
2.
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Properties.
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34
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Item
3.
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Legal
Proceedings.
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34
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Item
4.
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Mine
Safety Disclosures.
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34
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PART
II
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Item
5.
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Market
For Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchase Of Equity Securities
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35
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Item
6.
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Selected
Financial Data
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35
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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36
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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62
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Item
8.
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Financial
Statements and Supplementary Data.
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62
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
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62
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Item
9A.
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Controls
and Procedures.
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63
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Item
9B.
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Other
Information.
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63
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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64
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Item
11.
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Executive
Compensation.
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68
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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71
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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73
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Item
14.
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Principal
Accounting Fees and Services.
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74
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules.
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75
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Item
16.
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Form
10-K Summary.
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77
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In this Annual Report on Form 10-K, "we," "our," "us," "RumbleOn,"
and "the Company" refer to RumbleOn Inc. and its consolidated
subsidiaries, unless the context requires otherwise.
Forward-Looking and Cautionary Statements
This
Annual Report on Form 10-K contains forward-looking statements
as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
may appear throughout this Annual Report on Form 10-K, including
without limitation, the following sections: Item 1 "Business," Item
1A "Risk Factors," and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Forward-looking statements generally can be identified by words
such as "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "predicts," "projects," "will be," "will
continue," "will likely result," and similar expressions. These
forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties, which
could cause our actual results to differ materially from those
reflected in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not
limited to, those discussed in this Annual Report on Form 10-K, and
in particular, the risks discussed under the caption "Risk Factors"
in Item 1A and those discussed in other documents we file with the
Securities and Exchange Commission (SEC). We undertake no
obligation to revise or publicly release the results of any
revision to these forward-looking statements, except as required by
law. Given these risks and uncertainties, readers are cautioned not
to place undue reliance on such forward-looking
statements.
Market and Industry Data
Some of
the market and industry data contained in this Annual Report on
Form 10-K are based on independent industry publications or other
publicly available information. Although we believe that these
independent sources are reliable, we have not independently
verified and cannot assure you as to the accuracy or completeness
of this information. As a result, you should be aware that the
market and industry data contained herein, and our beliefs and
estimates based on such data, may not be reliable.
Item
1.
Business.
In this
Annual Report on Form 10-K (this "Form 10-K"), we refer to RumbleOn, Inc., as
"RumbleOn," "RMBL,"
the "Company," "we,"
"us," and "our,"
and similar words. All share amounts included in this Form 10-K
have been adjusted for the one-for-twenty reverse stock split of
our Class A Common Stock and Class B Common Stock, effective May
20, 2020.
Overview
RumbleOn,
Inc., a Nevada corporation,
is a technology driven, motor vehicle dealer and e-commerce
platform provider 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 all participants in the supply chain, including
RumbleOn, other dealers and consumers to
Buy-Sell-Trade-Finance-Transport pre-owned vehicles. Our goal is to
transform the way VIN-specific pre-owned vehicles are bought and
sold by providing users with the most comprehensive, efficient,
timely and transparent transaction experiences. While our initial
customer facing emphasis through most of 2018 was on motorcycles
and other powersports, in 2019 we enhanced our platform to
accommodate nearly any VIN-specific vehicle, and via our October
2018 acquisition of Wholesale, Inc., we made a concerted effort to
grow our cars and light truck categories. In August 2020, we
launched RumbleOn 3.0, bringing traditional brick and mortar
powersports dealers across the country online. Then, in March 2021,
we announced a definitive agreement to combine our ecommerce
platform with the RideNow powersports group, the nation's largest
powersports retailer. Completion of this transaction is subject to
a number of conditions, but we expect to close the business
combination during the second or third quarter of
2021.
1
Recent Developments
RideNow Transaction
On
March 12, 2021, we announced a definitive agreement to combine with
the RideNow dealership group, the nation’s largest
powersports retailer, to create the only omnichannel customer
experience in powersports and the largest publicly traded
powersports dealership platform (the “RideNow
Transaction”). Under the terms of the definitive agreement,
we will combine with up to 46 entities operating under the RideNow
brand for a total consideration of up to $575.4 million, consisting
of $400.4 million of cash and approximately 5.8 million shares of
our Class B Common Stock. We will finance the cash consideration
through a combination of up to $280.0 million of debt and the
remainder through the issuance of new equity. We have has entered
into a commitment letter with Oaktree
Capital Management, L.P. (“Oaktree”) to provide
for the debt financing, subject to certain conditions (the
“Oaktree Financing”). The number of shares to be issued
to RideNow is subject to increase as described in the definitive
agreement. The RideNow Transaction is subject to successful
completion of the debt and equity financing, RumbleOn stockholder
approval, manufacturer approval, other federal and state regulatory
approvals, and other customary closing conditions as described in
the definitive agreement. We expect to close the RideNow
Transaction during the second or third quarter of 2021.
The foregoing description of the
definitive agreement and debt financing does not purport to be
complete and is subject to, and qualified in its entirety by, the
full text of the Plan of Merger and Equity Purchase Agreement,
dated March 12, 2021, Registration Rights and Lock-Up Agreement,
dated March 12, 2021, Commitment Letter, dated March 12, 2021, and
Warrant, dated March 12, 2021, copies of which are incorporated by
reference to this report as Exhibits 2.4, 10.33, 10.31 and
4.11. See the section titled Subsequent Events in the
MD&A included in this report for a discussion of the RideNow
Transaction and Oaktree Financing.
Our Model
RumbleOn's goal is
to disrupt the inefficient, friction-laden pre-owned vehicle supply
chain through the use of innovative technology. We have created a
modern, technology-based platform to acquire and distribute
inventory transparently and efficiently at value-oriented prices.
We intend to leverage this platform to maximize the overall profit
and return on vehicles that RumbleOn buys/sells for its own
account, as well to provide both dealers and consumers
technology-based tools, financing and logistics-based solutions to
simplify their business or aid them through the complex process of
buying/selling a vehicle.
Our
model is anchored on powerful technology that enables RumbleOn to
efficiently acquire, process (including reconditioning, photos and
inspection), market and distribute vehicles to dealers and
consumers. Collectively, this allows us to maximize inventory value
and reduce inventory risk as we effect the entire vehicle supply
chain in a faster and more cost-efficient manner. There are two
critical inputs that are key to understanding how we do this: 1)
our innovative technology and 2) our inventory
management.
Innovative Technology
Technology
underpins everything at RumbleOn. If you want to disrupt an
industry, you have to have answer two fundamental
questions:
1)
What can we do to
eliminate existing customer pain points?
2)
How do we remove
friction from a marketplace?
We
leverage technology to drive change in an industry that is as old
as the automobile or motorcycle itself. At a high-level, we believe
there are two main areas where leveraging these innovations
provides us a competitive advantage and eliminates existing
customer pain points and removes friction from a marketplace
– 1) our proprietary supply chain and distribution software
and 2) and our mobile-first web application strategy.
We
utilize internally developed software and real time APIs to look at
the overall supply chain and reconfigure inventory for the purpose
of acquisition and distribution. Our technology aggregates multiple
data sources in real-time, tracking and cataloging inventory across
the country.
We
analyze real-time market data to inform our acquisition decisions,
continually capturing and archiving such data using advanced
algorithms, to calibrate pricing and estimate freight and
reconditioning expenses. The values are then used in our Cash Offer
tool to quickly determine a fair and reasonable, non-negotiable
offer.
2
Lastly,
we continue to enhance our website and mobile application to
provide not only a compelling user experience, from the front-end
user interface and powerful search tools to enabling secure data,
document and payment exchanges between parties, but also to help
optimize search engine marketing and lower overall cost of customer
acquisition. For example, the RumbleOn app has features such as
auto-populating details into the Cash Offer tool when a customer
scans their VIN, we introduced simplified uploading of vehicle
photos by app users, we integrate technologies to try and block
inappropriate content on our Classifieds site, and we are creating
fun social experiences like our Road Trip Planner and successful
blog campaigns. We announced the launch of RumbleOn 3.0 in August
of 2020. At that time, we had more than 18,000 powersport listings
on our site, from over 130 dealer locations around the country.
We’ve since massively scaled the offering, and currently have
more than 50,000 listings from over 300 dealer locations from coast
to coast on our platform.
The
business combination with RideNow is a natural evolution of our
RumbleOn 3.0 strategy. This combination will create the only
omnichannel customer experience in powersports and the largest
publicly traded powersports dealership platform. With more than
7,000 powersports dealers in the US and 85% of these dealers who
own only a single location, this industry remains ripe for
consolidation. Our technology, OEM relationships, winning culture
and new financial partners make us the partner of choice for
dealers around the country. Many of them, like RideNow, will get to
know us through RumbleOn 3.0.
Inventory Management
We
believe our ability to access and acquire inventory efficiently and
cost effectively, from both consumers and dealers, is a key
differentiator for RumbleOn. Using pre-owned retail and wholesale
vehicle market data obtained from a variety of internal and
external data sources, we evaluate a significant number of vehicles
daily across both online and traditional auction/dealer-based
channels to determine their fit with end-buyer demand, internal
profitability targets and our existing inventory needs by make,
model, condition and price point.
The
supply of pre-owned vehicles is influenced by a variety of factors,
including: the total number of vehicles in operation; the rate of
new vehicle sales, which in turn generate pre-owned vehicles; the
number of pre-owned vehicles sold or remarketed through our
consumer and dealer channels; model-year changes; fleet turnover;
seasonality; natural disasters; and economic
downturns.
As
such, we are very focused on nimbly managing our overall inventory
and strive to maintain our current average days to sale under 30
days. We believe this not only minimizes potential impacts on
profits from the items described above but also provides us
significant competitive benefits; namely: i) we have flexibility to
adjust our inventory in response to unforeseen market dynamics
– such as adverse weather conditions, including tornadoes and
hurricanes, or other events or conditions that impact purchasing
decisions, including disruptions in the domestic and global economy
due to the COVID-19 pandemic (discussed below); and ii) we can make
swift decisions to capitalize on market anomalies or leverage
arbitrage opportunities that may benefit our volume and margins in
a more consistent fashion.
To
support our emphasis on inventory management and reduction of
capital investment needs, we leverage a robust partner network that
manages the reconditioning, inspections and distribution of our
inventory. Our current regional partners are located in the cities
below:
Cincinnati, OH; Dallas, TX; Las Vegas, NV;
Atlanta,
GA; Statesville, NC; Philadelphia, PA; Nashville, TN;
Orlando,
FL; San Diego, CA; San Francisco, CA;
West
Palm Beach, FL
Every
unit of inventory we acquire is posted immediately to both our
website and Dealer Direct virtual inventory tool, as well as sent
to one of our regional partners who then uploads photos, prepares
detailed inspection reports, reconditions the vehicle to a dealer's
expectation and sets the vehicle for live auction sale in the near
future. If the vehicle is sold to a consumer, it is reconditioned
to the appropriate level for the buyer, which reduces unnecessary
reconditioning costs and enables us to protect our margin when
selling directly to a dealer who might prefer to manage or perform
much of the reconditioning to their standards. More importantly, we
are able to quickly establish new regional partners as needed to
reduce our cost of sales and freight expense while creating more
capacity for over-all sales growth. Currently, there are hundreds
of potential expansion locations that welcome the opportunity for
their business. These are owned by the likes of Cox Automotive
(Manheim); Copart (National Powersports Auctions); KARS (Adesa
auctions) just to name a few.
3
Competitive Positioning
We
believe we are disrupting a massive opportunity in the market and
unlike others, we are using this data-powered technology to serve
consumers, dealers and service providers across the entire supply
chain. Our comprehensive offering includes the
following:
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Dealers
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Consumers
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Other
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Dealer
to Consumer Sales
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Consumer
to Consumer Sales
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Lender
Listing Site
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Dealer
to Dealer Sales
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Online
Cash Offers from RumbleOn
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Dealer
Listing Site
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Online
Cash Offers from RumbleOn
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Classifieds
(including transaction support)
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Data
Aggregation
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Inventory
Management
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Finance
a Purchase
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Auction
Locations
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Dealer
Branded Cash Offers
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Warranty
Products
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Transport
Providers
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Dealer
Listing Site
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Inspection
Services
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Inspection
Services
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Logistics
Support
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Logistics
Support
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Peer-to-Peer
Payment
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Presently we are
buying and selling our entire inventory and delivering the same
customer experience across our websites – rumbleon.com,
RumbleOn Dealer Direct and
other URL's also represented as
powered by RumbleOn - providing us with a strategic
advantage of having vertical brands. These solutions exist as
separate websites and each fills a gap in the legacy buying and
selling experience while taking advantage of vertical search of the
same inventory across multiple consumer and dealer
channels.
RumbleOn.com is our primary national
online consumer facing platform. Consumers can currently get a real
Cash Offer for their vehicle as well as purchase vehicles through
this website. Customers can pay for their vehicle using cash or
they may select from a range of finance options from unrelated
third parties such as banks or credit unions, as well as RumbleOn
Finance, our own financing platform. Additionally, customers have
the option to protect their vehicle with Extended Protection Plans
("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 as well as other traditional protection
products.
RumbleOn Dealer Direct is currently
being used by multiple dealers which allows them to leverage the
RumbleOn inventory as a virtual inventory of their own at wholesale
prices without having to wait for auction day.
Wholesale Inc. and GotSpeed (formerly known as
AutoSport), Powered by RumbleOn (as well as any other sub-brands we may
utilize) – The
significant local brand awareness these parallel sites provide
allows us to take advantage of existing organic search benefits and
customer goodwill by creating a locally branded website with most
of the same functionality as RumbleOn.com.
RumbleOn Classifieds was launched in
December 2018 and is a one-stop free listing site for consumers who
wish to pursue peer-to-peer transactions, similar to Craigslist.
Consumers list the vehicle at the price they wish. RumbleOn then
offers both buyers and sellers a suite of option tools to
facilitate the transaction process, including assistance with
titles, documentation, third-party inspection, financing,
funds-transfer, and logistics. Classifieds allows us to not only
buy more inventory from unsuccessful listings, but more importantly
provide consumers who were unwilling to accept the RumbleOn Cash
Offer price an opportunity to stay in the RumbleOn
network.
RumbleOn Finance is our wholly owned
consumer finance entity that provides vehicle buyers competitive
borrowing alternatives fully underwritten internally. During the
second half of 2019, RumbleOn Finance began originating finance
transactions on powersports.
Our Market / Competition
We
participate in both the automotive and powersports
markets.
4
Automotive
The
U.S. used car marketplace is highly fragmented, and we face
competition from franchised dealers, who sell both new and used
vehicles; independent used car dealers; online and mobile sales
platforms; and private parties. There are approximately 18,000
franchised automotive dealerships, which sell both new and used
vehicles, as well as approximately 43,000 used car independents in
the U.S. according to NADA and Borrell Associates' 2017 Outlook,
respectively. Moreover, the top 100 car retailers control
approximately 8.6% of the used car market share in 2018 according
to Automotive News.
Collectively, there
were approximately 273 million registered vehicles in operation in
2018. Additionally, in 2019 automakers sold approximately 17
million new cars and approximately 41 million used cars were sold,
many of which were accompanied by trade-ins. Lastly, the National
Auto Auction Association and Cox Automotive estimate there are more
than 16 million vehicles annual sold through wholesale channels,
with approximately 9.6 million sold through auctions , the vast
majority of which are run through the two largest auction
participants, Manheim and Adesa, 4.9 million dealer-to-dealer and
2.1 direct to consumer or offsite/online.
Based
on the large number of new and used vehicles being sold each year,
coupled with the relatively small market share of any single used
car seller, we believe that both sources of used vehicles, and our
ability to sell them, will continue to be sufficient to meet our
current and future needs.
Powersports
We
currently operate in the powersports and recreational vehicle
market with significant scale and breadth of products. The
Motorcycle Industry Council estimates that in 2018, 10.1 million
U.S. households owned the 12.2 million motorcycles. Of these, 87%
of these were on-highway models, our initial targeted segment.
According to the Powersports Business 2020 Market Data Book,
pre-owned motorcycle registrations were 1 million units in 2019
with new unit sales of approximately 281,179. The owner demographic
is favorable to the market outlook as millennials and baby boomers
are maturing into the median ranges. The owner group is
characterized by brand loyal riding enthusiasts.
Our
initial focus was on pre-owned Harley-Davidson motorcycles as it
provided a targeted, identifiable segment to establish the
functionality of the platform and the RumbleOn brand.
Harley-Davidson is a highly regarded and dominant brand in the
motorcycle market, (representing approximately 50% market share of
new 601cc+ on-road motorcycles according to both Harley-Davidson
public filings and the Motorcycle Industry Council) and there were
approximately 3.1 million Harley Davidson riders in 2019, up
approximately 55,00 from the prior year per the IHS Markit
Motorcycles in Operations data. As our business has evolved, we
have expanded into other powersports and recreational vehicle with
a strong emphasis on the “other" brands of motorcycles
(Honda, Yamaha, Kawasaki, Suzuki, etc.), which essentially doubled
the available market and is a natural extension as these vehicles
are often sold or traded for Harley-Davidson vehicles. The
“other" market and dealer profile closely mirror that of the
Harley-Davidson market although it is more highly fragmented and
the average pre-owned vehicle selling price is less than a
pre-owned Harley Davidson. In addition, many of the “other"
dealers also retail other powersport vehicles including ATVs, UTVs,
snowmobiles and personal watercraft providing RumbleOn an
opportunity for product extensions by leveraging existing regional
partner relationships.
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 estimates from the
Powersports Business 2020 Market Data Book, approximately 930,000
ATV/UTV/side-by-sides and 55,000 snowmobiles sold world-wide in
2019, and there are estimated to be approximately 1.2 million
snowmobiles registered in the United States with another 600,000 in
Canada. Lastly, according the Powersports Business 2020 Market Data
Book, in 2019 there were more than 73,000 new PWCs sold in the
United States and there are currently more than 1.2 million PWCs
registered in the United States.
5
During
the third quarter of 2020 we launched RumbleOn.com version
3.0 consistent with our plan to allow dealers to leverage our
marketplace to list their inventory and receive corresponding leads
for future fees for things such as cash offers, pre-qualification
for lending and many others both present and future. At the request
of many dealers and as part of the 3.0 launch, we also released our
highly anticipated B2B powersports dealer only marketplace we call
Dealer Direct, which enabled us to be the first to offer a pure
online solution for dealer-to-dealer transactions in powersports.
This online dealer platform has proven to be extremely successful
for dealers in the auto segment through a host of providers and,
while in the early stages, in 2020 we enrolled in excess of 200
dealers with over 40,000 available listings. Dealer Direct has not
only allowed for higher margins on our owned inventory distribution
but in future periods will allow for revenue from multiple
transaction fees charged to dealers. By aggregating inventory on
3.0 from across the country, we are able to offer dealers access to
our host of software solutions to improve their business and put
them in a position to participate in pure online transactions and
while increase our reach with valuable content and data from the
site.
The
United States pre-owned powersports and recreational vehicle
marketplace is highly fragmented, and we face competition from
franchised dealers, who sell both new and pre-owned 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 pre-owned vehicle sales includes our
ability to provide a high degree of customer satisfaction with the
buying experience by virtue of our low, no-haggle prices and our
100% online marketplace platform including our website and mobile
web application and our ability to make a cash offer to purchase a
vehicle 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 make a cash
offer to purchase a customer's vehicle, whether or not the customer
is buying a vehicle from us, provides a competitive sourcing
advantage for vehicle sales 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 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.
The
supply of pre-owned vehicles,
including powersports, automobiles and light trucks, is
influenced by a variety of factors, including: the total number of
vehicles in operation; the rate of new vehicle sales, which in turn
generate pre-owned vehicles; and the number of pre-owned vehicles
sold or remarketed through our consumer and dealer channels. Based
on the large number of new and used vehicles being sold each year,
coupled with the relatively small market share of any single used
vehicle seller, we believe that both sources of used vehicles, and
our ability to sell them, will continue to be sufficient to meet
our current and future needs.
Seasonality
Historically, both
the automotive and powersport industries have been seasonal with
traffic and sales strongest in the spring and summer quarters.
Sales and traffic are typically slowest in the winter quarter but
increase typically in February and March, coinciding with tax
refunds and improved weather conditions. Given this seasonality,
coupled with the fact that we are a growing company, leads
us to expect our quarterly results of operations, including our
revenue, gross profit, profit/loss, and cash flow to vary
significantly in the future, based in part on vehicle buying
patterns. Over time, we expect to normalize to seasonal trends in
both markets, with the corresponding impact that may result from
the overall economic conditions.
Nashville Tornado
On
March 3, 2020, a severe tornado struck the greater Nashville area
causing significant damage to our 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 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 $2,783,000; and (3) loss of business
income, for which we have coverage in the amount of
$6,000,000.
6
All
three components of our 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 building insurer has agreed to
pay $2,778,000 on the building and personal property loss,
reflecting a complete recovery, net of $5,000 reflecting our
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 or
when any such recoveries will be made.
COVID-19 Pandemic
The
rapid spread of COVID-19 since March 2020 has resulted in
authorities implementing numerous measures to try to contain the
virus, such as travel bans and restrictions, quarantines, shelter
in place orders and shutdowns. These measures have impacted and may
further impact all or portions of our workforce and operations, the
behavior of our customers, and the operations of our partners,
vendors, and suppliers. While the federal and state governments
have taken measures to try to contain the COVID-19 pandemic, there
is considerable uncertainty regarding such measures and potential
future measures. The COVID-19 situation has created an
unprecedented and challenging time for our Company. Our current
focus is on positioning the Company for a strong recovery when this
crisis is over. During 2020 we took steps to reduce our inventory
and align our operating expenses to the state of the business. We
plan to continue to operate as permitted to support our
customers’ needs for reliable vehicles and to provide as many
jobs as possible for our associates; however, in April 2020 we
laid-off 169 associates. Future restrictions on our access to and
utilization of our logistics and distribution network, our
corporate offices, the inspection and reconditioning centers of our
partners, and/or our support operations or workforce, or similar
limitations for our partners, vendors, or suppliers, and
restrictions or disruptions of transportation, could further limit
our ability to conduct our business and have a material adverse
effect on our business, operating results, financial condition and
prospects. There is no certainty that measures taken by
governmental authorities will be sufficient to mitigate the risks
posed by the COVID-19 pandemic, and our ability to perform critical
functions could be harmed.
Outlook
The
COVID-19 pandemic effect on commercial activity and the significant
damage sustained to our wholesale automotive business from a
tornado in early March 2020 had a significant negative impact
on the growth in unit volume and revenue for our powersports,
automotive and transportation businesses for the year ended
December 31, 2020. Based on the evolving aspects of COVID-19 and
uncertainty surrounding its future development, it may continue to
have a negative impact on unit volumes and revenue in future
periods. Since the significant decrease in demand experienced in
early March through mid-April, we have seen monthly unit sales and
revenue increase sequentially month-over-month through July 2020.
However, during the six-month period ended December 31, 2020, our
average days to sale decreased and average selling prices increased
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.
This supply and demand imbalance continued 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 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
extent to which the COVID-19 outbreak ultimately impacts our
business, sales, results of operations, financial condition, and
liquidity will depend on the success of the roll out of the
vaccines and the efficacy of the vaccines and other future
developments, which are highly uncertain and cannot be predicted.
Even after the COVID-19 outbreak has subsided, we may continue to
experience significant impacts to our business as a result of its
global economic impact, including any economic downturn or
recession that has occurred or may occur in the
future.
7
Intellectual Property and Proprietary Rights
Our
brand image and intellectual property are an important element of
our business strategy. As of December 31, 2020, we
have a trademark registration for "RumbleOn" in
the United States as well as with the Madrid Protocol, a
patent covering near field communications to store and retrieve
vehicle information, and various applications pending with the U.S.
Patent and Trademark Office.
Government Regulation
Various
aspects of our business are or may be subject, directly or
indirectly, to U.S. federal and state laws and regulations. Failure
to comply with such laws or regulations may result in the
suspension or termination of our ability to do business in affected
jurisdictions or the imposition of significant civil and criminal
penalties, including fines or the award of significant damages
against us and our dealers in class action or other civil
litigation.
State Motor Vehicle Sales, Advertising and Brokering
Laws
The
advertising and sale of new or pre-owned motor vehicles is highly
regulated by the states in which we do business. Although we do not
anticipate selling new vehicles, state regulatory authorities or
third parties could take the position that some of the regulations
applicable to new vehicle dealers or to the manner in which
automobiles, powersports and recreational vehicles are advertised
and sold generally are directly applicable to our business. If our
products and services are determined to not comply with relevant
regulatory requirements, we could be subject to significant civil
and criminal penalties, including fines, or the award of
significant damages in class action or other civil litigation as
well as orders interfering with our ability to continue providing
our products and services in certain states. In addition, even
absent such a determination, to the extent dealers are uncertain
about the applicability of such laws and regulations to our
business, we may lose, or have difficulty increasing the number of
dealers in our network, which would affect our future
growth.
Several
states have laws and regulations that strictly regulate or prohibit
the brokering of motor vehicles or the making of so-called
"bird-dog" payments by dealers to third parties in
connection with the sale of motor vehicles through persons other
than licensed salespersons. If our products or services are
determined to fall within the scope of such laws or regulations, we
may be forced to implement new measures, which could be costly, to
reduce our exposure to those obligations, including the
discontinuation of certain products or services in affected
jurisdictions. Additionally, such a determination could subject us
to significant civil or criminal penalties, including fines, or the
award of significant damages in class action or other civil
litigation.
In
addition to generally applicable consumer protection laws, many
states in which we may do business either have or may implement
laws and regulations that specifically regulate the advertising for
sale of new or pre-owned automobiles, powersports and recreational
vehicles. These state advertising laws and regulations may not be
uniform from state to state, sometimes imposing inconsistent
requirements on the advertiser. If the content displayed on the
websites we operate is determined or alleged to be inaccurate or
misleading, we could be subject to significant civil and criminal
penalties, including fines, or the award of significant damages in
class action or other civil litigation. Moreover, such allegations,
even if unfounded or decided in our favor, could be extremely
costly to defend, could require us to pay significant sums in
settlements, and could interfere with our ability to continue
providing our products and services in certain states.
Federal Advertising Regulations
The
Federal Trade Commission ("FTC")
has authority to take actions to remedy or prevent advertising
practices that it considers to be unfair or deceptive and that
affect commerce in the United States. If the FTC takes the position
in the future that any aspect of our business constitutes an unfair
or deceptive advertising practice, responding to such allegations
could require us to pay significant damages, settlements, and civil
penalties, or could require us to make adjustments to our products
and services, any or all of which could result in substantial
adverse publicity, loss of participating dealers, lost revenue,
increased expenses, and decreased profitability.
8
Federal Antitrust Laws
The
antitrust laws prohibit, among other things, any joint conduct
among competitors that would lessen competition in the marketplace.
Some of the information that we may obtain from dealers may be
sensitive and, if disclosed inappropriately, could potentially be
pre-owned by dealers to impede competition or otherwise diminish
independent pricing activity. A governmental or private civil
action alleging the improper exchange of information, or unlawful
participation in price maintenance or other unlawful or
anticompetitive activity, even if unfounded, could be costly to
defend and adversely impact our ability to maintain and grow our
dealer network.
In
addition, governmental or private civil actions related to the
antitrust laws could result in orders suspending or terminating our
ability to do business or otherwise altering or limiting certain of
our business practices, including the manner in which we handle or
disclose pricing information, or the imposition of significant
civil or criminal penalties, including fines or the award of
significant damages against us in class action or other civil
litigation.
The
foregoing description of laws and regulations to which we are or
may be subject is not exhaustive, and the regulatory framework
governing our operations is subject to continuous change. The
enactment of new laws and regulations or the interpretation of
existing laws and regulations in an unfavorable way may affect the
operation of our business, directly or indirectly, which could
result in substantial regulatory compliance costs, civil or
criminal penalties, including fines, adverse publicity, loss of
participating dealers, lost revenue, increased expenses, and
decreased profitability. Further, investigations by government
agencies, including the FTC, into allegedly anticompetitive,
unfair, deceptive or other business practices by us, could cause us
to incur additional expenses and, if adversely concluded, could
result in substantial civil or criminal penalties and significant
legal liability.
Employees
As of
December 31, 2020, we had approximately 157
full time and two part-time employees.
Corporate History
RumbleOn, Inc. was
originally incorporated in the State of Nevada in October 2013 as a
development stage company under the name Smart Server, Inc. In
July 2016, Berrard
Holdings Limited Partnership ("Berrard Holdings") acquired 273,750 shares of common stock
of the Company from the prior owner of such shares pursuant to an
Amended and Restated Stock Purchase Agreement, dated July 13, 2016.
The shares acquired by Berrard Holdings represented 99.5% of the
Company's then issued and
outstanding shares of common stock. Steven Berrard, a director and
our Chief Financial Officer, has voting and dispositive control
over Berrard Holdings.
In
October 2016, Berrard
Holdings sold an aggregate of 165,625 shares of the
Company's common stock to
Marshall Chesrown, our Chairman of the Board and Chief
Executive Officer, and certain other purchasers. The 120,625 shares
acquired by Mr. Chesrown
represented 43.9% of the Company's then issued and outstanding shares of
common stock. The remaining shares owned by Berrard Holdings after
giving effect to the transaction represented 39.3% of the
Company's then issued and
outstanding shares of common stock.
On
January 8, 2017, the Company entered into an Asset Purchase
Agreement (the "NextGen
Agreement") with NextGen Dealer
Solutions, LLC ("NextGen"), Halcyon Consulting, LLC ("Halcyon"), and members of Halcyon signatory
thereto ("Halcyon
Members," and together with
Halcyon, the "Halcyon
Parties") pursuant to which
NextGen agreed to sell to the Company substantially all of the
assets of NextGen in exchange for a payment of approximately
$750,000 in cash, the issuance to NextGen of 76,191 unregistered
shares of Company common stock (the "Purchaser Shares"), the issuance of a subordinated secured
promissory note issued by the Company in favor of NextGen in the
amount of $1,333,333 (the "Acquisition Note") and the assumption by the Company of
certain specified post-closing liabilities of NextGen under the
contracts being assigned to the Company as part of the transaction
(the "NextGen
Acquisition").
9
On
January 9, 2017, the Company's
Board of Directors (the "Board") and stockholders holding 318,750 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 Smart Server, Inc. to RumbleOn, Inc. and to create an
additional class of Company common stock. The Certificate of
Amendment became effective on February 13, 2017, after the notice and
accompanying Information Statement describing the amendment was
furnished to non-consenting stockholders of the Company in
accordance with Nevada and Federal securities law.
Immediately before
approving the Certificate of Amendment, the Company had authorized
5,000,000 shares of common stock, $0.001 par value (the
"Authorized Common
Stock"), including 320,000
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 50,000 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
Class A Common Stock are entitled to 10 votes per share of Class A
Common Stock issued and outstanding and (ii) all other shares of
Common Stock, including all shares of Outstanding Common Stock were
deemed Class B Common Stock (the "Class B Common Stock"), which Class B Common Stock are
identical to the Class A Common Stock in all respects, except that
holders of Class B Common Stock will be entitled to one vote per
share of Class B Common Stock issued and outstanding.
On
January 9, 2017, the Company's
Board and stockholders holding 318,750 of the Company's issued and outstanding shares of common
stock approved the issuance to (i) Mr. Chesrown of 43,750 shares of
Class A Common Stock in exchange for an equal number of shares of
Class B Common Stock held by Mr. Chesrown and (ii) Mr. Berrard of
6,250 shares of Class A Common Stock in exchange for an equal
number of shares of Class B Common Stock held by Mr.
Berrard.
On
February 8, 2017 (the "Closing
Date"), RumbleOn and its wholly
owned subsidiary NextGen Pro, LLC ("NextGen Pro") completed the
NextGen Acquisition in exchange for approximately $750,000 in cash,
the Purchaser Shares, the Acquisition Note, and the other
consideration described above. The Acquisition Note was originally
set to mature on the third anniversary of the Closing Date (the
"Maturity Date"). Interest accrues and is paid
semi-annually originally (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 January 2020, the Acquisition Note was
amended to extend the Maturity Date to January 31, 2021, modify the
interest rate to 10% annually and also provide the holder the
option to convert the Acquisition Note at any time at a price of
$3.00 per share of Class B Common Stock. The Company's obligations under the Acquisition Note
are secured by substantially all the assets of the NextGen Pro
pursuant to an Unconditional Guaranty Agreement (the "Guaranty Agreement"), by and among Halcyon and NextGen Pro,
and a related Security Agreement between the parties, each dated as
of the Closing Date, as amended in January 2020. Under the terms of
the Guaranty Agreement, NextGen Pro has agreed to guarantee the
performance of all of the Company's obligations under the Acquisition
Note.
On
October 26, 2018, we entered into an Agreement and Plan of Merger
(as amended, the "Merger Agreement") by and among the Company, the
Company's newly-formed acquisition subsidiary RMBL Tennessee, LLC,
a Delaware limited liability company ("Merger Sub"), Wholesale
Holdings, Inc., a Tennessee corporation ("Holdings"), Wholesale,
LLC, a Tennessee limited liability company ("Wholesale"), Steven
Brewster and Janelle Brewster (each a "Stockholder," and together
the "Stockholders"), Steven Brewster, a Tennessee resident, as the
representative of each Stockholder (the "Representative"), and
Marshall Chesrown and Steven Berrard, providing for the merger (the
"Wholesale Merger") of Holdings with and into Merger Sub, with
Merger Sub surviving the Wholesale Merger as a wholly-owned
subsidiary of the Company. On October 29, 2018, we entered into an
Amendment to the Merger Agreement making a technical correction to
the definition of "Parent Consideration Shares" contained in the
Merger Agreement.
Also,
on October 26, 2018, we entered into a Membership Interest Purchase
Agreement (the "Purchase Agreement"), by and among the Company,
Steven Brewster and Justin Becker (together the "Express Sellers"),
and Steven Brewster as representative of the Express Sellers,
pursuant to which we acquired all of the membership interests (the
"Express Acquisition") in Wholesale Express, LLC, a Tennessee
limited liability company ("Wholesale Express").
10
Wholesale Inc. is one of the largest independent
distributors of pre-owned vehicles in the United States and Wholesale
Express, LLC is a related logistics company. The Wholesale Merger
and the Express Acquisition were both completed on October 30, 2018
(the "Wholesale Closing Date"). As consideration for the Wholesale
Merger, we (i) paid cash consideration of $12,353,941, subject to
certain customary post-closing adjustments and (ii) issued to the
Stockholders 1,317,329 shares (the "Stock Consideration") of our
previously designated Series B Non-Voting Convertible Preferred
Stock, par value $0.001 (the "Series B Preferred"). As
consideration for the Express Acquisition, we paid cash
consideration of $4,000,000, subject to certain customary
post-closing adjustments. Net proceeds from a private placement
completed in October 2018 and $5,000,000 funded under our credit
facility were used to partially fund the cash consideration of the
Wholesale Merger and the Express Acquisition. Each share of Series
B Preferred automatically converted on a one-for-one basis into
shares of the Company's Class B Common Stock on March 4,
2019.
On February 3, 2019, the Company completed the
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, a wholly owned subsidiary of Company, Scott
Bennie (the "Seller") and Autosport. Aggregate consideration for
the Acquisition consisted of (i) a closing cash payment of
$600,000, plus (ii) a fifteen-month $500,000 promissory note in
favor of the Seller, plus (iii)
a three-year $1,536,000 convertible promissory 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 for up to an
additional $787,500 if Autosport achieves certain performance
thresholds. In connection with the Acquisition, the Company 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 fair value of the contingent earn-out payment was
considered immaterial at the date of acquisition and was excluded
from the purchase price allocation. As of December 31, 2020, there
have been no payments earned under the performance thresholds and,
as of the date of this filing, the Seller’s right to any
earnout payments has expired.
Available Information
Our
Internet website is www.rumbleon.com.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act") are
available, free of charge, under the Investor Relations tab of our
website as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. Additionally,
the SEC maintains a website located at www.sec.gov
that contains the information we file or furnish electronically
with the SEC.
11
Item
1A.
Risk Factors
Described
below are certain risks to our business and the industry in which
we operate. You should carefully consider the risks described
below, together with the financial and other information contained
in this Annual Report on Form 10-K and in our other public
disclosures. If any of the following risks actually occurs, our
business, financial condition, results of
operations, cash flows and
prospects could be materially and adversely affected. As a result,
our future results could differ materially from historical results
and from guidance we may provide regarding our expectations of our
future financial performance, and the trading price of our Class B
common stock could decline.
Risk Factors Summary
The
following is a summary of the principal factors that make an
investment in our securities speculative or risky, all of which are
more fully described below in this section. This summary should be
read in conjunction with the full description of "Risk Factors" in
this section and should not be relied upon as an exhaustive summary
of the material risks facing our business. In addition to the
following summary and the information in this section, you should
consider the other information contained in this Annual Report on
Form 10-K before investing in our securities.
Risks Related to Our Business
●
We continue to
develop and expand our business and these investments may not
result in successful growth of our business.
●
The development 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.
●
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.
●
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.
●
The failure to
develop and maintain our brand could harm our ability to grow
unique visitor traffic and to expand our regional partner
network.
●
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 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.
●
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.
●
We rely on a number
of third parties to perform certain operating and administrative
functions for the Company.
●
We participate in a
highly competitive market, and pressure from existing and new
companies may adversely affect our business and operating
results.
●
Failure to
adequately protect our intellectual property 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.
●
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.
●
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.
●
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.
●
The ongoing effects
of COVID-19 may have a significant negative impact on our
business, sales, results of operations, financial condition, and
liquidity.
12
Risks Related to the RideNow Transaction
●
Completion
of the RideNow Transaction is subject to the conditions contained
in the RideNow Agreement and if these conditions are not satisfied,
the RideNow Transaction will not be completed.
●
Failure
to complete the RideNow Transaction could negatively impact our
stock price and our future business and financial
results.
●
The
RideNow Transaction will involve substantial costs.
●
In
connection with the RideNow Transaction, we will incur additional
indebtedness, which could adversely affect us, including our
business flexibility and will increase our interest
expense.
Risks Related to Ownership of our Class B Common Stock
●
The trading price
for our Class B Common Stock may be volatile and could be subject
to wide fluctuations in per share price.
●
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.
●
If
we fail to maintain an effective 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 trading 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.
Risks Related to the Company's 6.75% Convertible Senior Notes due
2025 (the "Notes")
●
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.
●
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.
●
The conditional
conversion feature of the Notes, if triggered, may adversely affect
our financial condition and operating results.
●
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.
●
Certain provisions
in the indenture governing the Notes may delay or make it more
expensive for a third party to acquire us.
Risks Related to Our Business
We continue to
develop and expand our
business and these investments may not result in successful growth
of our business.
We
expect to make significant investments in the further development
and expansion of our business and these investments may not result
in the development, operation, or growth of our business on a
timely basis or at all. We may not generate sufficient revenue and
we may incur significant losses in the future for a number of
reasons, including a lack of demand for our products and services,
increasing competition, weakness in the automotive, powersports and
recreational vehicle industries generally, as well as other risks
described in these Risk Factors, and we may encounter unforeseen
expenses, difficulties, complications and delays, and other unknown
factors relating to the development and operation of our business.
Accordingly, we may not be able to successfully develop and operate
our business, generate revenue, or achieve or maintain
profitability.
13
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.
We
expect our operating results to be subject to annual and quarterly
fluctuations, and they will be affected by numerous factors,
including:
●
a change in
consumer discretionary spending;
●
a shift in the mix
and type of vehicles we sell which could result in lower sales
price and lower gross profit;
●
weather, which may
impact the ability or desire for potential end customers to
consider whether they wish to own a powersports and recreational
vehicle;
●
the timing and cost
of, and level of investment in, development activities relating to
our software development and services, which may change from time
to time;
●
our ability to
attract, hire and retain qualified personnel;
●
expenditures that
we will or may incur to acquire or develop additional product and
service offerings;
●
future accounting
pronouncements or changes in our accounting policies;
and
●
the changing and
volatile U.S., European and global economic
environments.
If our
annual or quarterly operating results fall below the expectations
of investors or securities analysts, the price of our Class B
Common Stock could decline substantially. Furthermore, any annual
or quarterly fluctuations in our operating results may, in turn,
cause the price of our stock to fluctuate substantially. We believe
that annual and quarterly comparisons of our financial results are
not necessarily meaningful and should not be relied upon as an
indication of our future performance.
14
The development 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.
We
expect that, in the future, as our revenue increases, our rate of
growth will decline. In addition, we will not be able to grow as
fast or at all if we do not accomplish the following:
●
maintain and grow
our regional partner network;
●
increase the number
of users of our products and services, and in particular the number
of unique visitors to our website and our branded mobile
applications;
●
increase the number
of transactions between our users and both RumbleOn and our
regional partners;
●
introduce third
party ancillary products and services;
●
acquire sufficient
number of pre-owned vehicles at attractive cost; and
●
sell sufficient
number of pre-owned vehicles at acceptable prices.
We may
not successfully accomplish any of these objectives. We plan to
make investments for future growth and we expect to expend
substantial financial and other resources on:
●
marketing and
advertising;
●
product and service
development; including investments in our website, business
processes, infrastructure, inventory, product and service
development team and the development of new products and services
and new features for existing products; and
●
general
administration, including legal, accounting and other compliance
expenses related to being a public company.
In
addition, our anticipated growth may place significant demands on
our management and our operational and financial resources. As we
grow, we expect to hire additional personnel. Also, our
organizational structure will become more complex as we add
additional staff, and we will need to ensure we adequately develop
and maintain operational, financial and management controls as well
as our reporting systems and procedures.
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
intend to continue to make investments to support the development
and growth of our business and, we may require additional capital
to pursue our business objectives and respond to business
opportunities, challenges or unforeseen circumstances. Accordingly,
we may need to engage in equity or debt financings to secure
additional funds. However, additional funds may not be available
when we need them, on terms that are acceptable to us, or at all.
Volatility in the credit markets may also have an adverse effect on
our ability to obtain debt financing. Also, the incurrence of
leverage, the debt service requirements resulting therefrom, and
the possibility of a need for financing or any additional financing
could have important and negative consequences, including the
following: (a) the Company's
ability to obtain additional financing for working capital, capital
expenditures, or general corporate or other purposes may be
impaired in the future; (b) certain future borrowings may be at
variable rates of interest, which will expose the Company to the
risk of increased interest rates; (c) the Company may need to use a
portion of the money it earns to pay principal and interest on
their credit facilities, which will reduce the amount of money
available to finance operations and other business activities,
repay other indebtedness, and pay distributions; and (d)
substantial leverage may limit the Company's flexibility to adjust to changing
economic or market conditions, reduce their ability to withstand
competitive pressures and make them more vulnerable to a downturn
in general economic conditions.
15
If we
raise additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could suffer
significant dilution, and any new equity securities we issue could
have rights, preferences and privileges superior to those of
holders of our common stock. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, when we require
it, our ability to continue to pursue our business objectives and
to respond to business opportunities, challenges or unforeseen
circumstances could be significantly limited, and our business,
operating results, financial condition and prospects could be
adversely affected.
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.
We
believe that an important component of our development and growth
will be the business derived from the RumbleOn website and our
branded mobile applications. Because RumbleOn is a consumer brand,
we rely heavily on marketing and advertising to increase the
visibility of this brand with potential users of our products and
services.
Our
business model relies on our ability to scale rapidly and to
decrease incremental user acquisition costs as we grow. Some of our
methods of marketing and advertising may not be profitable because
they may not result in the acquisition of sufficient users visiting
our website and mobile applications such that we may recover these
costs by attaining corresponding revenue growth. If we are unable
to recover our marketing and advertising costs through increases in
user traffic and in the number of transactions by users of our
platform, it could have a material adverse effect on our growth,
results of operations and financial condition.
The failure to develop and maintain our brand could harm our
ability to grow unique visitor traffic and to expand our regional
partner network.
Developing and
maintaining the RumbleOn brand will depend largely on the success
of our efforts to maintain the trust of our users and dealers and
to deliver value to each of our users and dealers. If our potential
users perceive that we are not focused primarily on providing them
with a better pre-owned vehicle buying experience, our reputation
and the strength of our brand will be adversely
affected.
Complaints or
negative publicity about our business practices, our marketing and
advertising campaigns, our compliance with applicable laws and
regulations, the integrity of the data that we provide to users,
data privacy and security issues, and other aspects of our
business, irrespective of their validity, could diminish
users' and dealers' confidence in and the use of our products
and services and adversely affect our brand. There can be no
assurance that we will be able to develop, maintain or enhance our
brand, and failure to do so would harm our business growth
prospects and operating results.
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.
We
depend in part on Internet search engines and social media such as
Google™, Bing™, and Facebook™ to drive traffic to our website.
For example, when a user searches the internet for a particular
type of powersports or recreational vehicle, we will rely on a high
organic search ranking of our webpages in these search results to
refer the user to our website. However, our ability to obtain such
high, non-paid search result rankings is not within our control.
Our competitors' Internet
search engine and social media efforts may result in their websites
receiving a higher search result page ranking than ours, or
Internet search engines could revise their methodologies in a way
that would adversely affect our search result rankings. If Internet
search engines or social media companies modify their search
algorithms or display technologies in ways that are detrimental to
us, or if our competitors'
efforts are more successful than ours, overall growth in our user
base could slow or our user base could decline. Internet search
engine providers could provide recreation vehicle dealer and
pricing information directly in search results, align with our
competitors or choose to develop competing services. Any reduction
in the number of users directed to our website through Internet
search engines could harm our business and operating
results.
16
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.
Our
brand, reputation and ability to attract consumers, affinity groups
and advertisers depend on the reliable performance of our
technology infrastructure and content delivery. We may experience
significant interruptions with our systems in the future.
Interruptions in these systems, whether due to system failures,
computer viruses, or physical or electronic break-ins, could affect
the security or availability of our products on our website and
mobile application, and prevent or inhibit the ability of consumers
to access our products. Problems with the reliability or security
of our systems could harm our reputation, result in a loss of
consumers, dealers and affinity group marketing partners, and
result in additional costs.
We
intend to locate our communications, network, and computer hardware
used to operate our website and mobile applications at facilities
in various parts of the country to minimize the risk and create an
environment where we can remain online if one of the facilities in
which our equipment is housed goes offline. Nevertheless, we will
not own or control the operation of these facilities, and our
systems and operations will be vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure, terrorist
attacks, acts of war, electronic and physical break-ins, computer
viruses, earthquakes, and similar events. The occurrence of any of
these events could result in damage to our systems and hardware or
could cause them to fail.
Problems faced by
any third-party web hosting providers we may utilize could
adversely affect the experience of our consumers. Any third-party
web hosting providers could close their facilities without adequate
notice. Any financial difficulties, up to and including bankruptcy,
faced by any third-party web hosting providers or any of the
service providers with whom they contract may have negative effects
on our business, the nature and extent of which are difficult to
predict. If our third-party web hosting providers are unable to
keep up with our growing capacity needs, our business could be
harmed.
Any
errors, defects, disruptions, or other performance or reliability
problems with our network operations could cause interruptions in
access to our products as well as delays and additional expense in
arranging new facilities and services and could harm our
reputation, business, 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.
We
expect to receive data from third-party data providers, including
our partner network, dealer management system data feed providers,
data aggregators and integrators, survey companies, purveyors of
registration data and possibly others. There may be some instances
in which we use this information to collect a transaction fee from
those dealers and recognize revenue from the related
transactions.
From
time to time, we may experience interruptions in one or more data
feeds that we receive from third-party data providers, in a manner
that affects our ability to operate our business. These
interruptions may occur for a number of reasons, including changes
to the software used by these data feed providers and difficulties
in renewing our agreements with third-party data feed providers.
Additionally, when an interruption ceases, we may not always be
able to collect the appropriate fees and any such shortfall in
revenue could be material to our operating results.
17
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.
We
cannot assure you that we are able to provide a compelling vehicle
buying experience to our users and dealers, and our failure to do
so will mean that the number of transactions between our users,
RumbleOn and dealers will decline, and we will be unable to
effectively monetize our user traffic. We believe that our ability
to provide a compelling powersport and recreation vehicle buying
experience is subject to a number of factors,
including:
●
our ability to
launch new products that are effective and have a high degree of
consumer engagement; and
●
compliance of our
network partners with applicable laws, regulations and the rules of
our platform.
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.
We
anticipate that we will derive a significant portion of our revenue
from by existing vehicle dealers for dealer services we may provide
them. In addition, we utilize a select set of regional partners to
perform services for our benefit, including, among other things,
vehicle reconditioning, vehicle storage and vehicle photography. If
our relationships with our network of regional partners suffer harm
in a manner that leads to the departure of these regional partners
from our network, then our ability to operate our business, grow
revenue, and lower our costs will be adversely
affected.
We
cannot assure you that we will maintain strong relationships with
the regional partners in our network or that we will not suffer
partner attrition in the future. We may also have disputes with
regional partners from time to time, including relating to the
collection of fees from them and other matters. We may need to
modify our products, change pricing or take other actions to
address regional partner concerns in the future. If we are unable
to create and maintain a compelling value proposition for regional
partners to become and remain in our network, our network will not
grow and may begin to decline. If a significant number of these
regional partners decided to leave our network or change their
financial or business relationship with us, then our business,
growth, operating results, financial condition and prospects could
suffer. Additionally, if we are unable to attract regional partners
to our network, our growth could be impaired.
The growth of our business relies significantly on our ability to
increase the number of regional partners and dealers in our network
such that we are able to increase the number of transactions
between our users and regional partners. Failure to do so would
limit our growth.
Our
ability to both grow the number of regional partners and dealers in
our network and increase the average number of transaction
originating from each is an important factor in growing our
business. We may be viewed in a negative light by regional partners
and dealers, and there can be no assurance that we will be able to
maintain or grow the number of regional partners or dealers in our
network.
Our ability to grow our complementary product offerings may be
limited, which could negatively impact our development, growth,
revenue and financial performance.
As we
introduce or expand additional offerings for our platform, such as
recreation vehicle trade-ins, lead management, transaction
processing, financing, maintenance and insurance, we may incur
losses or otherwise fail to enter these markets successfully. Our
expansion into these markets may place us in competitive and
regulatory environments with which we are unfamiliar and involves
various risks, including the need to invest significant resources
and the possibility that returns on such investments will not be
achieved for several years, if at all. In attempting to establish
such new product offerings, we may incur significant expenses and
face various other challenges, such as expanding our sales force
and management personnel to cover these markets and complying with
complicated regulations that apply to these markets. In addition,
we may not successfully demonstrate the value of these ancillary
products to consumers or dealers, and failure to do so would
compromise our ability to successfully expand into these additional
revenue streams.
18
We rely on third-party financing providers to finance a portion of
our customers' vehicle purchases.
We rely
on third-party financing providers to finance a portion of our
customers' vehicle purchases.
Accordingly, our revenue and results of operations are partially
dependent on the actions of these third parties. We provide
financing to qualified customers through a number of third-party
financing providers. If one or more of these third-party providers
cease to provide financing to our customers, provide financing to
fewer customers or no longer provide financing on competitive
terms, it could have a material adverse effect on our business,
sales and results of operations. Additionally, if we were unable to
replace the current third-party providers upon the occurrence of
one or more of the foregoing events, it could also have a material
adverse effect on our business, sales and results of operations. We
rely on third-party providers to supply EPP products to our
customers. Accordingly, our revenue and results of operations will
be partially dependent on the actions of these third parties. If
one or more of these third-party providers cease to provide EPP
products, make changes to their products or no longer provide their
products on competitive terms, it could have a material adverse
effect on our business, revenue and results of operations.
Additionally, if we were unable to replace the current third-party
providers upon the occurrence of one or more of the foregoing
events, it could also have a material adverse effect on our
business, revenue and results of operations.
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.
We
believe when prices for pre-owned vehicles have declined, it can
have the effect of reducing demand among retail purchasers for new
vehicles (at or near manufacturer's suggested retail prices). Further,
vehicle manufacturers can and do take actions that influence the
markets for new and pre-owned vehicles. For example, introduction
of new models with significantly different functionality,
technology or other customer satisfiers can result in increased
supply of pre-owned vehicles, and a corresponding decrease in price
of pre-owned vehicles. Also, while historically manufacturers have
taken steps designed to balance production volumes for new vehicles
with demand, those steps have not always proven effective. In other
instances, manufacturers have chosen to supply new vehicles to the
market in excess of demand at reduced prices which has the effect
of reducing demand for pre-owned vehicles.
We rely on a number of third parties to perform certain operating
and administrative functions for the Company.
We rely
on a number of third parties to perform certain operating and
administrative functions for us. We may experience problems with
outsourced services, such as unfavorable pricing, untimely delivery
of services, or poor quality. Also, these third parties may
experience adverse economic conditions due to difficulties in the
global economy that could lead to difficulties supporting our
operations. In light of the amount and types of functions that we
will outsource, these service provider risks could have a material
adverse effect on our business and results of
operations.
We participate in a highly competitive market, and pressure from
existing and new companies may adversely affect our business and
operating results.
We face
significant competition from companies that provide listings,
information, lead generation, and vehicle buying services designed
to reach consumers and enable dealers to reach these consumers. We
will compete for a share of overall vehicle purchases as well as
vehicle dealer's marketing and
technology spend. To the extent that vehicle dealers view
alternative strategies to be superior to RumbleOn, we may not be
able to maintain or grow the number of dealers in our network, we
may sell fewer vehicles to users of our platform, and our business,
operating results and financial condition will be
harmed.
We also
expect that new competitors will continue to enter the online
vehicle retail industry with competing products and services, which
could have an adverse effect on our revenue, business and financial
results.
Our
competitors could significantly impede our ability to expand our
network of dealers and regional auctions and to reach consumers.
Our competitors may also develop and market new technologies that
render our existing or future products and services less
competitive, unmarketable or obsolete. In addition, if our
competitors develop products or services with similar or superior
functionality to our solutions, we may need to decrease the prices
for our solutions in order to remain competitive. If we are unable
to maintain our current pricing structure due to competitive
pressures, our revenue will be reduced, and our operating results
will be negatively affected.
19
Our
current and potential competitors may have significantly more
financial, technical, marketing and other resources than we have,
and the ability to devote greater resources to the development,
promotion, and support of their products and services.
Additionally, they may have more extensive recreation vehicle
industry relationships than we have, longer operating histories and
greater name recognition. As a result, these competitors may be
better able to respond more quickly to undertake more extensive
marketing or promotional campaigns. If we are unable to compete
with these companies, the demand for our products and services
could substantially decline.
In
addition, if one or more of our competitors were to merge or
partner with another of our competitors, the change in the
competitive landscape could adversely affect our ability to compete
effectively. Our competitors may also establish or strengthen
cooperative relationships with our current or future third-party
data providers, technology partners, or other parties with whom we
may have relationships, thereby limiting our ability to develop,
improve, and promote our solutions. We may not be able to compete
successfully against current or future competitors, and competitive
pressures may harm our revenue, business and financial
results.
Seasonality or weather trends may cause fluctuations in our unique
visitors, revenue and operating results.
Our
revenue trends are likely to be a reflection of
consumers' vehicle buying
patterns. While different types of recreation vehicles are designed
for different seasons (motorcycles are typically for non-snow
seasons, while snowmobiles are typically designed for winter), our
revenue may be cyclical if, for example, powersport and recreation
vehicles represent a large percentage of our revenue. Historically,
the used vehicle industry has been seasonal with traffic and sales
strongest in the spring and summer quarters. Sales and traffic are
typically slowest in the fall quarter but increase in February and
March, coinciding with tax refund season. Our business will also be
impacted by cyclical trends affecting the overall economy, as well
as by actual or threatened severe weather events.
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.
We
collect, process, store, share, disclose and use personal
information and other data provided by consumers, dealers and
auctions. We rely on encryption and authentication technology
licensed from third parties to effect secure transmission of such
information. We may need to expend significant resources to protect
against security breaches or to address problems caused by
breaches. Any failure or perceived failure to maintain the security
of personal and other data that is provided to us by consumers and
dealers could harm our reputation and brand and expose us to a risk
of loss or litigation and possible liability, any of which could
harm our business and operating results. In addition, from time to
time, it is possible that concerns will be expressed about whether
our products, services, or processes compromise the privacy of our
users. Concerns about our practices with regard to the collection,
use or disclosure of personal information or other privacy related
matters, even if unfounded, could harm our business and operating
results.
There
are numerous federal, state and local laws around the world
regarding privacy and the collection, processing, storing, sharing,
disclosing, using and protecting of personal information and other
data, the scope of which are changing, subject to differing
interpretations, and which may be costly to comply with and may be
inconsistent between countries and jurisdictions or conflict with
other rules. We generally comply with industry standards and are
subject to the terms of our privacy policies and privacy-related
obligations to third parties. We strive to comply with all
applicable laws, policies, legal obligations and industry codes of
conduct relating to privacy and data protection, to the extent
possible. However, it is possible that these obligations may be
interpreted and applied in new ways or in a manner that is
inconsistent from one jurisdiction to another and may conflict with
other rules or our practices or that new regulations could be
enacted. Any failure or perceived failure by us to comply with our
privacy policies, our privacy-related obligations to consumers or
other third parties, or our privacy-related legal obligations, or
any compromise of security that results in the unauthorized release
or transfer of sensitive information, which may include personally
identifiable information or other user data, may result in
governmental enforcement actions, litigation or public statements
against us by consumer advocacy groups or others and could cause
consumers and vehicle dealers to lose trust in us, which could have
an adverse effect on our business. Additionally, if vendors,
developers or other third parties that we work with violate
applicable laws or our policies, such violations may also put
consumer or dealer information at risk and could in turn harm our
reputation, business and operating results.
20
Failure to adequately protect our intellectual property could harm
our business and operating results.
A
portion of our success may be dependent on our intellectual
property, the protection of which is crucial to the success of our
business. We expect to rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions to
protect our intellectual property. In addition, we will attempt to
protect our intellectual property, technology, and confidential
information by requiring our employees and consultants to enter
into confidentiality and assignment of inventions agreements and
third parties to enter into nondisclosure agreements. These
agreements may not effectively prevent unauthorized use or
disclosure of our confidential information, intellectual property,
or technology and may not provide an adequate remedy in the event
of unauthorized use or disclosure of our confidential information,
intellectual property, or technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our website features, software, and functionality
or obtain and use information that we consider
proprietary.
Competitors may
adopt service names similar to ours, thereby harming our ability to
build brand identity and possibly leading to user confusion. In
addition, there could be potential trade name or trademark
infringement claims brought by owners of other registered
trademarks or trademarks that incorporate variations of the term
"RumbleOn" or "RMBL."
We
currently hold the "RumbleOn.com" Internet domain name and various other
related domain names. The regulation of domain names in the United
States is subject to change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name
registrars, or modify the requirements for holding domain names. As
a result, we may not be able to acquire or maintain all domain
names that use the name RumbleOn or RMBL.
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 may
from time-to-time face allegations that we have infringed the
trademarks, copyrights, patents and other intellectual property
rights of third parties, including from our competitors or
non-practicing entities.
Patent
and other intellectual property litigation may be protracted and
expensive, and the results are difficult to predict and may require
us to stop offering some features, purchase licenses or modify our
products and features while we develop non-infringing substitutes
or may result in significant settlement costs.
In
addition, we use open-source software in our products and will use
open-source software in the future. From time to time, we may face
claims against companies that incorporate open-source software into
their products, claiming ownership of, or demanding release of, the
source code, the open-source software or derivative works that were
developed using such software, or otherwise seeking to enforce the
terms of the applicable open-source license. These claims could
also result in litigation, require us to purchase a costly license
or require us to devote additional research and development
resources to change our platform or services, any of which would
have a negative effect on our business and operating
results.
Even if
these matters do not result in litigation or are resolved in our
favor or without significant cash settlements, these matters, and
the time and resources necessary to litigate or resolve them, could
harm our business, our operating results and our
reputation.
21
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.
We are
subject to a wide range of federal, state and local laws and
regulations. Our sale and purchase of pre-owned vehicles and
related activities, including the sale of complementary products
and services, are subject to state and local licensing
requirements, federal and state laws regulating advertising of
vehicles and related products and services, state laws related to
title and registration and state laws regulating the sale of
vehicles and related products and services. The applicability of
these regulatory and legal compliance obligations is dependent on
the evolving interpretations of these laws and regulations and how
our operations are, or are not, subject to them. The financing we
resell customers is subject to federal and state laws regulating
the provision of consumer finance. Our facilities and business
operations are subject to laws and regulations relating to
environmental protection and health and safety. In addition to
these laws and regulations that apply specifically to our business,
we are also subject to laws and regulations affecting public
companies, including securities laws and Nasdaq listing rules. The
violation of any of these laws or regulations could result in
administrative, civil or criminal penalties or in a
cease-and-desist order against our business operations, any of
which could damage our reputation and have a material adverse
effect on our business, sales and results of operations. We have
incurred and will continue to incur capital and operating expenses
and other costs to comply with these laws and
regulations.
We
currently provide transportation services and rely upon third-party
logistics and transportation providers to move vehicles between and
among customers, our distribution network partners and auction
partners; we and these transportation providers are subject to the
regulatory jurisdiction of the United States Department of
Transportation (the "DOT") and individual states through which our
vehicles travel, which have broad administrative powers with
respect to our logistics operations. Vehicle dimensions, driver
alcohol and drug testing and driver hours of service are also
subject to both federal and state regulation. More restrictive
limitations on vehicle weight and size, trailer length and
configuration, methods of measurement, driver qualifications or
driver hours of service would increase our costs, and if we are
unable to pass these cost increases on to our customers, our
operating expenses may increase and adversely affect our financial
condition, operating results and cash flows. If we or our providers
fail to comply with the DOT regulations or regulations become more
stringent, we could be subject to increased inspections, audits or
compliance burdens. Regulatory authorities could take remedial
action including imposing fines or shutting down our operations. If
any of these events occur, our financial condition, operating
results and cash flows would be adversely affected.
Our
sale of pre-owned vehicles, related products and services and
third-party finance products is subject to the state and local
licensing requirements of the jurisdictions in which we operate.
Regulators of jurisdictions where our customers reside but in which
we do not have a dealer or financing license could require that we
obtain a license or otherwise comply with various state
regulations. Despite our belief that we are not subject to the
licensing requirements of those jurisdictions, regulators may seek
to impose punitive fines for operating without a license or demand
we seek a license in those jurisdictions, any of which may inhibit
our ability to do business in those jurisdictions, increase our
operating expenses and adversely affect our financial condition and
results of operations.
The
foregoing description of laws and regulations to which we are or
may be subject is not exhaustive, and the regulatory framework
governing our operations is subject to evolving interpretations and
continuous change.
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.
We
provide transportation services and rely on external logistics to
transport vehicles between and among customers or distribution
network providers, and auction partners. As a result, we are
exposed to risks associated with the transportation industry such
as weather, traffic patterns, gasoline prices, recalls affecting
our vehicle fleet, local and federal regulations, vehicular
crashes, insufficient internal capacity, rising prices of external
transportation vendors, fuel prices, taxes, license and
registration fees, insurance premiums, self-insurance levels,
difficulty in recruiting and retaining qualified drivers,
disruption of our technology systems, and increasing equipment and
operational costs. Our failure to successfully manage our logistics
and fulfillment process could cause a disruption in our inventory
supply chain and distribution, which may adversely affect our
operating results and financial condition.
22
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.
We
believe our success will depend on the efforts and talents of our
executives and employees, including Marshall Chesrown, our Chairman
and Chief Executive Officer, and Steven R. Berrard, our Chief
Financial Officer. Our future success depends on our continuing
ability to attract, develop, motivate and retain highly qualified
and skilled employees. Qualified individuals are in high demand,
and we may incur significant costs to attract and retain them. In
addition, the loss of any of our senior management or key employees
could materially adversely affect our ability to execute our
business plan and strategy, and we may not be able to find adequate
replacements on a timely basis, or at all. Our executive officers
are at-will employees, which means they may terminate their
employment relationship with us at any time, and their knowledge of
our business and industry would be extremely difficult to replace.
We cannot ensure that we will be able to retain the services of any
members of our senior management or other key employees. If we do
not succeed in attracting well-qualified employees or retaining and
motivating existing employees, our business could be materially and
adversely affected.
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.
Our
success will depend, in part, on our ability to grow our business
in response to the demands of consumers, dealers and other
constituents within the vehicle industry as well as competitive
pressures. In some circumstances, we may determine to do so through
the acquisition of complementary businesses and technologies rather
than through internal development. The identification of suitable
acquisition candidates can be difficult, time-consuming, and
costly, and we may not be able to successfully complete identified
acquisitions. The risks we face in connection with acquisitions
include:
●
diversion of
management time and focus from operating our business to addressing
acquisition integration challenges;
●
coordination of
technology, research and development and sales and marketing
functions;
●
transition of the
acquired company's users to our
website and mobile applications;
●
retention of
employees from the acquired company;
●
cultural challenges
associated with integrating employees from the acquired company
into our organization;
●
integration of the
acquired company's accounting,
management information, human resources, and other administrative
systems;
●
the need to
implement or improve controls, procedures, and policies at a
business that prior to the acquisition may have lacked effective
controls, procedures, and policies;
●
potential
write-offs of intangibles or other assets acquired in such
transactions that may have an adverse effect on our operating
results in a given period;
●
liability for
activities of the acquired company before the acquisition,
including patent and trademark infringement claims, violations of
laws, commercial disputes, tax liabilities, and other known and
unknown liabilities; and
●
litigation or other
claims in connection with the acquired company, including claims
from terminated employees, consumers, former stockholders, or other
third parties.
Our
failure to address these risks or other problems encountered in
connection with our future acquisitions and investments could cause
us to fail to realize the anticipated benefits of these
acquisitions or investments, cause us to incur unanticipated
liabilities, and harm our business generally. Future acquisitions
could also result in dilutive issuances of our equity securities,
the incurrence of debt, contingent liabilities, amortization
expenses, or the impairment of goodwill, any of which could harm
our financial condition. Also, the anticipated benefits of any
acquisitions may not materialize to the extent we anticipate or at
all.
23
The ongoing impact of COVID-19 may have a significant
negative impact on our business, sales, results of operations,
financial condition, and liquidity.
The
global outbreak of COVID-19 resulted in severe disruptions in
general economic activities, particularly retail operations, as
businesses and federal, state, and local governments take
increasingly broad actions to mitigate this public health crisis.
We have experienced significant disruption to our business, both in
terms of disruption of our operations and the adverse effect on
overall economic conditions. These conditions may continue to
significantly negatively impact aspects of our business. Our
business is also dependent on the continued health and productivity
of our associates throughout this crisis. Individually and
collectively, we expect the ultimate consequences of the COVID-19
outbreak may have a significant negative impact on our business,
sales, results of operations, financial condition, and
liquidity.
The
extent to which the COVID-19 outbreak ultimately impacts our
business, sales, results of operations, financial condition, and
liquidity will depend on the success of the roll out of the
vaccines and the efficacy of the vaccines and other future
developments, which are highly uncertain and cannot be predicted.
Even after the COVID-19 outbreak has subsided, we may continue to
experience significant impacts to our business as a result of its
global economic impact, including any economic downturn or
recession that has occurred or may occur in the
future.
Risks Related to the RideNow Transaction
Completion of the RideNow Transaction is subject to the conditions
contained in the RideNow Agreement and if these conditions are not
satisfied, the RideNow Transaction will not be
completed.
The
completion of the RideNow Transaction is subject to various closing
conditions, including (a) the making of all filings and other
notifications required to be made under any Antitrust Law (as
defined in the RideNow Agreement) for the consummation of the
RideNow Transaction, the expiration or termination of all waiting
periods relating thereto, and the receipt of all clearances,
authorizations, actions, non-actions, or other consents required
from a governmental authority under any Antitrust Law for the
consummation of the RideNow Transaction, (b) performance in all
respects by each party of its covenants and agreements, (c) the
Company obtaining stockholder approval of the RideNow Transaction
and related matters, (d) the shares of our Class B Common Stock to
be issued as consideration in the RideNow Transaction being
approved for listing on Nasdaq, and (e) the receipt of consent to
the RideNow Transaction from certain powersports
manufacturers.
Many
of the conditions to the closing of the RideNow Transaction are not
within our control, and we cannot predict with certainty when or if
these conditions will be satisfied. The failure to satisfy any of
the required conditions could delay the completion of the RideNow
Transaction or prevent it from occurring. Any delay in completing
the RideNow Transaction could cause us not to realize some or all
of the benefits that we expect to achieve if the RideNow
Transaction is successfully completed within the expected
timeframe. There can be no assurance that the conditions to the
closing of the RideNow Transaction will be satisfied or that the
RideNow Transaction will be completed or that if completed we will
realize the anticipated benefits.
Failure to complete the RideNow Transaction could negatively impact
our stock price and our future business and financial
results.
If the
RideNow Transaction is not completed for any reason, our ongoing
business may be adversely affected and, without realizing any of
the benefits of having completed the RideNow Transaction, we could
be subject to a number of negative consequences, including, among
others: (i) we may experience negative reactions from the financial
markets, including negative impacts on our stock price; (ii) we
will still be required to pay certain significant costs relating to
the RideNow Transaction, including legal, accounting, and financial
advisor costs; and (iii) matters related to the RideNow Transaction
(including integration planning) require substantial commitments of
our time and resources, which could result in our inability to
pursue other opportunities that could be beneficial to us. If the
RideNow Transaction is not completed or if completion of the
RideNow Transaction is delayed, any of these risks could occur and
may adversely affect our business, financial condition, financial
results, and stock price.
24
The RideNow Transaction will involve substantial
costs.
We have
incurred, and expect to continue to incur, a number of
non-recurring costs associated with the RideNow Transaction. The
substantial majority of the non-recurring expenses will consist of
transaction and regulatory costs related to the RideNow
Transaction. We will also incur transaction fees and costs related
to formulating and implementing integration plans, including system
consolidation costs and employment-related costs. We continue to
assess the magnitude of these costs, and additional unanticipated
costs may be incurred from the RideNow Transaction and integration.
Although we anticipate that the elimination of duplicative costs
and the realization of other efficiencies and synergies related to
the integration should allow us to offset integration-related costs
over time, this net benefit may not be achieved in the near term,
or at all.
In connection with the RideNow Transaction, we will incur
additional indebtedness, which could adversely affect us, including
our business flexibility and will increase our interest
expense.
We will
have increased indebtedness following completion of the RideNow
Transaction, which could have the effect, among other things, of
reducing our flexibility to respond to changing business and
economic conditions and increasing our interest expense. We will
also incur various costs and expenses related to the financing of
the RideNow Transaction. The amount of cash required to pay
interest on our increased indebtedness following completion of the
RideNow Transaction and thereby the demands on our cash resources
will be greater than the amount of cash flow required to service
our indebtedness prior to the RideNow Transaction. The increased
levels of indebtedness following completion of the RideNow
Transaction could also reduce funds available for working capital,
capital expenditures, and other general corporate purposes, and may
create competitive disadvantages for us relative to other companies
with lower debt levels. If we do not achieve the expected synergies
and cost savings from the RideNow Transaction, or if our financial
performance after the RideNow Transaction does not meet our current
expectations, then our ability to service the indebtedness may be
adversely impacted.
Risks Related to Ownership of our Class B Common Stock
The trading price for our Class B Common Stock may be volatile and
could be subject to wide fluctuations in per share
price.
Our
Class B Common Stock is listed for trading on The NASDAQ Capital
Market under the trading symbol "RMBL,"
however historically there has been a limited public market for our
Class B Common Stock. The liquidity of any market for the shares of
our Class B Common Stock will depend on a number of factors,
including:
●
the number of
stockholders;
●
our operating
performance and financial condition;
●
the market for
similar securities;
●
the extent of
coverage of us by securities or industry analysts; and
●
the interest of
securities dealers in making a market in the shares of our common
stock.
The
market price for our Class B Common Stock may be highly volatile
and could be subject to wide fluctuations. In addition, the price
of shares of our Class B Common Stock could decline significantly
if our future operating results fail to meet or exceed the
expectations of market analysts and investors and actual or
anticipated variations in our quarterly operating results could
negatively affect our share price.
25
Other
factors may also contribute to volatility of the price of our Class
B Common Stock and could subject our Class B Common Stock to wide
fluctuations. These include:
●
developments in the
financial markets and worldwide or regional economies;
●
announcements of
innovations or new products or services by us or our
competitors;
●
announcements by
the government relating to regulations that govern our
industry;
●
significant sales
of our Class B Common Stock or other securities in the open
market;
●
variations in
interest rates;
●
changes in the
market valuations of other comparable companies; and
●
changes in
accounting principles.
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.
Our
executive officers and directors as a group own shares of our Class
A Common Stock and Class B Common Stock representing approximately
31.24% in aggregate of our voting power as of March 26, 2021,
including approximately 25.28% in aggregate voting power held by
Messrs. Chesrown and Berrard as the only holders of our 50,000
outstanding shares of our Class A Common Stock, which has 10 votes
for each one share outstanding. As a result, these stockholders
have the ability to exert significant control over matters
requiring stockholder approval. For example, these stockholders are
able to exert significant control over elections of directors,
amendments of our organizational documents' approval of any merger,
including the RideNow Transaction, sale of assets, or other major
corporate transaction. This may prevent or discourage unsolicited
acquisition proposals or offers for our common stock that you may
believe are in your best interest as a stockholder or to take other
action that you may believe are not in your best interest as a
stockholder. This may also adversely affect the market price of our
Class B Common Stock.
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.
The
trading market for our Class B Common Stock may be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If any of the analysts who cover
us issue an adverse or misleading opinion regarding us, our
business model, our intellectual property or our stock performance,
or if our operating results fail to meet the expectations of
analysts, our stock price would likely decline. If one or more of
these analysts cease coverage of us or fail to publish reports on
us regularly, we could lose visibility in the financial markets,
which in turn could cause our stock price or trading volume to
decline.
We do not currently or for the foreseeable future intend to pay
dividends on our common stock.
We have
never declared or paid any cash dividends on our common stock. We
currently do not intend to pay cash dividends in the foreseeable
future on the shares of common stock. We intend to reinvest any
earning in the development and expansion of our business. As a
result, any return on your investment in our common stock will be
limited to the appreciation in the price of our common stock, if
any.
26
We are currently 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.
We are
currently subject to reduced reporting requirements so long as we
are considered a "smaller reporting company". We cannot predict if
investors will find our common stock less attractive because we
currently rely on these exemptions. If some investors find our
common stock less attractive as a result, there may be a less
active trading market for our common stock and our stock price may
be more volatile.
If we fail to maintain an effective 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 trading price of our common
stock.
Effective internal
controls over financial reporting are necessary for us to provide
reliable financial reports and, together with adequate disclosure
controls and procedures, are designed to prevent fraud. Any failure
to implement required new or improved controls, or difficulties
encountered in their implementation could cause us to fail to meet
our reporting obligations. In addition, any testing by us conducted
in connection with Section 404 of the Sarbanes-Oxley Act, or any
subsequent testing by our independent registered public accounting
firm, may reveal deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses or
that may require prospective or retroactive changes to our
financial statements or identify other areas for further attention
or improvement. Inferior internal controls could also cause
investors to lose confidence in our reported financial information,
which could have a negative effect on the trading 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.
Nevada
law and our charter, bylaws, and other governing documents contain
provisions that could discourage, delay or prevent a third party
from acquiring us, even if doing so may be beneficial to our
stockholders, which could cause our stock price to decline. In
addition, these provisions could limit the price investors would be
willing to pay in the future for shares of our common
stock.
Risks Related to the Company's 6.75% Convertible Senior Notes due
2025 (the "Notes")
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.
The
Notes rank senior in right of payment to any of our indebtedness
that is expressly subordinated in right of payment to the Notes,
equal in right of payment with all of our liabilities that is not
so subordinated, effectively junior in right of payment to any of
our secured indebtedness to the extent of the value of the assets
securing such indebtedness, and structurally junior to all
indebtedness and other liabilities (including trade payables) of
our current or future subsidiaries. In the event of our bankruptcy,
liquidation, reorganization, or other winding up, our assets that
secure debt ranking senior or equal in right of payment to the
Notes will be available to pay obligations on the Notes only after
the secured debt has been repaid in full from these assets, and the
assets of our subsidiaries will be available to pay obligations on
the Notes only after all claims senior to the Notes have been
repaid in full. There may not be sufficient assets remaining to pay
amounts due on any or all of the Notes then outstanding. The
indenture governing the Notes (the "Indenture") does not prohibit
us from incurring additional senior debt or any future secured
debt, nor does it prohibit any of our current or future
subsidiaries from incurring additional liabilities.
As of
December 31, 2020, excluding operating lease liabilities and the
derivative liability, our total consolidated net indebtedness was
$53,108,353, net of unamortized debt discount of $12,045,479. This
includes $17,811,626 of secured indebtedness directly attributable
to the Company's vehicles in inventory or held for sale, and the
security of those lenders includes all of the vehicles financed by
such lenders as well as all of the assets of our
subsidiaries.
27
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.
The
Notes are our obligations exclusively. A substantial portion of our
operations is conducted through, and a substantial portion of our
consolidated assets is held by, our subsidiaries. Accordingly, our
ability to service our debt, including the Notes, depends, in part,
on the results of operations of our subsidiaries and on the ability
of such subsidiaries to provide us with cash, whether in the form
of dividends, loans, or otherwise, to pay amounts due on our
obligations, including the Notes. However, our subsidiaries are
separate and distinct legal entities, are not guaranteeing the
Notes, and have no obligation, contingent or otherwise, to make
payments on the Notes or to make any funds available for that
purpose. In addition, dividends, loans, or other distributions to
us from such subsidiaries may be subject to contractual and other
restrictions and are subject to other business considerations. Our
right to receive any assets of any of our subsidiaries on such
subsidiary's bankruptcy, liquidation, or reorganization, and,
therefore, the right of the holders of Notes to participate in
those assets, will be subject to prior claims of creditors of the
subsidiary, including trade creditors, and such subsidiary may not
have sufficient assets remaining to make any payments to us as a
shareholder or otherwise. We advise holders of Notes that there may
not be sufficient assets remaining to pay amounts due on any or all
the Notes then outstanding.
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.
Our
ability to make payments of the principal of, to pay interest on,
or to refinance the Notes or other indebtedness depends on our
future performance, which is subject to economic, financial,
competitive, and other factors beyond our control. Our business may
not continue to generate cash flow from operations in the future
sufficient to service our debt and make necessary capital
expenditures. If we are unable to generate such cash flow, we may
be required to adopt one or more alternatives, such as selling
assets, restructuring debt, obtaining additional debt financing, or
issuing additional equity securities, any of which may be on terms
that are not favorable to us or, in the case of equity securities,
highly dilutive. Our ability to refinance the Notes or our other
indebtedness will depend on the capital markets, our business, and
our financial condition at such time. We may not be able to engage
in any of these activities or engage in these activities on
desirable terms, which could result in a default on our debt
obligations. In addition, our future debt agreements may contain
restrictive covenants that may prohibit us from adopting any of
these alternatives. Our failure to comply with any such covenants
could result in an event of default which, if not cured or waived,
could result in the acceleration of our debt.
Recent and future regulatory actions and other events may adversely
affect the trading price and liquidity of the Notes.
We
expect that many investors in, and potential purchasers of, the
Notes will employ, or seek to employ, a convertible arbitrage
strategy with respect to the Notes. Investors would typically
implement such a strategy by selling short the Class B Common Stock
underlying the Notes and dynamically adjusting their short position
while continuing to hold the Notes. Investors may also implement
this type of strategy by entering into swaps on our Class B Common
Stock in lieu of or in addition to short selling the Class B Common
Stock.
The SEC
and other regulatory and self-regulatory authorities have
implemented various rules and taken certain actions, and may in the
future adopt additional rules and take other actions, that may
impact those engaging in short selling activity involving equity
securities (including our Class B Common Stock) and securities
convertible into or exchangeable for equity securities. Such rules
and actions include Rule 201 of SEC Regulation SHO, the adoption by
the Financial Industry Regulatory Authority, Inc. and the national
securities exchanges of a "Limit Up-Limit Down" program, the
imposition of market-wide circuit breakers that halt trading of
securities for certain periods following specific market declines,
and the implementation of certain regulatory reforms required by
the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010. Any government or regulatory action that restricts the
ability of investors in or potential purchasers of the Notes to
effect short sales of our Class B Common Stock, borrow our Class B
Common Stock, or enter into swaps on our Class B Common Stock could
adversely affect the trading price and the liquidity of the
Notes.
28
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.
Our
Class B Common Stock is listed for trading on The NASDAQ Capital
Market under the trading symbol "RMBL," however historically there
has been a limited public market for our Class B Common Stock. The
liquidity of any market for the shares of our Class B Common Stock
will depend on a number of factors, including:
●
the number of
stockholders;
●
our operating
performance and financial condition;
●
the market for
similar securities;
●
the extent of
coverage of us by securities or industry analysts; and
●
the interest of
securities dealers in making a market in the shares of our common
stock.
The
market price for our Class B Common Stock may be highly volatile
and could be subject to wide fluctuations. In addition, the price
of shares of our Class B Common Stock could decline significantly
if our future operating results fail to meet or exceed the
expectations of market analysts and investors and actual or
anticipated variations in our quarterly operating results could
negatively affect our share price.
Other
factors may also contribute to volatility of the price of our Class
B Common Stock and could subject our Class B Common Stock to wide
fluctuations. These include:
●
developments in the
financial markets and worldwide or regional economies;
●
announcements of
innovations or new products or services by us or our
competitors;
●
announcements by
the government relating to regulations that govern our
industry;
●
significant sales
of our Class B Common Stock or other securities in the open
market;
●
variations in
interest rates;
●
changes in the
market valuations of other comparable companies; and
●
changes in
accounting principles.
A
decrease in the market price of our Class B Common Stock would
likely adversely impact the trading price of the Notes. The market
price of our Class B Common Stock could also be affected by
possible sales of our Class B Common Stock by investors who view
the Notes as a more attractive means of investing in us and by
hedging or arbitrage trading activity that we expect to develop
involving our Class B Common Stock. This trading activity could
adversely affect the trading price of the Notes.
29
We may incur substantially more debt in the future or take other
actions which would intensify the risks discussed in these risk
factors.
We and
our subsidiaries may be able to incur substantial additional debt
in the future (including secured debt), subject to the restrictions
contained in our debt instruments. We are not restricted under the
terms of the indenture governing the Notes from incurring
additional debt, securing existing or future debt, refinancing our
debt, repurchasing our stock, pledging our assets, making
investments, paying dividends, guaranteeing debt, or taking a
number of other actions that are not limited by the terms of the
indenture governing the Notes, any of which could have the effect
of diminishing our ability to make payments on the Notes when
due.
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.
Holders
of the Notes have the right to require us to repurchase all or a
portion of their Notes on the occurrence of a fundamental change at
a fundamental change repurchase price equal to 100% of the
principal amount of the Notes to be repurchased, plus accrued and unpaid interest,
if any, to, but excluding the fundamental change repurchase date,
as described in the Indenture. In addition, on conversion of the
Notes, unless we elect to deliver only shares of our Class B Common
Stock to settle such conversion (other than paying cash in lieu of
delivering any fractional share), we will be required to make cash
payments in respect of the Notes being converted. Moreover, we are
required to repay the Notes in cash at their maturity unless
earlier converted or repurchased. Our ability to meet our
obligations to holders of the Notes depends on our operating
results and cash flow. However, we may not have enough available
funds on hand or be able to obtain financing at the time we are
required to make payments with respect to Notes at maturity, on
surrender for repurchase, or on conversion.
In
addition, our ability to repurchase the Notes or to pay cash on
conversions of the Notes may be limited by law, regulations, or
agreements governing our future indebtedness. Our failure to
repurchase Notes at a time when the repurchase is required by the
indenture governing the Notes or to pay any cash payable on future
conversions of the Notes or at maturity as required by such
indenture would constitute a default under such indenture. A
default under such indenture or the fundamental change itself could
also lead to a default under agreements governing our future
indebtedness. If the repayment of the related indebtedness were to
be accelerated after any applicable notice or grace periods, we may
not have sufficient funds to repay the indebtedness and repurchase
the Notes or make cash payments on conversions of the Notes, if
settled in cash.
Redemption may adversely affect the return on the
Notes.
We may
not redeem the Notes prior to January 14, 2023. We may redeem for
cash all or any portion of the Notes, at our option, on or after
January 14, 2023 if the last reported sale price of our Class B
Common Stock has been at least 130% of the conversion price of the
Notes then in effect for at least 20 trading days (whether or not
consecutive), including the trading day immediately preceding the
date on which we provide notice of redemption, during any 30
consecutive trading day period ending on, and including, the
trading day immediately preceding the date on which we provide
notice of redemption, at a redemption price equal to 100% of the
principal amount of Notes to be redeemed, plus accrued and unpaid
interest to, but excluding, the redemption date. We may choose to
redeem some or all of the Notes, including at times when prevailing
interest rates are relatively low. Holders of the Notes may not be
able to reinvest the proceeds from the redemption of the Notes in a
comparable security at an effective interest rate as high as the
interest rate on the Notes being redeemed.
The conditional conversion feature of the Notes, if triggered, may
adversely affect our financial condition and operating
results.
In the
event the conditional conversion feature of the Notes is triggered,
holders of such Notes will be entitled to convert their Notes at
any time during specified periods at their option. If any holder
elects to convert its Notes, unless we elect to satisfy our
conversion obligation by delivering only shares of our Class B
Common Stock (other than paying cash in lieu of delivering any
fractional share), we would be required to settle a portion or all
of our conversion obligation in cash, which could adversely affect
our liquidity. In addition, even if holders do not elect to convert
their Notes, we could be required under applicable accounting rules
to reclassify all or a portion of the outstanding principal of the
Notes as a current liability rather than a long-term liability,
which would result in a material reduction of our net working
capital and may harm our business.
30
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.
The
conversion of some or all of the Notes may dilute the ownership
interests of our stockholders. On conversion of the Notes, we have
the option to pay or deliver, as the case may be, cash, shares of
our Class B Common Stock, or a combination of cash and shares of
our Class B Common Stock. In addition, in certain circumstances, we
will make an interest make-whole payment to a converting holder
which may be paid in cash or shares of our common stock. If we
elect to settle our conversion obligation (or the interest
make-whole payment) in shares of our Class B Common Stock or a
combination of cash and shares of our Class B Common Stock, any
sales in the public market of our Class B Common Stock issuable on
such conversion could adversely affect prevailing market prices of
our Class B Common Stock. In addition, the existence of the Notes
may encourage short selling by market participants because the
conversion of the Notes could be used to satisfy short positions,
or anticipated conversion of the Notes into shares of our Class B
Common Stock could depress the market price of our Class B Common
Stock.
Future sales of our Class B Common Stock or equity-linked
securities in the public market could lower the market price for
our Class B Common Stock and adversely impact the trading price of
the Notes.
In the
future, we may raise funds by selling additional equity,
equity-linked securities, or debt securities. In addition, a
substantial number of shares of our Class B Common Stock is
reserved for issuance on the exercise of stock options, settlement
of restricted stock units, and conversion of the Notes. We cannot
predict the size of future issuances or the effect, if any, that
they may have on the market price for our Class B Common Stock. The
issuance and sale of substantial amounts of our Class B Common
Stock or equity-linked securities, or the perception that such
issuances and sales may occur, could adversely affect the trading
price of the Notes and the market price of our Class B Common
Stock, and impair our ability to raise capital through the sale of
additional equity or equity-linked securities.
Holders of Notes are not entitled to any rights with respect to our
Class B Common Stock, but they will be subject to all changes made
with respect to them to the extent our conversion obligation
includes shares of our Class B Common Stock.
Holders
of Notes are not entitled to any rights with respect to our Class B
Common Stock (including, without limitation, rights to receive any
dividends or other distributions on our Class B Common Stock) prior
to the conversion date relating to such Notes (if we have elected
to settle the conversion by delivering only shares of our Class B
Common Stock, other than paying cash in lieu of delivering any
fractional share) or the last trading day of the observation period
(if we elect to pay and deliver, as the case may be, a combination
of cash and shares of our Class B Common Stock in respect of the
conversion). But, holders of Notes will be subject to all changes
affecting our Class B Common Stock. For example, if an amendment is
proposed to our certificate of incorporation or bylaws requiring
stockholder approval and the record date for determining the
stockholders of record entitled to vote on the amendment occurs
prior to the conversion date with respect to any Notes surrendered
for conversion, then the holder surrendering such Notes will not be
entitled to vote on the amendment, although such holder will
nevertheless be subject to any changes affecting our Class B Common
Stock.
The conditional conversion feature of the Notes could result in
holders receiving less than the value of our Class B Common Stock
into which the Notes would otherwise be convertible.
Prior
to the close of business on the business day immediately preceding
July 1, 2024, holders may convert their Notes only if specified
conditions are met. If the specific conditions for conversion are
not met, holders will not be able to convert their Notes during
that period, and they may not be able to receive the shares of
Class B Common Stock (or the value of such shares in cash or a
combination of cash and shares of Class B Common Stock) into which
the Notes would otherwise be convertible.
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.
Under
the Notes, a converting holder will be exposed to fluctuations in
the value of our Class B Common Stock during the period from the
date such holder surrenders Notes for conversion until the date we
settle our conversion obligation.
31
On
conversion of the Notes, we have the option to pay or deliver, as
the case may be, cash, shares of our Class B Common Stock, or a
combination of cash and shares of our Class B Common Stock
(including, if applicable, any interest make-whole payment we
elect, or are deemed to have elected to satisfy by delivering
shares of our Class B Common Stock). If we elect to satisfy our
conversion obligation in cash or a combination of cash and shares
of our Class B Common Stock, the amount of consideration that
holders will receive on conversion of their Notes will be
determined by reference to the volume-weighted average price of our
Class B Common Stock for each trading day in a 40-trading day
observation period and an interest make-whole payment, if
applicable.
Accordingly, if the
price of our Class B Common Stock decreases during the applicable
period, the amount and value of consideration holders receive will
be adversely affected. In addition, if the market price of our
Class B Common Stock at the end of such period is below the
volume-weighted average price of our Class B Common Stock during
such period, the value of any shares of our Class B Common Stock
that holders will receive in satisfaction of our conversion
obligation will be less than the value used to determine the number
of shares that holders will receive.
If we
elect to satisfy our conversion obligation only in shares of our
Class B Common Stock on conversion of the Notes, we will, subject
to the blocker provisions to the extent applicable, be required to
deliver the shares of our Class B Common Stock, together with cash
for any fractional share, on the second business day following the
conversion date (provided that, with respect to any conversion date
following the regular record date immediately preceding the
maturity date where physical settlement applies to the related
conversion, we will settle any such conversion on the maturity
date). Accordingly, if the price of our Class B Common Stock
decreases during this period, the value of the shares that holders
receive will be adversely affected and would be less than the
conversion value of the Notes on the conversion date.
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.
If a
make-whole fundamental change occurs prior to the maturity date for
the Notes or if we deliver a notice of redemption with respect to
the Notes, we will, under certain circumstances, increase the
conversion rate for the Notes by a number of additional shares of
our Class B Common Stock for Notes converted in connection with
such make-whole fundamental change or notice of redemption. The
increase in the conversion rate will be determined based on the
date on which the make-whole fundamental change occurs or becomes
effective, or the date we deliver the notice of redemption, as the
case may be, and the price paid (or deemed to be paid) per share of
our Class B Common Stock in the make-whole fundamental change or
determined with respect to the notice of redemption, as the case
may be. 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 you for any lost value of
your Notes as a result of such transaction or redemption. In
addition, if the "stock price" (as defined in the Indenture) is
greater than $1.00 per share or less than the Make-Whole Adjustment
Reference Price (as defined in the Indenture”), no additional
shares of Class B Common Stock will be added to the conversion
rate. Moreover, in no event will the conversion rate per $1,000
principal amount of Notes as a result of this adjustment exceed
61.6523 shares of Class B Common Stock, subject to adjustment in
the same manner as the conversion rate for the Notes.
Our
obligation to increase the conversion rate for Notes converted in
connection with a make-whole fundamental change or a notice of
redemption could be considered a penalty, in which case the
enforceability would be subject to general principles of
reasonableness and equitable remedies.
The conversion rate of the Notes may not be adjusted for dilutive
events.
The
conversion rate of the Notes is subject to adjustment for certain
events, including, but not limited to, the issuance of certain
stock dividends on our Class B Common Stock, the issuance of
certain rights or warrants, subdivisions or combinations of our
Class B Common Stock, distributions of capital stock, indebtedness,
or assets, cash dividends, and certain issuer tender or exchange
offers as described under the Indenture. However, the conversion
rate will not be adjusted for other events, such as a third-party
tender or exchange offer or an issuance of Class B Common Stock for
cash, that may adversely affect the trading price of the Notes or
our Class B Common Stock. An event that adversely affects the value
of the Notes may occur, and that event may not result in an
adjustment to the conversion rate. We have no obligation to
consider the specific interests of the holders of the Notes in
engaging in any such offering or transaction.
32
Some significant restructuring transactions may not constitute a
fundamental change, in which case we would not be obligated to
offer to repurchase the Notes.
On the
occurrence of a fundamental change, you have the right to require
us to repurchase all or a portion of your Notes. However, the
fundamental change provisions do not afford protection to holders
of Notes in the event of other transactions that could adversely
affect the Notes. For example, transactions such as leveraged
recapitalizations, refinancing’s, restructurings, or
acquisitions initiated by us may not constitute a fundamental
change requiring us to repurchase the Notes. In the event of any
such transaction, the holders would not have the right to require
us to repurchase the Notes, even though each of these transactions
could increase the amount of our indebtedness or otherwise
adversely affect our capital structure or any credit ratings,
thereby adversely affecting the holders of Notes.
Certain provisions in the indenture governing the Notes may delay
or make it more expensive for a third party to acquire
us.
Certain
provisions in the indenture governing the Notes may make it more
difficult or expensive for a third party to acquire us. For
example, the indenture governing the Notes requires us, at the
noteholders' election, to repurchase the Notes for cash on the
occurrence of a fundamental change and, in certain circumstances,
to increase the conversion rate for a holder that converts its
Notes in connection with a make-whole fundamental change. A
takeover of us may trigger the requirement that we repurchase the
Notes or increase the conversion rate, which could make it more
costly for a third party to acquire us. Furthermore, the indenture
for the Notes prohibits us from engaging in certain mergers or
acquisitions unless, among other things, the surviving entity
assumes our obligations under the Notes. These and other provisions
in the indenture could deter or prevent a third party from making
bids to acquire us even when the acquisition may be favorable to
you.
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.
Notwithstanding
anything to the contrary herein, 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, but only to
the extent, that such receipt would cause such holders to become,
directly or indirectly, the "beneficial owner" (within the
meaning of Section 13(d) under the Exchange Act and the rules
promulgated thereunder) of our Class B Common Stock in excess
4.99% of the total number of the shares of our Class B Common Stock
then issued and outstanding. Any purported delivery of shares of
our Class B Common Stock upon conversion of the Notes shall be void
and have no effect to the extent, but only to the extent, that such
delivery would result in any person becoming the beneficial owner
of shares of our Class B Common Stock outstanding at such time in
excess of the beneficial ownership limits then applicable to such
person.
As a
result of the beneficial ownership limits, shares of Class B Common
Stock otherwise deliverable upon conversion of Notes may be
delayed, or never delivered at all. These limitations on beneficial
ownership may force you to sell shares of our Class B Common Stock
or other securities you own in order to receive shares you would
otherwise be entitled to receive upon conversion. If holders
convert their Notes and do not receive any shares otherwise
deliverable upon conversion, we are not responsible for any lost
value due to a delayed delivery, or if they are never delivered as
a result of the conversion restrictions described
above.
We cannot assure you that an active trading market will develop for
the Notes.
Prior
to the 2020 Note Offering (as defined below), there has been no
trading market for the Notes, and we do not intend to apply to list
the Notes on any securities exchange or to arrange for quotation on
any automated dealer quotation system. We have been informed by the
initial purchaser that it intended to make a market in the Notes
after the 2020 Note Offering. However, the initial purchaser may
cease its market-making at any time without notice. The liquidity
of the trading market in the Notes, and the market price quoted for
the Notes, may be adversely affected by changes in the overall
market for this type of security and by changes in our financial
performance or prospects or in the prospects for companies in our
industry generally. We cannot assure you that an active trading
market will develop for the Notes. If an active trading market does
not develop or is not maintained, the market price and liquidity of
the Notes may be adversely affected. In that case you may not be
able to sell your Notes at a particular time or you may not be able
to sell your Notes at a favorable price.
33
Any adverse rating of the Notes may cause their trading price to
fall.
We do
not intend to seek a rating on the Notes. However, if a rating
service were to rate the Notes and if such rating service were to
lower its rating on the Notes below the rating initially assigned
to such Notes or otherwise announce its intention to put such Notes
on credit watch, the trading price of the Notes could
decline.
Item
1B.
Unresolved Staff Comments.
None.
Item
2.
Properties.
Powersports and Automotive Segments
We
currently maintain our corporate offices at 901 W Walnut Hill Lane,
Irving, Texas 75038, and we occupy a small administrative
office in Las Vegas to support the development of our RumbleOn
Finance business. Aggregate annual rent for these two
facilities is approximately $510,000 plus, in Las Vegas, our
proportionate shares of the landlord’s excess operating
costs. The term of the Irving, TX lease expires in
Q2 2023; however we can elect to extend the term for up to seven
years at a rate equal to the lesser of (i) prevailing rental
rates at the time of renewal or (ii) 105% of the annual Base Rent
for the immediately preceding term. The Las Vegas, NV
lease expires in Q3 2022 and we have a single five (5) year renewal
option with a minimum annual increase of 3% each year of the
renewal period.
We have
a facility in the greater Nashville, TN metropolitan area that we
assumed as part of the acquisition of Wholesale, Inc. It is
intended to serve three main purposes: i) as a general
office/administrative location, ii) a staging and reconditioning
property, and iii) as a retail sales location where we display
vehicles and operate a traditional used car sales
lot. The underlying lease in Nashville expires on Q4
2021 and we have two (2) renewal options, each of which provides
for five (5) additional years with ten percent (10%) increase in
the base rent. The total rent for the facility is currently
approximately $25,000 per month. In March 2020, the
facility took a direct hit from a tornado and most of the facility
was destroyed. Since that time, we have cleared the
property of all but one structure we were able to remediate and we
have placed several temporary trailers on the property to house
administrative and salespersons as we work through the rebuilding
process with the landlord; we expect a new retail storefront to be
open on the property in 2022. Our use of the property
for vehicle staging and reconditioning resumed in Q3
2020.
We
lease space in West Palm Beach, FL to support the operations of our
GotSpeed retail location; we believe we pay market rates, the term
of this lease run through December 2023, and we have an option to
extend the lease for an additional two years with approximately 5%
annual increases in each year.
The
Company is a tenant at two facilities that serve as fulfillment
centers – one in Arlington, Texas, and another in Ocoee,
Florida. The locations will allow those from whom we
purchase vehicles to drop them off as well as serve as pick-up
locations for customers who have purchased vehicles from us and
elected not to have the vehicle delivered to their
home. The Arlington, TX facility is approximately 7,000
square feet and the Ocoee, FL center is approximately 56,000 square
feet. Aggregate rent on these two facilities is
approximately $525,000. We have less than twelve (12)
months remaining on the Arlington, TX but have three one-year
renewal options; the Ocoee facility is under lease through mid-2025
with the ability to lease it for up to five additional
years.
In
April 2020 we sublet our former corporate headquarters in Coppell,
TX to a third party, and in Q2 2020 due to COVID-19 we ceased
operations of a newly opened fulfillment center in Las
Vegas. In October 2020 we began marketing the Las Vegas
facility for sublease, and in January 2021 we entered a sublease
effective as of the same month. The term of each
sublease encompasses the initial term of the respective primary
lease, and the collective monthly rent charged in the subleases
covers all but a de minimis portion of our monthly exposure to
these two facilities.
Vehicle Logistics and Transportation Services
The
needs of the Vehicle Logistics and Transportation Services segment
of our operations are currently serviced out of a 5,800 sq. ft.
facility we lease in Mesa, AZ, as well as a portion of space we
have in Nashville, TN. For the majority of 2020 we also
had to make rent payment for two facilities we had vacated however
those leases have terminated and we have no remaining obligations
on them. Our lease on the Mesa, AZ location runs through
Q2 2023 and our annual rent is approximately
$120,000.
Item
3.
Legal Proceedings.
We are
not a party to any material legal proceedings other than ordinary
routine litigation incidental to our business.
Item
4.
Mine Safety Disclosures.
Not
Applicable.
34
PART
II
Item
5.
Market For Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchase Of Equity Securities
Market Information
As of
October 29, 2017, our Class B Common Stock has been listed on the
Nasdaq Global Select Market ("NASDAQ") under the symbol RMBL. Before October
29, 2017, our common stock traded on the OTCQB Market under the
symbol RMBL, and before January 1, 2017, our common stock was not
traded, except for 250 shares, which traded on the OTC Markets Pink
Sheets on January 22, 2016.
Reverse Stock Split
On May
18, 2020, the Company filed a Certificate of Change to the
Company’s Articles of Incorporation with the Secretary of
State of the State of Nevada to effect a one-for-twenty reverse
stock split of its issued and outstanding Class A Common Stock and
Class B Common Stock (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
Reverse Stock Split. The authorized preferred stock of the Company
was not impacted by the Reverse Stock Split. The Company has
retrospectively adjusted the per share and share amounts included
in this Annual Report on Form 10-K for the Reverse Stock
Split.
Holders of Common Stock
As of
March 26, 2021, we had approximately 38 stockholders
of record of 2,286,404 issued and outstanding shares of Class B
Common Stock and two holders of record of 50,000 issued and
outstanding shares of Class A Common Stock.
Dividends
We have
never declared or paid any cash dividends. We currently do not
intend to pay cash dividends in the foreseeable future on the
shares of common stock. We intend to reinvest any earning in the
development and expansion of our business. Any cash dividends in
the future to common stockholders will be payable when, as and if
declared by our board of directors, based upon the
Board's assessment
of:
●
our financial
condition;
●
earnings;
●
need for
funds;
●
capital
requirements;
●
prior claims of
preferred stock to the extent issued and outstanding;
and
●
other factors,
including any applicable law.
Therefore, there
can be no assurance that any dividends on the common stock will
ever be paid.
Item
6.
Selected Financial Data
This
item is not applicable, as we are considered a smaller reporting
company.
35
Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The management's discussion and
analysis of financial condition and results of operations should be
read in conjunction with the audited financial statements and
accompanying notes included in this annual report.
Overview
We are
a technology driven, motor vehicle dealer and e-commerce platform
provider 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 all participants in the supply chain, including
RumbleOn, other dealers and consumers to
Buy-Sell-Trade-Finance-Transport pre-owned vehicles. Our goal is to
transform the way VIN-specific pre-owned vehicles are bought and
sold by providing users with the most comprehensive, efficient,
timely and transparent transaction experience. While our initial
customer 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
acquisitions of Wholesale, Inc. ("Wholesale") in October 2018 and
Autosport USA, Inc. ("Autosport") in February 2019, we have
significantly increased our sales of cars and light trucks
("automotive"). Of the 18,024 vehicles we sold in 2020, 12,741
(70.7%) were automotive and 5,283 (29.3%) were powersports
vehicles. In 2019, we sold 43,143 vehicles of which 29,952 (69.4%)
were automotive and 13,191 (30.6%) were powersports vehicles. In
August 2020, we launched RumbleOn 3.0, bringing traditional brick
and mortar powersports dealers across the country online. Then, in
March 2021, we announced a definitive agreement to combine our
ecommerce platform with the RideNow powersports group, the nation's
largest powersports retailer as discussed further
below.
RideNow Transaction
On
March 12, 2021, we announced a definitive agreement to combine with
the RideNow dealership group, the nation’s largest
powersports retailer, to create the only omnichannel customer
experience in powersports and the largest publicly traded
powersports dealership platform (the “RideNow
Transaction”). Under the terms of the definitive agreement,
we will combine with up to 46 entities operating under the RideNow
brand for a total consideration of up to $575.4 million, consisting
of $400.4 million of cash and approximately 5.8 million shares of
our Class B Common Stock. We will finance the cash consideration
through a combination of up to $280.0 million of debt and the
remainder through the issuance of new equity. We have has entered
into a commitment letter with Oaktree
Capital Management, L.P. ( “Oaktree”) to provide
for the debt financing, subject to certain conditions (the
“Oaktree Financing”). The number of shares to be issued
to RideNow is subject to increase as described in the definitive
agreement. The RideNow Transaction is subject to successful
completion of the debt and equity financing, RumbleOn stockholder
approval, manufacturer approval, other federal and state regulatory
approvals, and other customary closing conditions as described in
the definitive agreement. We expect to close the RideNow
Transaction during the second or third quarter of 2021.
The foregoing description of the
definitive agreement and debt financing does not purport to be
complete and is subject to, and qualified in its entirety by, the
full text of the Plan of Merger and Equity Purchase Agreement,
dated March 12, 2021, Registration Rights and Lock-Up Agreement,
dated March 12, 2021, Commitment Letter, dated March 12, 2021, and
Warrant, dated March 12, 2021, copies of which are incorporated by
reference to this report as Exhibits 2.4, 10.33, 10.31 and
4.11. See the section titled Subsequent Events in this
MD&A for a discussion of the RideNow Transaction and Oaktree
Financing.
COVID-19 Update
The rapid spread of COVID-19 since March 2020 has
resulted in authorities implementing numerous measures in an
attempt to contain the virus, such as travel bans and restrictions,
quarantines, shelter in place orders and shutdowns. These measures
have impacted and may further impact all or portions of our
workforce and operations, the behavior of our customers, and the
operations of our partners, vendors, and suppliers. While the
federal and state governments have taken measures to try to contain
the COVID-19 pandemic, there is considerable uncertainty regarding
such measures and potential future measures. The COVID-19
situation has created an unprecedented and challenging time for our
Company. Our current focus is on positioning the Company for a
strong recovery when this crisis is over. During 2020 we took steps
to reduce our inventory and align our operating expenses to the
state of the business. We plan to continue to operate as permitted
to support our customers’ needs for reliable vehicles and to
provide as many jobs as possible for our associates; however, in
April 2020 we laid off 169 associates. Future restrictions on our access to and
utilization of our logistics and distribution network, our
corporate offices, the inspection and reconditioning centers of our
partners, and/or our support operations or workforce, or similar
limitations for our partners, vendors, or suppliers, and
restrictions or disruptions of transportation, could further limit
our ability to conduct our business and have a material adverse
effect on our business, operating results, financial condition and
prospects. There is no certainty that measures taken by
governmental authorities will be sufficient to mitigate the risks
posed by the COVID-19 pandemic, and our ability to perform critical
functions could be harmed.
36
Our
financial statements reflect estimates and assumptions made by
management that affect the carrying values of the Company's assets
and liabilities, disclosures of contingent assets and liabilities,
and the reported amounts of revenue and expenses during the
reporting period. The judgments, assumptions and estimates used by
management are based on historical experience, management's
experience, and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ
materially from these judgments and estimates, including as a
result 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 business and our results of
operations and financial condition as conditions evolve as a result
of the COVID-19 pandemic.
Nashville Tornado
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 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
$2,783,000; 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 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.
Outlook
The
COVID-19 pandemic effect on commercial activity and the significant
damage sustained to our wholesale automotive business from a
tornado in early March 2020 had a significant negative impact
on the growth in unit volume and revenue for our powersports,
automotive and transportation businesses for the year ended
December 31, 2020. Based on the evolving aspects of COVID-19 and
uncertainty surrounding its future development, it may continue to
have a negative impact on unit volumes and revenue in future
periods. Since the significant decrease in demand experienced in
early March through mid-April, we have seen monthly unit sales and
revenue increase sequentially month-over-month through July 2020.
However, during the six-month period ended December 31, 2020, our
average days to sale decreased and average selling prices increased
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.
This supply and demand imbalance continued 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 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
extent to which the COVID-19 outbreak ultimately impacts our
business, sales, results of operations, financial condition, and
liquidity will depend on the success of the roll out of the
vaccines and the efficacy of the vaccines and other future
developments, which are highly uncertain and cannot be predicted.
Even after the COVID-19 outbreak has subsided, we may continue to
experience significant impacts to our business as a result of its
global economic impact, including any economic downturn or
recession that has occurred or may occur in the
future.
Reportable Segments
Business segments are defined as
components of an enterprise about which discrete financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and
in assessing operating performance. Our operations are organized by
management into operating segments by line of business. We have
determined that we have three reportable segments as defined in
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. In addition, the
powersports segment includes the activities of our finance company
operations. Our vehicle logistics and transportation service
segment provides nationwide automotive transportation services
primarily 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" in
the accompanying Notes to the Consolidated Financial
Statements.
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Ended December 31, 2020
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Year Ended December 31, 2019
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|
|
|
|
|
|
|
|
|
|
Powersports
|
$47,526,127
|
11.4%
|
$7,465,556
|
15.7%
|
$101,008,976
|
12.0%
|
$12,335,461
|
12.2%
|
|
Automotive
|
337,084,959
|
81.0%
|
28,284,328
|
8.4%
|
717,042,511
|
85.3%
|
31,728,617
|
4.4%
|
|
Transportation
|
31,816,157
|
7.6%
|
7,615,928
|
23.9%
|
22,577,860
|
2.7%
|
6,553,898
|
29.0%
|
|
Subtotal
|
416,427,243
|
100.0%
|
43,365,812
|
10.4%
|
840,629,347
|
100.0%
|
50,617,976
|
6.0%
|
|
Impairment loss
(1)
|
-
|
-
|
(11,738,413)
|
(2.8)%
|
-
|
-
|
-
|
-
|
|
|
$416,427,243
|
100.0%
|
$31,627,399
|
7.6%
|
$840,629,347
|
100.0%
|
$50,617,976
|
6.0%
|
_________________________
(1) Impairment Loss resulting from the Nashville
Tornado.
37
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 growth, 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 retail sales through a
variety of product offerings. For the year ended December 31, 2020,
the amounts reflected below and in the tables that follow in this
section do not include expenditures of $343,820 and $796,365 for
the powersports and automotive segments, respectively, that
represent costs that are not attributed to specific
vehicles.
|
Powersports
|
2020
|
2019
|
|
Vehicles
sold
|
5,283
|
13,191
|
|
Average days to
sale
|
43
|
34
|
|
Total vehicle
revenue
|
$47,526,127
|
$101,008,976
|
|
Gross
profit
|
$7,809,376
|
$12,335,461
|
|
Automotive
|
2020
|
2019
|
|
Vehicles
sold
|
12,741
|
29,952
|
|
Average days to
sale
|
46
|
23
|
|
Total vehicle
revenue
|
$337,084,959
|
$717,042,511
|
|
Gross
profit
|
$29,080,693
|
$31,728,617
|
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.
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
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 uncertainty 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 are primarily through
dealer sales. Pre-owned
vehicles sold through our B2B “Dealer Direct” platform
generally have the highest dollar gross profit since the vehicle is
sold directly to the dealer without a third-party auction.
Pre-owned vehicles sold to dealers through third party 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, our average days to sale, and our
pricing strategy. We may opportunistically choose to shift our
inventory mix to higher or lower cost vehicles, or to
opportunistically raise or lower our prices relative to
market to take advantage of supply or demand imbalances, which
could temporarily lead to average selling prices 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
|
|
2020
|
2019
|
|
Key
Operation Metrics:
|
|
|
|
Vehicles
sold
|
5,283
|
13,191
|
|
|
|
|
|
Total
Powersports Revenue
|
$47,526,127
|
$101,008,976
|
|
Gross
profit
|
$7,809,376
|
$12,335,461
|
|
Gross profit per
vehicle
|
$1,478
|
$935
|
|
Gross
margin
|
16.4%
|
12.2%
|
|
Average selling
price
|
$8,996
|
$7,657
|
|
|
|
|
|
Consumer:
|
|
|
|
Vehicles
sold
|
458
|
955
|
|
|
|
|
|
Total
Consumer Revenue
|
$5,330,008
|
$8,295,615
|
|
Gross
profit
|
$1,815,239
|
$2,058,743
|
|
Gross profit per
vehicle
|
$3,963
|
$2,156
|
|
Gross
margin
|
34.1%
|
24.8%
|
|
Average selling
price
|
$11,638
|
$8,687
|
|
|
|
|
|
Dealer:
|
|
|
|
Vehicles
sold
|
4,825
|
12,236
|
|
|
|
|
|
Total
Dealer Revenue
|
$42,196,119
|
$92,713,361
|
|
Gross
profit
|
$5,994,137
|
$10,276,718
|
|
Gross profit per
vehicle
|
$1,242
|
$840
|
|
Gross
margin
|
14.2%
|
11.1%
|
|
Average selling
price
|
$8,745
|
$7,577
|
38
Key Operations Metrics – Automotive
|
|
2020
|
2019
(1)
|
|
Key
Operation Metrics:
|
|
|
|
Total vehicles
sold
|
12,741
|
29,952
|
|
|
|
|
|
Total
Automotive Revenue
|
$337,084,959
|
$717,042,511
|
|
Gross
profit
|
$29,080,693
|
$31,728,617
|
|
Gross profit per
vehicle
|
$2,282
|
$1,059
|
|
Gross
margin
|
8.6%
|
4.4%
|
|
Average selling
price
|
$26,457
|
$23,940
|
|
|
|
|
|
Consumer:
|
|
|
|
Vehicles
sold
|
1,336
|
2,792
|
|
|
|
|
|
Total
Consumer Revenue
|
$39,933,457
|
$75,950,236
|
|
Gross
profit
|
$4,578,072
|
$9,939,683
|
|
Gross profit per
vehicle
|
$3,427
|
$3,560
|
|
Gross
margin
|
11.5%
|
13.1%
|
|
Average selling
price
|
$29,890
|
$27,203
|
|
|
|
|
|
Dealer:
|
|
|
|
Vehicles
sold
|
11,405
|
27,160
|
|
|
|
|
|
Total
Dealer Revenue
|
$297,151,502
|
$641,092,275
|
|
Gross
profit
|
$24,502,621
|
$21,788,934
|
|
Gross profit per
vehicle
|
$2,148
|
$802
|
|
Gross
margin
|
8.2%
|
3.4%
|
|
Average selling
price
|
$26,054
|
$23,604
|
(1) Inclusive only of Autosport as of February 3, 2019 (the
"Autosport Acquisition Period").
39
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 growth, 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
increased profitability.
|
|
2020
|
2019
|
|
Revenue
|
$35,887,132
|
$31,931,488
|
|
|
|
|
|
Vehicles
delivered
|
61,314
|
77,449
|
|
|
|
|
|
Gross
profit
|
$7,615,928
|
$6,553,898
|
|
|
|
|
|
Gross profit per
vehicle delivered
|
$124
|
$85
|
Revenue
Revenue
is derived from freight brokerage agreements with dealers,
distributors, or private party individuals to transport vehicles
from a point of origin to a designated destination. The transaction
price is based on the consideration specified in the customer's
contract. The freight brokerage agreements are fulfilled by
independent third-party transporters who are obligated to meet our
performance obligations and standards. Generally, customers are
billed either upon shipment of the vehicle or on a monthly basis,
and remit payment according to approved payment terms. Revenue is
recognized as risks and rewards of transportation of the vehicle is
transferred to the owner 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. Revenue and cost of revenue for these services for the
year ended December 31, 2020 and December 31, 2019 was $4,070,975
and $9,353,628, respectively, and was eliminated in the
consolidated financial statements for the years ended December 31,
2020 and 2019, respectively.
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 in turn profitability in the vehicle 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 cost to contract an independent third-party
transporter to fulfill our obligation under the freight 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.
40
COMPONENTS OF RESULTS OF OPERATIONS
Revenue
Revenue
for our powersports and automotive segments is derived from our
online marketplace and auctions and primarily includes the sale of
pre-owned vehicles to consumer and dealers.
Revenue
from our vehicle logistics and transportation service segment is
derived by providing automotive transportation services between
dealerships and auctions throughout the United States.
The
Company recognizes revenue using a five-step model that includes:
(1) identify the contract; (2) identify the performance
obligations; (3) determine the transaction price; (4) allocate the
transaction price to the performance obligations; and (5) recognize
revenue when (or as) performance obligations are satisfied. Based
on the manner in which we historically recognized revenue, the
adoption of ASC 606 did not have a material impact on the amount or
timing of our revenue recognition, and we recognized no cumulative
effect adjustment upon adoption. See
Item 8 of Part II, Financial Statements and Supplementary
Data—Note 1—
"Description of Business and Significant Accounting Policies
– Revenue Recognition" for a further description of the
Company's revenue recognition.
Pre-owned Vehicle Sales
Pre-owned vehicle
sales are primarily comprised of revenue from 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.
Pre-owned vehicle
sales represent the aggregate sales of pre-owned vehicles to
consumers and dealers through our website or at
auctions. 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 who may wish
to trade-in or to sell us their vehicle independent of a retail
sale. Factors affecting pre-owned vehicle sales include the number
of retail pre-owned vehicles sold and the average selling price of
these vehicles.
The
number of pre-owned vehicles we sell depends on our volume of
website traffic, volume of cash offers made, our inventory levels
and 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 pre-owned vehicles we sell is also
affected by seasonality, with demand for pre-owned 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
pre-owned vehicle sales expected to occur in the fourth calendar
quarter.
Our
average retail selling price depends on the mix of pre-owned
vehicles we acquire and hold in inventory, retail market prices in
our markets, our average days to sale, and our pricing strategy. We
may choose to shift our inventory mix to higher or lower cost
pre-owned vehicles, or to opportunistically raise or lower our
prices relative to market to take advantage of supply or demand
imbalances, which could temporarily lead to average selling prices
increasing or decreasing.
The
number of pre-owned vehicles sold to dealers at auctions is
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 pre-owned vehicles that do
not meet the Company's quality standards to be sold through
Rumbleon.com.
41
Vehicle Logistics and Transportation Services
Vehicle
logistics and transportation services revenue is generated
primarily by entering into freight
brokerage agreements with dealers, 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 customer's contract.
A performance obligation is created when the customer under a
transportation contract submits a bill of lading for the transport
of goods from origin to destination. These performance obligations
are satisfied as the shipments move from origin to
destination. The freight
brokerage agreements are fulfilled by independent
third-party transporters. While the Company is primarily
responsible for fulfilling to customers, these transporters are
obligated to meet our performance obligations and standards.
Performance
obligations are short-term, with transit days less than one week.
Generally, customers are billed either upon shipment of the vehicle
or on a monthly basis, and remit payment according to approved
payment terms, generally not to exceed 30 days. Revenue is
recognized as all risks and rewards of transportation of the
vehicle are transferred to the owner during delivery.
Cost of Revenue – Pre-owned Vehicles Sales
Cost of
revenue is primarily comprised of cost of pre-owned vehicle
sales.
Cost of
pre-owned vehicle sales to consumers and dealers includes the cost
to acquire pre-owned vehicles and the reconditioning and
transportation costs associated with preparing these 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 pre-owned vehicles.
Transportation costs consist of costs incurred to transport the
vehicles from the point of acquisition. Cost of pre-owned vehicle
sales also includes any necessary adjustments to reflect vehicle
inventory at the lower of cost or net realizable
value.
Cost of Revenue – Vehicle Logistics and Transportation
Services
Cost of
vehicle transportation and logistics services primarily include the
costs of independent third-party transporters to deliver a vehicle
from a point of origin to a designated destination.
Selling, General and Administrative Expense
Selling, general
and administrative expenses include costs and expenses for
compensation and benefits, advertising and marketing, development
and operating our product procurement and distribution system,
managing our logistics system, and other corporate overhead
expenses, including expenses associated with technology
development, legal, accounting, finance, and business development.
Selling, general and administrative expenses will continue to
increase substantially in future periods as we 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, but we anticipate they will decline as a percentage of
sales revenue.
Depreciation and Amortization
Depreciation and
amortization is comprised of the: (i) amortization of capitalized and
acquired technology development; and (ii) depreciation of vehicles, leasehold
improvements, 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.
42
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 NextGen.
Seasonality
The
volume of vehicles sold 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 quality of
vehicles, holidays, and the seasonality of the retail 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 well as additional costs
associated with the holidays and winter weather.
RESULTS OF OPERATIONS
The
following table provides our results of operations for the year
ended December 31, 2020 and 2019, including key financial
information relating to our business and operations. This financial
information should be read in conjunction with our audited
Consolidated Financial Statements and Notes to Consolidated
Financial Statements included in Item 8 of Part II. The results of
operations of Autosport are included in the Company's Consolidated
Financial Statements for the year ended December 31, 2019 for the
Autosport Acquisition Period. In this Management's Discussion and
Analysis of Financial Condition and Results of Operations,
no
comparable information is discussed with respect to Autosport for
the periods before the Autosport Acquisition
Date.
|
|
For the Year ended December 31, 2020
|
|||||
|
|
Powersports
|
Automotive
|
Vehicle
Logistics and Transportation Services
|
Elimination(1)
|
Total
|
2019(2)
|
|
Revenue:
|
|
|
|
|
|
|
|
Pre-owned vehicle
sales
|
|
|
|
|
|
|
|
Powersports
|
$46,653,668
|
$-
|
-
|
-
|
$46,653,668
|
$101,008,976
|
|
Automotive (2)
|
-
|
337,084,959
|
-
|
-
|
337,084,959
|
717,007,436
|
|
Transportation and vehicle
logistics
|
-
|
-
|
35,887,132
|
(4,070,975)
|
31,816,157
|
22,577,860
|
|
Other
|
872,459
|
-
|
-
|
-
|
872,459
|
35,075
|
|
Total revenue
|
47,526,127
|
337,084,959
|
35,887,132
|
(4,070,975)
|
416,427,243
|
840,629,347
|
|
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Cost of
revenue:
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Powersports
|
40,060,571
|
-
|
-
|
-
|
40,060,571
|
88,673,515
|
|
Automotive (2)
|
-
|
308,800,631
|
-
|
-
|
308,800,631
|
685,313,894
|
|
Transportation
|
-
|
-
|
28,271,204
|
(4,070,975)
|
24,200,229
|
16,023,962
|
|
Cost of revenue before impairment
loss
|
40,060,571
|
308,800,631
|
28,271,204
|
(4,070,975)
|
373,061,431
|
790,011,371
|
|
Impairment loss
|
-
|
11,738,413
|
-
|
-
|
11,738,413
|
-
|
|
Total cost of
revenue
|
40,060,571
|
320,539,044
|
28,271,204
|
(4,070,975)
|
384,799,844
|
790,011,371
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$7,465,556
|
$16,545,915
|
$7,615,928
|
$-
|
$31,627,399
|
$50,617,976
|
(1) Intercompany freight services from Wholesale Express are
eliminated in the consolidated financial statements.
(2) Inclusive only of the Autosport Acquisition
Period.
43
Powersports and Automotive Segments
The
following table provides our results of operations for the years
ended December 31, 2020 and 2019 for the powersports and automotive
segments, including key financial information relating to these
segments. Our vehicle distribution segment consists of the
distribution of powersports and automotive vehicles, as further
described below. This financial information should be read in
conjunction with our audited Consolidated Financial Statements and
Notes to Consolidated Financial Statements included in Item 8 of
Part II. The results of operations of Autosport are included in the
Company's Consolidated Financial Statements for the year ended
December 31, 2019 for the Autosport Acquisition Period. In this
Management's Discussion and Analysis of Financial Condition and
Results of Operations, no comparable information is discussed with
respect to Autosport for the periods before the Autosport
Acquisition Date.
|
|
2020
|
2019
|
|
Revenue:
|
|
|
|
Pre-owned
vehicle sales:
|
|
|
|
Powersports
|
$47,526,127
|
$101,008,976
|
|
Automotive (1)
|
337,084,959
|
717,042,511
|
|
Total
vehicle revenue
|
384,611,086
|
818,051,487
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
Powersports
|
40,060,571
|
88,673,515
|
|
Automotive (1)
|
308,800,631
|
685,313,894
|
|
Total
cost of revenue before impairment loss
|
348,861,202
|
773,987,409
|
|
Impairment
loss on automotive inventory
|
11,738,413
|
-
|
|
Total
cost of revenue
|
360,599,615
|
773,987,409
|
|
|
|
|
|
Gross
profit
|
24,011,471
|
44,064,078
|
|
|
|
|
|
Selling,
general and administrative
|
48,720,614
|
82,006,331
|
|
|
|
|
|
Insurance recovery
proceeds
|
(5,615,268)
|
-
|
|
|
|
|
|
Depreciation
and amortization
|
2,136,877
|
1,779,021
|
|
|
|
|
|
Operating
loss
|
(21,230,752)
|
(39,721,274)
|
|
|
|
|
|
Interest
expense
|
(6,633,260)
|
(7,186,418)
|
|
Decrease in
derivative liability
|
10,806
|
1,302,500
|
|
(Loss) on early
extinguishment of debt
|
188,164
|
(1,499,250)
|
|
Net
loss before provision for income taxes
|
(27,665,042)
|
(47,104,442)
|
|
|
|
|
|
Benefit
for income taxes
|
-
|
-
|
|
|
|
|
|
Net
loss
|
$(27,665,042)
|
$(47,104,442)
|
(1) Inclusive only of the Autosport Acquisition
Period.
44
Total
revenue decreased by $433,440,401 to $384,611,086 for the year
ended December 31, 2020 compared to $818,051,487 for the same
period of 2019. Total powersports vehicle revenue decreased by
$53,482,849 to $47,526,127 for the year ended December 31, 2020
compared to $101,008,976 for the same period of 2019. Total
automotive revenue decreased by $379,957,552 to $337,084,959 for
the year ended December 31, 2020 compared to $717,042,511 for the
same period of 2019. The decrease was primarily due to a decrease
in the number of pre-owned vehicles sold to 18,024 for the year
ended December 31, 2020 as compared to 43,143 for the same period
of 2019, which was partially offset by an increase in the average
selling price per unit to $21,339 for the year ended December 31,
2020 compared to $18,961 for the year ended December 31, 2019. The
decrease in vehicles sold resulted from (i) the adverse impact of
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 automotive 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 and margin growth as we took prescriptive
steps to accelerate profitability; and (iv) a reduction in per
vehicle advertising expenditures. 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
cost of revenue before impairment loss decreased $425,126,207 to
$348,861,202 for the year ended December 31, 2020 compared to
$773,987,409 for the same period of 2019. The decrease was
primarily due to the decrease in the number of pre-owned vehicles
sold for the year ended December 31, 2020 as compared to the same
period of 2019. Powersports
total cost of revenue decreased by $48,612,944 to $40,060,571 for
the year ended December 31, 2020 as compared to the same period of
2019. Automotive total cost of revenue decreased by $376,513,263 to
$308,800,631 for the year ended December 31, 2020 as compared to
$685,313,894 for the same period of 2019.
Powersports
The
following table provides the results of operations for the year
ended December 31, 2020 and 2019 for our powersports segment,
including key financial information relating to the powersports
business. This financial information should be read in conjunction
with our audited Consolidated Financial Statements and Notes to
Consolidated Financial Statements included in Item 8 of Part
II.
|
|
2020
|
2019
|
|
Powersports
|
|
|
|
|
|
|
|
Vehicle
revenue:
|
|
|
|
Consumer
|
$5,330,008
|
$8,295,615
|
|
Dealer
|
42,196,119
|
92,713,361
|
|
Total
vehicle revenue
|
$47,526,127
|
$101,008,976
|
|
|
|
|
|
Vehicle
cost of revenue
|
|
|
|
Consumer
|
$3,860,463
|
$6,236,872
|
|
Dealer
|
36,200,108
|
82,436,643
|
|
Total
vehicle cost of revenue
|
$40,060,571
|
$88,673,515
|
|
|
|
|
|
Vehicle
gross profit:
|
|
|
|
Consumer
|
$1,469,545
|
$2,058,743
|
|
Dealer
|
5,996,011
|
10,276,718
|
|
Total
vehicle gross profit
|
$7,465,556
|
$12,335,461
|
|
|
|
|
|
Vehicles
sold:
|
|
|
|
Consumer
|
458
|
955
|
|
Dealer
|
4,825
|
12,236
|
|
Total
vehicles Sold
|
5,283
|
13,191
|
|
|
|
|
|
Gross
profit per vehicle:
|
|
|
|
Consumer
|
$3,209
|
$2,156
|
|
Dealer
|
$1,243
|
$840
|
|
Total
|
$1,413
|
$935
|
|
|
|
|
|
Gross
margin per vehicle:
|
|
|
|
Consumer
|
27.6%
|
24.8%
|
|
Dealer
|
14.2%
|
11.1%
|
|
Total
|
15.7%
|
12.2%
|
|
|
|
|
|
Average
vehicle selling price:
|
|
|
|
Consumer
|
$11,638
|
$8,687
|
|
Dealer
|
$8,745
|
$7,577
|
|
Total
|
$8,996
|
$7,657
|
45
Powersports Vehicle Revenue
Total
powersports vehicle revenue decreased by $53,482,849 to $47,526,127
for the year ended December 31, 2020 compared to $101,008,976 for
the same period of 2019. The decrease in powersports revenue was
primarily due to a decrease in the number of pre-owned vehicles
sold to 5,283 for the year ended December 31, 2020 as compared
to 13,191 for the same period of 2019, offset by an increase in the
average selling price per vehicle to $8,996 for the year ended
December 31, 2020 from $7,657 for the same period of 2019. The
decrease in vehicles sold and increase in average selling price
resulted from (i) the adverse impact of 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. 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
$2,965,607 to $5,330,008 for the year ended December 31,
2020 compared to $8,295,615 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 458 for the year
ended December 31, 2020 compared to 955 for the same
period of 2019, which was partially offset by an increase in the
average selling price per vehicle to $11,638 for the year
ended December 31, 2020 from $8,687 for the same period of
2019. The decrease in vehicles sold and increase in average selling
price per unit for the year ended December 31, 2020 as compared to
the same period of 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. 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
$50,517,242 to $42,196,119 for the year ended December
31, 2020 compared to $92,713,361 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 4,825 for the year ended December 31, 2020 compared
to 12,236 for the same period of 2019, which was
partially offset by an increase in the average selling price per
vehicle to $8,745 for the year ended December 31, 2020 from
$7,577 for the same period of 2019. The decrease in vehicles
sold and increase in average selling price per unit
for the
year ended December 31, 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. 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
Total
powersport cost of vehicle revenue decreased by $48,612,944 to
$40,060,571 for the year ended December 31, 2020 compared to $88,673,515 for the same period of 2019. The decrease was
primarily due to a decrease in the number of vehicles purchased and
sold for the year ended December 31, 2020 compared to the same period of 2019. The decrease
in the number of vehicles purchased and sold 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. Total cost of vehicle revenue for
the year ended December 31, 2020 consisted of: (i) the
acquisition cost of vehicles sold to consumers and dealers of
$37,745,349 from the sale of 5,283 pre-owned vehicles at an average
acquisition cost of $7,145; (ii) aggregate reconditioning and
transportation costs of $1,971,402; and (iii) other cost not attributed to a specific
vehicle of $343,820 which included a $340,268 write down of vehicle
inventory to the lower of cost or net realizable value resulting
from the negative impact on our sales channels from reduced
commercial activity stemming from COVID-19. For the year
ended December 31, 2019, the $88,673,515 cost of vehicle revenue
consisted of: (i) the acquisition cost of vehicles sold to
consumers and dealers of $85,143,181 from the sale of 13,191
pre-owned vehicles at an average acquisition cost of $6,455; and
(ii) aggregate reconditioning and transportation costs of
$3,530,334.
Total powersport
cost of vehicle revenue from sales to consumers decreased by
$2,376,409 to $3,860,463 for the year ended December 31,
2020 as compared to $6,236,872 the same period of 2019. The
decrease was primarily due to a decrease in the number of vehicles
purchased and sold for the year ended December 31, 2020 compared to
the same period of 2019. The decrease in the number vehicles
purchased and sold result 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. Total cost of
consumer vehicle revenue for the year ended December 31, 2020
consisted of: (i) the acquisition cost of vehicles sold to
consumers of $3,189,739 from the sale
of 458 pre-owned vehicles at an average acquisition cost
of $6,964; (ii) aggregate reconditioning and transportation costs
of $325,030; and (iii) other costs of $345,694 not attributed to a
specific vehicle. For the year ended December 31, 2019, cost of
vehicle revenue consisted of: (i) the acquisition cost of vehicles
sold to consumers of $5,824,586 from the sale
of 955 pre-owned vehicles at an average acquisition cost
of $6,099; and (ii) aggregate reconditioning and transportation
costs of $412,286.
46
Powersport cost of vehicle revenue from the sale
to dealers decreased by $46,236,535 to
$36,200,108 for the year ended December 31, 2020
as compared to $82,436,643 for the
same period in 2019. The decrease was primarily due to a decrease
in the number of vehicles purchased and sold for the year
ended December 31, 2020 compared to
the same period of 2019. The decrease in the number vehicles
purchased and sold 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. Total cost of dealer vehicle
revenue for the year ended December 31, 2020 consisted of: (i) the acquisition cost of vehicles sold to
dealers of $34,555,610 from the sale
of 4,825 pre-owned vehicles at an average acquisition
cost of $7,162; (ii) aggregate reconditioning and transportation
costs of $1,646,372; and (iii) other costs reimbursements of
$(1,874) not attributable to a specific vehicle. Total cost of
dealer vehicle revenue for the year ended December 31, 2019
consisted of: (i) the acquisition cost of vehicles sold to
dealers of $79,318,595 from the sale of 12,236 pre-owned
vehicles at an average acquisition cost of $6,482; and (ii)
aggregate reconditioning and transportation costs of
$3,118,048.
Automotive
The
following table provides the results of operations for the year
ended December 31, 2020 and 2019 for the automotive segment
including key financial information relating to the automotive
business. The results of operations of Autosport are included in
the Company's Consolidated Financial Statements for the year ended
December 31, 2019 for the Autosport Acquisition Period. This
financial information should be read in conjunction with our
audited Consolidated Financial Statements and Notes to Consolidated
Financial Statements included in Item 8 of Part II. In this
Management's Discussion and Analysis of Financial Condition and
Results of Operations, no comparable information is discussed with
respect to Autosport for the periods before the Autosport
Acquisition Date.
|
|
|
2020
|
|
|
2019(1)
|
|
||
|
Automotive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
revenue:
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
39,933,457
|
|
|
$
|
75,950,236
|
|
|
Dealer
|
|
|
297,151,502
|
|
|
|
641,092,275
|
|
|
Total
vehicle revenue
|
|
$
|
337,084,959
|
|
|
$
|
717,042,511
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
cost of revenue
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
36,193,470
|
|
|
$
|
66,010,553
|
|
|
Dealer
|
|
|
272,607,161
|
|
|
|
619,303,341
|
|
|
Total
vehicle cost of revenue
|
|
$
|
308,800,631
|
|
|
$
|
685,313,894
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
3,739,987
|
|
|
$
|
9,939,683
|
|
|
Dealer
|
|
|
24,544,341
|
|
|
|
21,788,934
|
|
|
Total
vehicle gross
profit
|
|
$
|
28,284,328
|
|
|
$
|
31,728,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicles
sold
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
1,336
|
|
|
|
2,792
|
|
|
Dealer
|
|
|
11,405
|
|
|
|
27,160
|
|
|
Total
vehicles sold
|
|
|
12,741
|
|
|
|
29,952
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit per vehicle
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
2,799
|
|
|
$
|
3,560
|
|
|
Dealer
|
|
$
|
2,152
|
|
|
$
|
802
|
|
|
Total
|
|
$
|
2,220
|
|
|
$
|
1,059
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin per vehicle
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
9.4
|
%
|
|
|
13.1
|
%
|
|
Dealer
|
|
|
8.3
|
%
|
|
|
3.4
|
%
|
|
Total
|
|
|
8.4
|
%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Average
selling price:
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
$
|
29,890
|
|
|
$
|
27,203
|
|
|
Dealer
|
|
$
|
26,054
|
|
|
$
|
23,604
|
|
|
Total
|
|
$
|
26,457
|
|
|
$
|
23,940
|
|
(1) Inclusive only of the Autosport Acquisition
Period.
47
Automotive Revenue
Total
automotive revenue decreased by $379,957,552 to $337,084,959 for
the year ended December 31, 2020 compared to $717,042,511 for the
same period of 2019. The decrease in automotive revenue was
primarily due to a decrease in the number of pre-owned vehicles
sold to 12,741 for the year ended December 31, 2020 as
compared to 29,952 for the same period of 2019, offset by an
increase in the average selling price per vehicle to $26,457 for
the year ended December 31, 2020 from $23,940 for the same period
of 2019. The decrease in vehicles sold and increase in average
selling price resulted from (i) the adverse impact of 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 units available for sale
as a result of the significant damage to the Company’s
operating facilities and inventory held for sale in Nashville
resulting from the March 2020 tornado; (iii) our continued
disciplined approach to sales volume and margin growth 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. 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 future 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 $36,016,779 to
$39,933,457 for the year ended
December 31, 2020 compared to
$75,950,236 for the same period of 2019. The decline in
consumer revenue was primarily due to the decrease in the number of
vehicles sold to 1,336 for the year ended December
31, 2020 compared
to 2,792 for the same period of 2019, which was partially
offset by an increase in the average selling price per vehicle to
$29,890 for the year ended December 31, 2020
from
$27,203 for the same period of 2019. The decrease in vehicles
sold and increase in average selling price per unit for the
year ended December 31, 2020 as compared to the same
period of 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 units
available for sale as a result of the significant damage to the
Company’s operating facilities and inventory held for sale in
Nashville resulting from the March 2020 tornado; (iii) our
continued disciplined approach to sales volume and margin growth 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.
Total automotive
revenue from the sale to dealers decreased by $343,940,773 to
$297,151,502 for the year ended December 31, 2020
compared
to $641,092,275 for the same period of
2019. The decline in dealer revenue was primarily due to the
decrease in the number of vehicles sold
to 11,405 for the year ended December 31, 2020
compared
to 27,160 for the same period of 2019, which was
partially offset by an increase in the average selling price per
vehicle to $26,054 for the year ended December 31, 2020 from
$23,604 for the same period of 2019. The decrease in vehicles
sold and increase in average selling price per unit for the year
ended December 31, 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 units available for sale
as a result of the significant damage to the Company’s
operating facilities and inventory held for sale in Nashville
resulting from the March 2020 tornado;; (iii) our
continued disciplined approach to sales volume and margin growth 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.
Automotive Cost of Revenue
Total automotive cost of vehicle revenue before
impairment loss decreased by $376,513,263 to
$308,800,631 for the year ended December 31, 2020
compared to $685,313,894
for the same period of 2019.
The decrease was primarily due to a
decrease in vehicles sold for the year ended December 31,
2020 compared to the same period of
2019. The decrease in vehicles purchased and 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 units
available for sale as a result of the significant damage to the
Company’s operating facilities and inventory held for sale in
Nashville resulting from the March 2020 tornado; (iii) our continued disciplined approach to
sales volume and margin growth as we took prescriptive steps to
accelerate profitability; and (iv) a reduction in per vehicle
advertising expenditures. Total cost of vehicle revenue for
the year ended December 31, 2020 consisted of: (i) the acquisition cost of
vehicles sold to consumers and dealers of $300,978,562 from
the sale of 12,741 pre-owned vehicles at an average
acquisition cost of $23,623; (ii) aggregate
reconditioning and transportation costs of $7,025,704; and (iii) net other cost not attributed
to a specific vehicle of $796,365 which included a
$898,542 write down of vehicle inventory to the lower of cost
or net realizable value resulting from the negative impact on our
sales channels from reduced commercial activity stemming from
COVID-19. Total cost of revenue for the year ended December
31, 2019 was $685,313,894, which included
$66,010,553 from the
sales to consumers and $619,303,341 from sales to
dealers. For the year ended December 31, 2019, the
$685,313,894 cost of vehicle revenue consisted of: (i) the
acquisition cost of vehicles sold to consumers and dealers of
$673,039,189 from the sale of 29,952 pre-owned vehicles at an
average acquisition cost of $22,471 and (ii) aggregate
reconditioning and transportation costs of
$12,274,705.
48
Total
cost of revenue from the sale to consumers decreased by $29,817,083
to $36,193,470 for the year ended December 31, 2020 compared to
$66,010,553 for 2019. The decrease was primarily due to a decrease
in vehicles sold in 2020 compared to 2019. The decrease in vehicles
purchased and sold was a result of (i) the adverse impact of
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 unit available
for as a result of the significant damage to the Company’s
operating facilities and inventory held for sale in Nashville
resulting from the March 2020 tornado;; (iii) our continued
disciplined approach to sales volume and margin growth as we took
prescriptive steps to accelerate profitability; (iv) a reduction in
per vehicle advertising expenditures. The total cost of consumer
vehicle revenue for the year ended December 31, 2020 consisted of:
(1) the acquisition cost of vehicles sold to consumers of
$34,326,522 from the sale of 1,336 pre-owned vehicles at an average
acquisition cost of $25,694; (ii) aggregate reconditioning and
transportation costs of $1,028,863 and (iii) net other cost not
attributed to a specific vehicle of $838,085. For the year
ended December 31, 2019, the $66,010,553 cost of consumer vehicle
revenue consisted of: (i) the acquisition cost of vehicles sold to
consumers of $64,409,956 from the sale of 2,792 pre-owned vehicles
at an average acquisition cost of $23,069 and (ii) aggregate
reconditioning and transportation costs of $1,600,597.
Total
cost of revenue from the sale to dealers decreased by $346,696,180
to $272,607,161 for the year ended December 31, 2020
compared to $619,303,341 for 2019. The decrease was primarily due
to a decrease in vehicles sold for the year ended December 31, 2020
compared to the same period of 2019. The decrease in vehicles
purchased and 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
units available for sale as a result of the significant damage to
the Company’s operating facilities and inventory held for
sale in Nashville resulting from the March 2020 tornado;
(iii) our continued disciplined approach to sales volume and
margin growth as we took prescriptive steps to accelerate
profitability; and (iv) a reduction in per vehicle advertising
expenditures. The total cost of dealer vehicle revenue for the year
ended December 31, 2020 consisted of: (1) the acquisition cost of
vehicles sold to dealers of $266,652,040 from the sale of 11,405
pre-owned vehicles at an average acquisition cost of $23,380; (ii)
aggregate reconditioning and transportation costs of
$5,996,841; and (iii)
other cost reimbursements of $41,720 not attributed to a specific
vehicle. For the year ended December 31, 2019, the $619,303,341
cost of dealer vehicle revenue consisted of: (i) the acquisition
cost of vehicles sold to dealers of $608,629,233 from the sale of
27,160 pre-owned vehicles at an average acquisition cost of $22,409
and (ii) aggregate reconditioning and transportation costs of
$10,674,108.
Vehicle Logistics and Transportation Services Segment
The
following table provides our results of operations for the year
ended December 31, 2020 and 2019 for our vehicle logistics and
transportation services segment, including key financial
information relating to this segment. This financial information
should be read in conjunction with our audited Consolidated
Financial Statements and Notes to Consolidated Financial Statements
included in Item 8 of Part II.
|
|
2020
|
2019
|
|
Vehicle Logistics and Transportation Services
|
|
|
|
|
|
|
|
Total
revenue
|
$35,887,132
|
$31,931,488
|
|
|
|
|
|
Cost of
revenue
|
28,271,204
|
25,377,590
|
|
|
|
|
|
Gross
profit
|
7,615,928
|
6,553,898
|
|
|
|
|
|
Selling, general
and administrative
|
4,938,734
|
4,617,920
|
|
|
|
|
|
Depreciation and
amortization
|
6,063
|
7,405
|
|
|
|
|
|
Operating
income
|
2,671,131
|
1,928,573
|
|
|
|
|
|
Interest
expense
|
5,064
|
1,186
|
|
|
|
|
|
Net income before
income tax
|
$2,666,067
|
$1,927,387
|
|
|
|
|
|
Vehicles
delivered
|
61,314
|
77,449
|
|
|
|
|
|
Revenue
per delivery
|
$585
|
$412
|
|
|
|
|
|
Gross
profit per delivery
|
$124
|
$85
|
|
|
|
|
|
Gross
margin per delivery
|
21.2%
|
20.5%
|
49
Vehicle Logistics and Transportation Services
Revenue
Total
logistic and transportation service revenue increased by $3,955,644
to $35,887,132 for the year ended December 31, 2020 compared to
$31,931,488 for 2019. The increase in revenue for the year ended
December 31, 2020 resulted from the increased in average revenue
per vehicle delivered of $585 compared to $412 for 2019 offset by a
decrease in the total vehicles delivered to 61,314 compared to
77,449 for 2019. The increase in average revenue per vehicle
delivered was a result of: (i) our more disciplined approach to
sales volume and margin growth as we took prescriptive steps to
accelerate profitability; and (ii) an increase in commercial
activity during 2020 as compared to 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 years ended December 31,
2020 and 2019, intercompany freight services provided by Wholesale
Express was $4,070,975 and $9,353,628, respectively and was
eliminated in the consolidated financial statements.
Vehicle Logistics and Transportation Services Cost of
Revenue
Total
logistic and transportation service cost of revenue increased by
$2,893,614 to $28,271,204 for the year ended December 31, 2020
compared to $25,377,590 for 2019. The increase in cost of revenue
for the year ended December 31, 2020 resulted from the increased in
average cost of revenue per vehicle delivered to $461 compared to
$328 for 2019 offset by a decrease in the total vehicles delivered
to 61,314 as compared to 77,449 for 2019. The increase in average
cost of revenue per vehicle delivered was a result of an increase
in commercial activity during 2020 as compared to 2019 resulting in
a greater demand for transportation services, as sales channels,
marketing activities and supply chains began to progress towards
normalized pre-COVID-19 activity levels. The greater demand
resulted in a significant increase in the market rates charged per
unit delivered. 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. Included
in cost of revenue for the year ended December 31, 2020 and
2019, was freight services purchases from Wholesale Express of
$4,070,975 and $9,353,628, respectively and was eliminated in the
consolidated financial statements.
Selling, general and administrative
|
|
2020
|
2019
|
|
Selling
general and administrative:
|
|
|
|
Compensation and
related costs
|
$25,734,308
|
$33,502,020
|
|
Advertising and
marketing
|
5,287,284
|
18,228,262
|
|
Professional
fees
|
3,148,381
|
2,542,357
|
|
Technology
development
|
1,421,138
|
2,408,338
|
|
General and
administrative
|
18,068,237
|
29,943,272
|
|
|
$53,659,348
|
$86,624,249
|
Selling, general
and administrative expenses decreased by $32,964,901 to $53,659,348 for the year
ended December 31, 2020 compared to $86,624,249 for the same period
of 2019. The decrease in selling, general and administrative for
the year ended December 31, 2020 was a result of: (i) our continued
disciplined approach to sales volume and margin growth 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 year ended December 31, 2020 as compared to 2019; (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 $7,767,712 to $25,734,308 for the year
ended December 31, 2020 compared to $33,502,020 for the same period
of 2019. The decrease was 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 157 full-time and two part-time
employees at December 31, 2020 as compared to 300 full-time
employees on December 31, 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.
50
Advertising and
marketing decreased by $12,940,978 to $5,287,284 for the year ended
December 31, 2020 compared to $18,228,262 for the same period
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; (iii) our continued disciplined approach to sales
volume and margin growth as we took prescriptive steps to
accelerate profitability; and (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 $606,024 to
$3,148,381 for the year ended
December 31, 2020 compared to $2,542,357 for the same period
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 operating 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" and Note 9 - "Stockholders' Equity," in the
accompanying Notes to the Condensed Consolidated Financial
Statements.
Technology
development expenses decreased by $987,200 to $1,421,138 for the
year ended December 31, 2020 compared to $2,408,338 for the same
period 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 the year
ended December 31, 2020 were $3,529,743 of which $2,145,055 was
capitalized. For the year ended December 31, 2019, total technology
costs and expenses incurred were $5,494,081 of which $3,085,743 was
capitalized. For the year ended December 31, 2020, a third-party
contractor billed $602,873 of the total technology development
costs as compared to $1,028,884 for the same period of 2019. The
amortization of capitalized technology development costs for the
year ended December 31, 2020 was $1,887,305 as compared to
$1,436,088 for the same period of 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 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 $11,875,035 to $18,068,237
for the year ended December 31, 2020 compared to $29,943,272 for
the same period of 2019. The decrease
was primarily due to a decrease in vehicles sold for the
year ended December 31, 2020 compared
to the same period of 2019 which resulted in a $7,513,991 reduction in auction and
floor plan fees for the year ended December 31, 2020 as compared to
2019. The decrease in vehicles
purchased and 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 units
available for sale as a result of the significant damage to the
Company’s operating facilities and inventory held for sale in
Nashville resulting from the March 2020 tornado; (iii) our continued disciplined approach to
sales volume and margin growth as we took prescriptive steps to
accelerate profitability; and (iv) a reduction in per vehicle
advertising expenditures. Additionally, in connection with
the adverse impact of the
COVID-19 pandemic on commercial activity we implemented a reduction
in administrative costs
and expenses as well as purchasing levels to align with
demand and market conditions and deferred discretionary growth
expenditures such as travel, facility cost and other business
expenses which resulted in a decrease in these costs and expenses
of $2,511,044, net of a $739,581 increase in rent expense for new
facilities for the year
ended December 31, 2020 as compared to 2019. Included in
General and administrative expenses for the year ended December 31,
2019 is the recognition of an
impairment loss on goodwill of $1,850,000. As the impact of COVID-19 abates
over time and commercial activity increases, 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.
51
Depreciation and Amortization
Depreciation and
amortization increased by $356,513 to $2,142,939 for the year ended
December 31, 2020 compared to $1,786,426 for the same period of
2019. The increase in depreciation and amortization is a result of
the cumulative investments made in connection with the development
of the business which included capitalized technology acquisition
and development costs of $2,145,055 and $174,786 in additions to
property and equipment for the year ended December 31, 2020 as
compared to $3,085,743 of capitalized technology acquisition and
development costs and $119,748 in additions to property and
equipment for the year ended December 31, 2019. The decrease in
capitalized technology acquisition and development costs for the
year ended December 31, 2020 as compared to the same period of 2019
was a
result of a temporary reduction in discretionary growth
expenditures on information technology spending due to the negative
impact of COVID-19 and the effect of sheltering-in-place and
significantly reduced commercial activity. For the year
ended December 31, 2020, amortization of capitalized technology
development was $1,887,305 as compared to $1,436,088 for the same
period of 2019. Depreciation and amortization on vehicle,
furniture, equipment and leasehold improvements was $255,634 as
compared to $350,338 for the same period of 2019.
Interest Expense
Interest expense decreased by
$549,279 to $6,638,325 for the year ended December 31, 2020
compared to $7,187,604 for the same period 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 in interest expense for the year ended December 31, 2020
as compared to the same period of 2019 was primarily from a
reduction in total indebtedness outstanding which included amounts
outstanding under floor plan lines of credit which was a result of
a decrease in the number of vehicles sold to 18,024 compared to
43,143 for 2019, and reductions in principal balances under various
notes. Interest expense on the Private Placement Notes for
the year ended December 31, 2020 was $140,136 and included $75,601
of discount amortization compared to interest expense of $316,091,
which included $259,396 of debt discount amortization for 2019.
Interest expense on the NextGen Note the year ended December 31,
2020 was $87,128 compared to $110,484 for 2019. Interest expense on
the Line of Credit-Floor Plans for the year ended December 31, 2020
was $1,712,068 compared to $3,239,293 for 2019. Interest expense
for the year ended December 31, 2020, on the PPP Loans was $30,960.
Interest expense for the year ended December 31, 2020 on the
convertible senior notes was $4,433,485 and included $1,867,313 of
debt discount amortization compared to interest expense of
$2,523,064, which included $1,218,064 of debt discount amortization
for 2019. Interest expense for the year ended December 31, 2020 on
the Convertible Notes-Autosport USA was $186,751 and included
$84,131 of debt discount amortization compared to interest expense
for year ended December 31, 2019 of 228,001, which included
$103,095 of debt discount amortization. There was no interest expense on the
Hercules Loan in 2020 compared to interest expense for year
ended December 31, 2019 of 758,466, which included $342,841 of debt
discount amortization. See Part II, Financial
Statements and Supplementary Data—Note 8—"Notes Payable
and Lines of Credit "
for additional discussion.
On May
14, 2019, the Company made a payment to Hercules Capital Inc.
("Hercules") of $11,134,696, 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 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 the Consolidated Statements of
Operations. 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.
52
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 loss was comprised of
three components: (1) inventory loss, assessed by the insurance
carrier at approximately $13,000,000; (2) building and personal
property loss, primarily impacting our leased facilities, assessed
by the insurance carrier at $2,783,000; 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 or when any such
recoveries will be made.
As a result of the damage caused by the tornado the Company
concluded that the utility of the inventory damaged by the storm
was 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.
During the year ended December 31, 2020 the Company recorded an
impairment loss on inventory of $11,738,413 comprised of
$4,453,775 for vehicles that were a total loss and
$7,284,638 in loss in value for vehicles partially damaged and
subject to repair. The impairment loss is reported in cost of
revenue in the 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 operating loss in the
Consolidated Statement of Operations for the year ended December
31, 2020.
Derivative Liability
In connection with the Notes, a derivative
liability was recorded at issuance with an interest make-whole
provision of $20,673 based on a lattice model using a stock
price of $14.60, an estimated volatility of 55.0% and risk-free
rate rates over the entire 10-year yield curve. This amount was
recorded as a debt discount and is amortized to interest expense
over the term of the Notes using the effective interest rate. The
derivative liability is remeasured at each reporting date with the
change in value of $10,806 and $1,302,500, respectively being
recorded in the Statements of Operations for the year ended
December 31, 2020 and 2019. The value of the derivative liability
as of December 31, 2020 is $16,694 as compared to $27,500 on
December 31, 2019.
Adjusted EBITDA
Adjusted EBITDA is
a non-GAAP financial measure and should not be considered as an
alternative to operating income or net income as a measure of
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 loss adjusted to add back interest expense including
debt extinguishment and depreciation and amortization, and certain
charges and expenses, such as goodwill impairment, impairment loss
on automotive inventory, impairment loss on plant & equipment,
insurance recovery proceeds, non-cash stock-based compensation,
change in derivative liability, litigation expenses, severance, new
business development and other non-recurring costs, 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.
53
The
following tables reconcile Adjusted EBITDA to net loss for the
periods presented:
|
|
2020
|
2019
|
|
Net
loss
|
$(24,998,975)
|
$(45,177,053)
|
|
Add
back:
|
|
|
|
Interest expense
(including debt extinguishment)
|
6,450,161
|
8,686,854
|
|
Depreciation and
amortization
|
2,142,939
|
1,786,426
|
|
EBITDA
|
(16,405,875)
|
(34,703,773)
|
|
Adjustments
|
|
|
|
Goodwill
impairment
|
-
|
1,850,000
|
|
Impairment loss on
automotive inventory
|
11,738,413
|
-
|
|
Impairment loss on
plant & equipment
|
177,626
|
-
|
|
Insurance recovery
proceeds
|
(5,615,268)
|
-
|
|
Non-cash
stock-based compensation
|
2,978,236
|
3,836,518
|
|
Change in
derivative liability
|
(10,806)
|
(1,302,500)
|
|
Litigation
expenses
|
1,295,717
|
61,446
|
|
Severance
|
-
|
1,079,438
|
|
New business
development
|
-
|
1,224,523
|
|
Other Non-recurring
costs
|
51,387
|
1,578,220
|
|
|
$(5,790,570)
|
$(26,376,128)
|
Liquidity and Capital Resources
We
generate cash from the sale of used 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 technology and software
development efforts.
In connection with the RideNow Transaction, on March 12, 2021, we
executed a secured promissory note with BRF Finance Co., LLC
(“BRF Finance”), an affiliate of B. Riley Securities,
Inc., pursuant to which BRF Finance loaned us $2.5 million (the
“Bridge Loan”). The Bridge Loan matures on the earlier
of September 30, 2021 or upon the issuance of debt or equity above
a threshold. The Bridge Loan is secured by certain intellectual
property assets held by our subsidiary, NextGen Pro, LLC. Interest
will accrue on the Bridge Loan until maturity (by acceleration or
otherwise) at a rate of 12% annually. The foregoing description of
the Bridge Loan does not purport to be complete and is subject to,
and qualified in its entirety by, the full text of the Secure
Promissory Note, dated March 12, 2021, a copy of which is
incorporated by reference to this report as Exhibit
10.31.
The
Company's 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. Management believes that current working
capital, results of operations, and existing financing arrangements
are sufficient to fund operations for at least one year from the
financial statement date.
54
We had
the following liquidity resources available as of December 31, 2020
and December 31, 2019:
|
|
2020
|
2019
|
|
Cash
and cash equivalents
|
$1,466,831
|
$49,660
|
|
Restricted cash (1)
|
2,049,056
|
6,676,622
|
|
Total
cash, cash equivalents, and restricted cash
|
3,515,887
|
6,726,282
|
|
Availability
under short-term revolving facilities
|
2,188,374
|
35,839,030
|
|
Committed
liquidity resources available
|
$5,704,261
|
$42,565,312
|
(1) Amounts included in restricted cash represent the deposits
required under the Company's short-term revolving
facilities.
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 7.0% 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 (as defined below),
pursuant to which the Company agreed to complete (i) a note
exchange pursuant to which $30,000,000 of the Old Notes (as defined
below) 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.
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.
As of
December 31, 2020, and 2019, excluding operating lease liabilities
and the derivative liability, the outstanding principal amount of
indebtedness was $53,108,353 and $82,585,522, respectively,
summarized in the table below. See Note 8 — Notes Payable and
Lines of Credit and Note 20 – Subsequent Events to our
consolidated financial statements included in Part II, Item 8,
Financial Statements and Supplementary Data of this Annual Report
on Form 10-K for further information on our debt.
|
|
December
31,
|
|
|
Asset-based
financing:
|
2020
|
2019
|
|
Inventory
|
$17,811,626
|
$59,160,970
|
|
Total asset-based
financing
|
17,811,626
|
59,160,970
|
|
Secured notes
payable
|
2,391,361
|
2,000,334
|
|
Unsecured senior
convertible notes
|
39,774,000
|
31,901,843
|
|
PPP
loans
|
5,176,845
|
-
|
|
Total
debt
|
65,153,832
|
93,063,147
|
|
Less: unamortized
discount and debt issuance costs
|
(12,045,479)
|
(10,477,625)
|
|
Total debt,
net
|
$53,108,353
|
$82,585,522
|
55
The
following table sets forth a summary of our cash flows for the year
ended December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Net cash provided
by (used in) operating activities
|
$17,143,227
|
$(39,747,330)
|
|
Net cash used in
investing activities
|
(2,281,405)
|
(3,871,223)
|
|
Net cash (used in)
provided by financing activities
|
(18,072,217)
|
34,559,933
|
|
Net (decrease)
increase in cash
|
$(3,210,395)
|
$(9,058,620)
|
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, technology development and personnel-related
expenses. For the year ended December 31, 2020, net cash provided
by operating activities was $17,143,227, an increase of $56,890,557
compared to net cash used in operating activities of $39,747,330
for the same period of 2019. The increase in our net cash provided
by operating activities was primarily due to: (i) a $32,094,116
decrease in our net loss, which excluded aggregate impairment
losses on inventory and plant and equipment of $11,916,039. In
addition, the Company received a $5,615,268 insurance recovery due
to the Nashville tornado; and (ii) a $19,181,173 of changes in
operating assets and liabilities, primarily vehicle inventory,
accounts receivable and accounts payable. The change in net loss
was a result of: (i) our continued disciplined approach to sales
volume and margin growth 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, marketing and general and
administrative spend for the year ended December 31, 2020; and (ii)
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 for technology
development and acquisitions to expand our operations. Cash used in
investing activities for the year ended December 31, 2020 was
$2,281,405, a decrease of $1,589,818 compared to 2019.
The decrease results from a reduction in technology spending
and no acquisition activities during the year ended December
31, 2020 as compared to 2019. The decrease in technology spending
for the year ended December 31, 2020 as compared to the same period
of 2019 was a result of a reduction in staffing levels, adjusted
purchasing levels and a deferral of discretionary growth
expenditures due to the adverse impact of the COVID-19 pandemic on
commercial activity. The Company acquired Autosport in February
2019 which included a cash payment of $835,000.
Financing Activities
Cash
flows from financing activities primarily relate to our short and
long-term debt activity and proceeds from equity issuances which
have been used to provide working capital and for general corporate
purposes, including paying down our short-term revolving
facilities. Cash used in financing activities was $18,072,217 for
the year ended December 31, 2020 compared to net cash provided by
financing activities of $34,559,933 for 2019. The
$52,632,150 decrease in cash provided by financing activities
for the year ended December 31, 2020 as compared to the same period
of 2019 was a result of a: (i) $43,322,228 increase in repayments
on floor plan lines of credit; (ii) a reduction in net proceeds of
$4,916,575 received from notes payable; and (iii) a reduction in
net proceeds from equity offerings of $4,393,347 for the year ended
December 31, 2020 as compared to the same period of
2019.
56
Liquidity
The accompanying
consolidated financial statements of the Company have been prepared
in conformity with U.S. GAAP, which contemplate continuation of the
Company as a going concern. The Company has incurred losses from
inception through December 31, 2020 and may incur additional
losses in the future. As the Company continues to expand its
business, build its brand name and awareness and continues
technology and software development efforts, it may need access to
additional capital. Historically, the Company has raised additional
equity or debt instruments to fund the expansion; refer to Note 8
— NOTES PAYABLE and Note 9 — STOCKHOLDER'S
EQUITY. Management believes that current working capital,
availability of equity under its current shelf registration
statement, results of operations, and expected continued inventory
financing are sufficient to fund operations for at least one year
from the financial statement issuance
date.
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 for a strong recovery as 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.
Off-Balance Sheet Arrangements
As of
December 31, 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.
Subsequent Events
RideNow Definitive Agreement
On
March 12, 2021, the Company entered into a Plan of Merger and
Equity Purchase Agreement (the “RideNow Agreement”)
with RO Merger Sub I, Inc., an Arizona corporation and wholly owned
subsidiary of the Company (“Merger Sub I”), RO Merger
Sub II, Inc., an Arizona corporation and wholly owned subsidiary of
the Company (“Merger Sub II”), RO Merger Sub III, Inc.,
an Arizona corporation and wholly owned subsidiary of the Company
(“Merger Sub III”), RO Merger Sub IV, Inc., an Arizona
corporation and wholly owned subsidiary of the Company
(“Merger Sub IV,” and together with Merger Sub I,
Merger Sub II, and Merger Sub III, the “Merger Subs”),
C&W Motors, Inc., an Arizona corporation, Metro Motorcycle,
Inc., an Arizona corporation, Tucson Motorcycles, Inc., an Arizona
corporation, and Tucson Motorsports, Inc., an Arizona corporation,
William Coulter, an individual (“Coulter”), Mark Tkach,
an individual (“Tkach” and together with Coulter, the
“Principal Owners”), and certain other persons who own
equity interests in the Acquired Companies (as defined in the
RideNow Agreement) and execute a Seller Joinder (as defined in the
RideNow Agreement) (together with the Principal Owners, the
“Sellers” and each, a “Seller”), and Tkach,
as the representative of the Sellers (the “Sellers’
Representative”). The Acquired Companies own and operate
powersports retail dealerships under the RideNow brand which
include sales, financing, and parts and service of new and used
motorcycles, ATVs, UTVs, scooters, side by sides, sport bikes,
cruisers, watercraft, and other vehicles and ancillary businesses
and activities relating thereto.
57
The
RideNow Agreement provides that, upon the terms and subject to the
conditions set forth in the RideNow Agreement, (i) the Company will
acquire all of the equity interests (the “Equity
Purchases”) in the Transferred Entities (as defined in the
RideNow Agreement), (ii) Merger Sub I will merge with and into
C&W Motors, Inc., with C&W Motors, Inc. continuing as a
surviving corporation, (iii) Merger Sub II will merge with and into
Metro Motorcycle, Inc., with Metro Motorcycle, Inc. continuing as a
surviving corporation, (iv) Merger Sub III will merge with and into
Tucson Motorcycles, Inc., with Tucson Motorcycles, Inc. continuing
as a surviving corporation, and (v) Merger Sub IV will merge with
and into Tucson Motorsports, Inc., with Tucson Motorsports, Inc.
continuing as a surviving corporation, in each case under the laws
of the State of Arizona and each as a wholly-owned subsidiary of
the Company (the “Mergers”). The Equity Purchases and
the Mergers will result in the acquisition from the Sellers of up
to 46 Acquired Companies (the “RideNow Transaction”).
The RideNow Transaction is expected to close (the
“Closing”) in the second or third quarter of 2021.
Effective as of the Closing, Tkach and Coulter will become
executive officers and directors of the Company.
The
RideNow Agreement provides that the Company will acquire the
Acquired Companies in exchange for (i) $400,400,000 in cash plus or
minus any adjustments for net working capital and closing
indebtedness, and (ii) shares of the Company's Class B Common Stock
having a value of $175,000,000 (the “Closing Payment
Shares”), valued equally, on a per share basis, based upon
the lowest value of (A) $30.00; (B) the VWAP of the Company's Class
B Common Stock for the twenty (20) trading days immediately
preceding the Closing, and (C) the value on a per share basis paid
for the Class B Common Stock or any shares underlying securities
convertible into or exercisable for Class B Common Stock by any
person which purchases Class B Common Stock or any shares
underlying securities convertible into or exercisable for Class B
Common Stock from the Company from the date of the RideNow
Agreement until the Closing not including purchases of Class B
Common Stock underlying currently outstanding options, warrants,
convertible notes, or other derivative securities. Ten percent
(10%) of the Closing Payment Shares will be escrowed at Closing and
will be released pursuant to the terms of the RideNow Agreement.
The Company will finance the cash consideration through a
combination of approximately $280,000,000 of debt provided by the
Initial Lender (as defined below) and through the issuance of new
equity for the remainder thereof.
Each of
the Company, the Merger Subs, and the Sellers has provided
customary representations, warranties and covenants in the RideNow
Agreement. The completion of the RideNow Transaction is subject to
various closing conditions, including (a) the making of all filings
and other notifications required to be made under any Antitrust Law
(as defined in the RideNow Agreement) for the consummation of the
RideNow Transaction, the expiration or termination of all waiting
periods relating thereto, and the receipt of all clearances,
authorizations, actions, non-actions, or other consents required
from a governmental authority under any Antitrust Law for the
consummation of the RideNow Transaction, (b) performance in all
respects by each party of its covenants and agreements, (c) the
Company obtaining stockholder approval of the RideNow Transaction
and related matters, (d) the Closing Payment Shares being approved
for listing on Nasdaq, and (e) the receipt of consent to the
RideNow Transaction from certain powersports
manufacturers.
Certain
RideNow minority equity holders are not initially parties to the
RideNow Agreement and some of such minority holders have rights of
first refusal (“ROFR”) with respect to the RideNow
entity in which they own a stake. If any of these equity
holders either decide not to sell their interests to the Company or
to exercise their ROFR, RumbleOn will not be able to acquire all of
the Equity Interests of the Acquired Companies, or in certain cases
any interests in an Acquired Company, and the consideration payable
therefor in the RideNow Transaction will be correspondingly
reduced. RideNow anticipates that all minority owners will
participate in the RideNow Transaction and that no minority owners
will exercise their ROFR, but there is no assurance this will
occur.
The
RideNow Agreement contains certain termination rights for both the
Company and the Sellers' Representative. Both the Company and the
Sellers' Representative have the right to terminate the RideNow
Agreement if the Closing does not occur on or before June 30, 2021,
subject to certain rights of the parties to extend the termination
date to July 31, 2021, as set forth in the RideNow
Agreement.
58
Commitment Letter
On
March 12, 2021, the Company entered into a commitment letter (the
“Commitment Letter”) with Oaktree Capital Management,
L.P. ( “Oaktree”). The Commitment Letter provides that,
subject to the conditions set forth therein, Oaktree or certain
funds or accounts within its Strategic Credit Strategy (the
“Initial Lender”) commits to provide senior secured
term loan facilities in an aggregate principal amount of up to
$400,000,000 (the “Credit Facility”), comprised of (i)
an initial advance of $280,000,000 to fund the RideNow Transaction,
consummate the Refinancing (as defined in the Commitment Letter)
and pay the RideNow Transaction costs and (ii) a delayed draw term
facility of up to $120,000,000 to fund permitted acquisitions and
similar investments and related fees and expenses.
The
Credit Facility interest rates will be, at the option of the
Company, (a) Adjusted LIBOR (as defined in the Commitment Letter)
plus 8.25%, of which (i) Adjusted LIBOR plus 7.25% shall be paid in
cash and (ii) 1.00% shall be payable in kind or (b) ABR (as defined
in the Commitment Letter) plus 7.25%, of which (i) ABR plus 6.25%
shall be paid in cash and (ii) 1.00% shall be payable in kind. The
Credit Facility shall mature on the fifth anniversary of the
Closing date of the RideNow Transaction (subject to extension with
the consent of only the extending lender).
The
Company and its subsidiaries will grant certain security interests
to the Initial Lender to secure the Credit Facility, subject to
certain exceptions and permitted liens, all to be more fully set
forth in the definitive documentation for the Credit Facility. The
Credit Facility will be subject to prepayment with the proceeds of
certain events including 50% of excess cash flow, 100% of certain
asset sales, 100% of proceeds of certain debt issuances, and 50% of
certain public or private equity financings. The Commitment Letter
provides that the Credit Facility will contain customary
affirmative and negative covenants, and events of default, subject
to certain carve-outs and exceptions as more fully described in the
Commitment Letter.
The
commitment to provide the Credit Facility is subject to certain
conditions, including: the receipt of customary closing documents,
completion of applicable “know your customer” requests
and delivery of documentation related thereto, no material adverse
change, delivery of customary financial reporting, specified
representations and warranties, perfection of certain security
interests, and delivery of customary legal opinions. The Company
will pay certain fees and expenses in connection with obtaining the
Credit Facility.
Warrant
In
connection with the Commitment Letter, in lieu of a commitment fee,
the Company has agreed to issue to Oaktree a warrant to purchase a
number of shares of Class B Common Stock at an exercise price per
share to be determined either at Closing or at termination of the
Commitment Letter (the “Warrant”). If issued at
Closing, the Warrant will be for that number of shares equal to
$40,000,000 divided by the lowest price per share at which equity
is issued in connection with financing the RideNow Transaction,
which price shall also be the exercise price. If issued in
connection with a termination of the Commitment Letter, the Warrant
will be issued to purchase that number of shares equal to five
percent (5%) of the Company's fully diluted market capitalization
at the close of business on the day after a termination of the
Commitment Letter is publicly announced divided by the weighted
average price of the Company's Class B Common Stock for the five
days immediately preceding such date, which price shall also be the
exercise price. The Warrant is immediately exercisable upon the
Closing or five days after the termination of the Commitment Letter
and expires eighteen (18) months after the Closing or termination
of the Commitment Letter.
Bridge Loan
Also in
connection with the RideNow Transaction, on March 12, 2021, the
Company and its subsidiary, NextGen Pro, LLC (“NextGen
Pro”), executed a secured promissory note with BRF Finance
Co., LLC (“BRF Finance”), an affiliate of B. Riley
Securities, Inc., pursuant to which BRF Finance has loaned the
Company $2,500,000 (the “Bridge Loan”). The Bridge Loan
matures on the earlier of September 30, 2021 or upon the issuance
of debt or equity above a threshold. The Bridge Loan is secured by
certain intellectual property assets held by NextGen Pro as set
forth in Exhibit A to the secured promissory note. Interest will
accrue on the Bridge Loan until maturity (by acceleration or
otherwise) at a rate of 12% annually.
59
Certificate of Amendment and Changes to Incentive Plan
In
contemplation of the RideNow Transaction, on March 9, 2021, the
Board of Directors (the "Board") approved, subject to stockholder
approval, (i) an amendment to the Articles of Incorporation of the
Company to increase the number of shares of authorized Class B
Common Stock to 100,000,000 (the “Certificate of
Amendment”), and (ii) an amendment to the RumbleOn, Inc. 2017
Stock Incentive Plan (the “Incentive Plan”) to increase
the authorized shares of Class B Common Stock available under the
Incentive Plan from 700,000 shares to 2,700,000 shares and extend
the term of the Incentive Plan for an additional ten
years.
Registration Rights and Lock-Up Agreement
In
connection with the RideNow Transaction, on March 12, 2021, the
Company entered into a registration rights and lock-up agreement,
by and among the Company and certain equity holders of the Acquired
Companies (the “Registration Rights Agreement”).
Pursuant to the Registration Rights Agreement (i) the Company
agreed to file a resale registration statement for the Registrable
Securities (as defined in the Registration Rights Agreement) no
later than thirty (30) days following the Closing, and to use
commercially reasonable efforts to cause it to become effective as
promptly as practicable following such filing, (ii) the equity
holders were granted certain piggyback registration rights with
respect to registration statements filed subsequent to the Closing,
and (iii) the Lock-Up Holders (as defined in the Registration
Rights Agreement) agreed, subject to certain customary exceptions,
not to sell, transfer or dispose of any Company common stock for a
period of one hundred and eighty (180) days from the
Closing.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements,
which have been prepared in accordance with United States generally
accepted accounting principles ("GAAP"). The preparation of these
financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and
liabilities, revenue and expenses and related disclosures of
contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under
different assumptions or conditions, impacting our reported results
of operations and financial condition.
Certain
accounting policies involve significant judgments and assumptions
by management, which have a material impact on the carrying value
of assets and liabilities and the recognition of income and
expenses. Management considers these accounting policies to be
critical accounting policies. The estimates and assumptions used by
management are based on historical experience and other factors,
which are believed to be reasonable under the circumstances. The
significant accounting policies and estimates which we believe are
the most critical to aid in fully understanding and evaluating our
reported financial results are described below. Refer to Note 1
— Description of Business and Summary of Significant
Accounting Policies of the consolidated financial statements
included in Part II, Item 8, Financial Statements and Supplementary
Data, of this Annual Report on Form 10-K, for more detailed
information regarding our critical accounting
policies.
Revenue Recognition
We
adopted ASC 606, Revenue from
Contracts with Customers on January 1, 2018 using the
modified retrospective method. ASC 606 prescribes a five-step model
that includes: (1) identify the contract; (2) identify the
performance obligations; (3) determine the transaction price; (4)
allocate the transaction price to the performance obligations; and
(5) recognize revenue when (or as) performance obligations are
satisfied. Based on the manner in which we historically
recognized revenue, the adoption of ASC 606 did not have a material
impact on the amount or timing of our revenue recognition, and we
recognized no cumulative effect adjustment upon
adoption.
For
vehicles sold at wholesale to dealers we satisfy our performance
obligation for vehicles sales when the wholesale purchaser obtains
control of the underlying vehicle, which is upon delivery when the
transfer of title, risks and rewards of ownership and control pass
to the dealer. We recognize revenue at the amount we expect to
receive for the pre-owned vehicle, which is the fixed price
determined at the auction. The purchase price of the wholesale
vehicle is typically due and collected within 30 days of delivery
of the wholesale vehicle.
60
For
vehicles sold to consumers the purchase price is set forth in the
customer contracts at a stand-alone selling price which is agreed
upon prior to delivery. We satisfy our performance obligation for
pre-owned vehicle sales upon delivery when the transfer of title,
risks and rewards of ownership and control pass to the customer. We
recognize revenue at the agreed upon purchase price stated in the
contract, including any delivery charges, less an estimate for
returns. Our return policy allows customers to initiate a return
during the first three days after delivery. Estimates for returns
are based on an analysis of historical experience, trends and sales
data. Changes in these estimates are reflected as an adjustment to
revenue in the period identified. The amount of consideration
received for pre-owned vehicle sales to consumers includes noncash
consideration representing the value of trade-in vehicles, if
applicable, as stated in the contract. Prior to the delivery of the
vehicle, the payment is received, or financing has been arranged.
Payments from customers that finance their purchases with third
parties are typically due and collected within 30 days of delivery
of the pre-owned vehicle. In future periods additional provisions
may be necessary due to a variety of factors, including changing
customer return patterns due to the maturation of the online
vehicle buying market, macro- and micro-economic factors that could
influence customer return behavior and future pricing environments.
If these factors result in adjustments to sales returns, they could
significantly impact our future operating results. Revenue
exclude any sales taxes, title and registration fees, and other
government fees that are collected from customers.
Vehicle
logistics and transportation services revenue is generated
primarily by entering into freight
brokerage agreements with dealers, 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 customer's contract.
A performance obligation is created when the customer under a
transportation contract submits a bill of lading for the transport
of goods from origin to destination. These performance obligations
are satisfied as the shipments move from origin to
destination. The freight
brokerage agreements are fulfilled by independent
third-party transporters. While the Company is primarily
responsible for fulfilling to customers, these transporters are
obligated to meet our performance obligations and standards.
Performance
obligations are short-term, with transit days less than one week.
Generally, customers are billed either upon shipment of the vehicle
or on a monthly basis, and remit payment according to approved
payment terms, generally not to exceed 30 days. Revenue is
recognized as risks and rewards of transportation of the vehicle is
transferred to the owner 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.
Valuation of Inventory
Pre-owned vehicle
inventory is accounted for pursuant to ASC 330, Inventory and
consists of pre-owned vehicles primarily acquired from consumers
and includes the cost to acquire and recondition a pre-owned
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. Pre-owned inventory is stated at the lower of
cost or net realizable value. Vehicle inventory cost is determined
by specific identification. Net realizable value is based on 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 data of
similar vehicles, as well as independent market resources. Each
reporting period, the Company recognizes any necessary adjustments
to reflect pre-owned vehicle inventory at the lower of cost or net
realizable value, which is recognized in cost of revenue in our
Consolidated Statements of Operations.
Goodwill
Goodwill represents
the excess of the consideration transferred over the fair value of
the identifiable assets acquired and liabilities assumed in
business combinations. Goodwill is tested for impairment annually
as of December 31, or whenever events or changes in circumstances
indicate that an impairment may exist.
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. Each of these segments are considered
separate reporting units for purposes of goodwill testing. In
performing our annual goodwill impairment test, we first review
qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying
amount. If, after assessing qualitative factors, we determine that
it is not more likely than not that the fair value of a reporting
unit is less than its carrying amount, then performing the
quantitative test is unnecessary and our goodwill is not considered
to be impaired. However, if based on the qualitative assessment we
conclude that it is more likely than not that the fair value of the
reporting unit is less than its carrying amount, or if we elect to
bypass the optional qualitative assessment as provided for under
GAAP, we proceed with performing the quantitative impairment
test.
61
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 as of 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. In
connection with its annual goodwill impairment test as of December
31, 2020, the Company performed impairment assessments by reviewing
qualitative factors for each of its reporting units. The results of
the assessments indicated that it was not more likely than not that
the fair value of the reporting units were greater than the
carrying values and no goodwill impairment was determined to exist
for the years ended December 31, 2020.
In
connection with its annual goodwill impairment test as of December
31, 2019 for the
three reporting units we
performed quantitative impairment testing of the fair value of our
reporting units using an income and market valuation approach. The
income valuation approach estimates our enterprise value using a
net present value model, which discounts projected free cash flows
of our business using the weighted average cost of capital as the
discount rate. We also validated the fair value for each reporting
unit using the income approach by calculating a cash earnings
multiple and determining whether the multiple was reasonable
compared to recent market transactions completed in the industry.
As part of that assessment, we also reconcile the estimated
aggregate fair values of our reporting units to our market
capitalization. We believe this reconciliation process is
consistent with a market participant perspective. This
consideration would also include a control premium that represents
the estimated amount an investor would pay for our equity
securities to obtain a controlling interest, and other significant
assumptions including revenue and profitability growth, profit
margins, residual values and the cost of
capital. For
the year ended December 31, 2019, we recognized an impairment loss
on goodwill of $1,850,000 related to powersports, which is recorded
in selling, general and administrative expenses in the Consolidated
Statement of Operations. No goodwill impairment resulted from the
quantitative impairments tests of the remaining reporting units as
of December 31, 2019.
Newly Issued Accounting Pronouncements
In February 2016, the FASB issued an accounting
pronouncement (FASB ASU 2016-02) related to the accounting for
leases. This pronouncement requires lessees to record most leases
on their balance sheet while also disclosing key information about
those lease arrangements. Under the new guidance, lease
classification as either a finance lease or an operating lease will
affect the pattern and classification of expense recognition in the
income statement. The classification criteria to distinguish
between finance and operating leases are generally consistent with
the classification criteria to distinguish between capital and
operating leases under existing lease accounting guidance. This
pronouncement is effective for fiscal years, and for interim
periods within those fiscal years, beginning after December
15, 2018. We adopted the new standard
for our fiscal year beginning January 1, 2019.
Item
7A.
Quantitative and Qualitative Disclosures About Market
Risk.
This
item in not applicable as we are currently considered a smaller
reporting company.
Item 8.
Financial Statements and Supplementary Data.
See
Index to Financial Statements and Financial Statement Schedules
beginning on page F-1 of this Form 10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
62
Item
9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
December 31, 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'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's Chief Executive
Officer and Chief Financial Officer concluded that the
Company's disclosure controls
and procedures were effective as of December 31, 2020.
Management's Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as is defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act. These internal
controls are designed to provide reasonable assurance that the
reported financial information is presented fairly, that
disclosures are adequate and that the judgments inherent in the
preparation of financial statements are reasonable. There are
inherent limitations in the effectiveness of any system of internal
controls, including the possibility of human error and overriding
of controls. Consequently, an effective internal control system can
only provide reasonable, not absolute, assurance with respect to
reporting financial information.
Our
internal control over financial reporting includes policies and
procedures that: (i) pertain to maintaining records that
in reasonable detail accurately and fairly reflect our
transactions; (ii) provide
reasonable assurance that transactions are recorded as necessary
for preparation of our financial statements in accordance with
generally accepted accounting principles and the receipts and
expenditures of company assets are made and in accordance with our
management and directors authorization; and (iii) provide reasonable assurance
regarding the prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a
material effect on our financial statements.
Management has
undertaken an assessment of the effectiveness of our internal
control over financial reporting based on the framework and
criteria established in the Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Based upon this evaluation, management
concluded that our internal control over financial reporting was
effective as of December 31, 2020.
This
annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by
our registered public accounting firm pursuant to the temporary
rules of the Securities and Exchange Commission that permit the
company to provide only the management's report in this Annual Report on Form
10-K.
Changes in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that have
materially affected, or reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B.
Other Information.
None.
63
Item 10.
Directors, Executive Officers and Corporate
Governance.
Directors and Executive Officers
Below
are the names of and certain information regarding our executive
officers and directors:
|
Name
|
|
Age
|
|
Position
|
|
Marshall
Chesrown
|
|
63
|
|
Chief
Executive Officer and Chairman
|
|
Steven
R. Berrard
|
|
66
|
|
Chief
Financial Officer and Director
|
|
Adam
Alexander
|
|
49
|
|
Director
|
|
Denmar
Dixon
|
|
59
|
|
Director
|
|
Richard
A. Gray, Jr.
|
|
73
|
|
Director
|
|
Peter
Levy
|
|
50
|
|
Chief
Operating Officer
|
|
Michael
Marchlik
|
|
48
|
|
Director
|
|
Kevin
Westfall
|
|
65
|
|
Director
|
Marshall Chesrown has served as our
Chief Executive Officer and Chairman since October 24, 2016. Mr.
Chesrown has over 35 years of leadership experience in the
automotive retail sector. From December 2014 to September 2016, Mr.
Chesrown served as Chief Operating Officer and as a director of
Vroom.com, an online direct car retailer ("Vroom"). Mr. Chesrown
served as Chief Operating Officer of AutoAmerica, an automotive
retail company, from May 2013 to November 2014. Previously, Mr.
Chesrown served as the President of Chesrown Automotive Group from
January 1985 to May 2013, which was acquired by AutoNation, Inc., a
leading automotive retail company, in 1997. Mr. Chesrown served as
Senior Vice President of Retail Operations for AutoNation from 1997
to 1999. From 1999 to 2013, Mr. Chesrown served as the Chairman and
Chief Executive Officer of Blackrock Development, a real estate
development company widely known for development of the nationally
recognized Golf Club at Black Rock. Mr. Chesrown filed for personal
bankruptcy in May 2013, which petition was discharged in January
2017.
We
believe that Mr. Chesrown possesses attributes that qualify him to
serve as a member of our Board, including his extensive experience
in the automotive retail sector.
Steven R. Berrard has served as our
Chief Financial Officer since January 9, 2017 and served as Interim
Chief Financial Officer from July 13, 2016 through January 9, 2017
and as Chief Executive Officer from July 13, 2016 through October
24, 2016. Mr. Berrard served as Secretary from July 13, 2016
through June 30, 2017 and has served on our Board since July 13,
2016. Mr. Berrard has served as a director of BurgerFi
International, Inc. (“BurgerFi”) since December 15,
2020, and serves as Chair of the Audit Committee and a member of
the Compensation Committee and Nominating Committee of BurgerFi.
Mr. Berrard serves as a director of Lionheart Acquisition Corp. II
(“Lionheart”) since August 13, 2020, and serves as
Chair of the Audit Committee and a member of the Compensation
Committee of Lionheart. Mr. Berrard served as a director of Walter
Investment Management Corp. ("Walter Investment") from 2010 until
May 2017. Mr. Berrard served on the Board of Directors of Swisher
Hygiene Inc., a publicly traded industry leader in hygiene
solutions and products, from 2004 until May 2014. Mr. Berrard is
the Managing Partner of New River Capital Partners, a private
equity fund he co-founded in 1997. Mr. Berrard was the co-founder
and Co-Chief Executive Officer of AutoNation from 1996 to 1999.
Prior to joining AutoNation, Mr. Berrard served as President and
Chief Executive Officer of the Blockbuster Entertainment Group, at
the time the world's largest video store operator. Mr. Berrard
served as President of Huizenga Holdings, Inc., a real estate
management and development company, and served in various positions
with subsidiaries of Huizenga Holdings, Inc. from 1981 to 1987. Mr.
Berrard was employed by Coopers & Lybrand (now
PricewaterhouseCoopers LLP ("PwC")) from 1976 to 1981. Mr. Berrard
currently serves on the Board of Directors of Pivotal Fitness,
Inc., a chain of fitness centers operating in a number of markets
in the United States. He has previously served on the Boards of
Directors of Jamba, Inc., (2005 – 2009), Viacom, Inc., (1987
– 1996), Birmingham Steel (1999 – 2002), HealthSouth
(2004 – 2006), and Boca Resorts, Inc. (1996 – 2004).
Mr. Berrard earned his B.S. in Accounting from Florida Atlantic
University.
We
believe that Mr. Berrard's management experience and financial
expertise is beneficial in guiding our strategic direction. He has
served in senior management and on the Board of several prominent,
publicly traded companies. In several instances, he has led
significant growth of the businesses he has managed. In addition,
Mr. Berrard has served as the Chairman of the audit committee of
several boards of directors.
64
Adam Alexander has served on our Board
since July 15, 2020. Mr. Alexander co-founded CA Global Partners, a
full-service auction and liquidation company in 1997. Since 2010,
CA Global Partners has expanded globally managing hundreds of
auction and liquidation projects in the UK, Europe, Asia,
Australia, and Africa as well as all across North America. Mr.
Alexander attended Pepperdine University where he received a BS in
Business Management, and subsequently received an MBA in Global
Business which was jointly conferred by NYU Stern, HEC School of
Management in Paris, and the London School of Economics and
Political Science.
We
believe that Mr. Alexander possesses attributes that qualify him to
serve as a member of our Board, including his extensive
understanding of auction projects and business
operations.
Denmar Dixon has served on our Board
since January 9, 2017. Mr. Dixon served as a director of Walter
Investment from April 2009 (and for its predecessor since December
2008) until June 2016. Effective October 2015, Mr. Dixon was
appointed Chief Executive Officer and President of Walter
Investment and served until his resignation effective June 2016. In
2008, Mr. Dixon founded Blue Flame Capital, LLC, a consulting,
financial advisory and investment firm. Before forming Blue Flame,
Mr. Dixon spent 23 years with Banc of America Securities, LLC and
its predecessors. At the time of his retirement, Mr. Dixon was a
Managing Director in the Corporate and Investment Banking group and
held the position of Global Head of the Basic Industries Group of
Banc of America Securities.
We
believe that Mr. Dixon possesses attributes that qualify him to
serve as a member of our Board, including his extensive business
development, mergers and acquisitions and capital
markets/investment banking experience within the financial services
industry. As a director, he provides significant input into, and is
actively involved in, leading our business activities and strategic
planning efforts. Mr. Dixon has significant experience in the
general industrial, consumer and business services
industries.
Richard A. Gray, Jr., has served on our
Board since October 1, 2017. Mr. Gray has served as President of
Gray & Co. Realtors, Inc., a licensed real estate service
provider he founded, since 1987. Gray & Co. Realtors has been
involved in the development, liquidation, the joint venture, and
management of commercial real estate, representing both U.S.
investors and foreign investors, and since 1998, has also been
involved in raising venture capital for startup and additional
round funding for public companies in the technology sector. Before
Gray & Co. Realtors, he served as a broker at Wiggins Gray
Interests, a company focused on development of retail and office
properties in Dallas Fort Worth Metroplex, as well as office,
industrial, land and retail brokerage from 1985 to 1987. Before
Wiggins Gray Interests, he served at Hudson & Hudson Realtors
from 1973 to 1985, Murray Investment Company from 1971 to 1973, and
Borden Chemical Company from 1969 to 1971. Mr. Gray has also served
as a director of the Cystic Fibrosis Foundation, Migra Tech, and
Equitable Bank. Mr. Gray received his BBA from Texas Tech
University.
We
believe that Mr. Gray possesses attributes that qualify him to
serve as a member of our Board, including his extensive experience
in funding technology sector public companies.
Peter Levy has served as our Chief
Operating Officer since May 20, 2019. From November 2017 to May
2019, Mr. Levy served as our Senior Vice President of Operations
overseeing the day-to-day inventory logistics, auctions, dealer
networks, and managing the teams responsible for driving sales
within the Company. Mr. Levy is a seasoned and highly respected
operating executive who has been involved in the automotive
industry for over 25 years. Also, Mr. Levy's distinguished career
includes multiple executive and management level positions within
the industry at companies such as AutoNation and Automotive
Remarketing Services, all focusing on business development and
creative uses of technology to gain market share. Mr. Levy
graduated from Indiana University with a B.S. in Marketing and
Finance.
65
Michael Marchlik has served on our Board
since May 6, 2020. Mr. Marchlik has served as the Co-Chief
Executive Officer of the Advisory Services division of B. Riley
Financial, Inc., formally known as Great American Group
(“GA”), since April 2017 and is responsible for
overseeing the operations and client service efforts for lenders,
sponsors and borrowers. Prior to that, he served as a Partner and
National Sales and Marketing Director of GA from January 2010 to
April 2017, as Executive Vice President, Western Region of GA from
January 2004 to December 2009, as Senior Vice President of Sales,
Western Region of GA from June 2001 to December 2003, and as
Director of Operations at GA from July 1996 to May 2001. With
decades of experience in all segments of the asset disposition and
valuation industries, he has a deep understanding of corporate
transactional services, credit structure and asset-based valuation,
lending solutions and business operations. Mr. Marchlik attended
Northeastern University in Boston where he received a Bachelor of
Science in Finance.
We
believe that Mr. Marchlik possesses attributes that qualify him to
serve as a member of our Board, including his extensive
understanding of corporate transactional services, credit structure
and asset-based valuation, lending solutions and business
operations.
Kevin Westfall has served on our Board
since January 9, 2017. Mr.
Westfall has served as Chairman of Prime Automotive Group since
January 2020. Mr. Westfall was a co-founder and served as
Chief Executive Officer of Vroom from January 2012 through November
2015. Previously, from March 1997 through November 2011, Mr.
Westfall served as Senior Vice President of Sales and Senior Vice
President of Automotive Finance at AutoNation. Mr. Westfall was a
founder of BMW Financial Services in 1990 and served as its
President until March 1997. Mr. Westfall also served as Retail
Lease Manager of Chrysler Credit Corporation from 1987 until 1990
and as President of World Automotive Imports and Leasing from 1980
until 1987.
We
believe that Mr. Westfall possesses attributes that qualify him to
serve as a member of our Board, including his more than 30 years of
executive experience in automotive retail and finance
operations.
Corporate Governance Principles and Code of Ethics
Our
Board is committed to sound corporate governance principles and
practices. Our Board's core principles of corporate governance are
set forth in our Corporate Governance Principles. In order to
clearly set forth our commitment to conduct our operations in
accordance with our high standards of business ethics and
applicable laws and regulations, our Board also adopted a Code of
Business Conduct and Ethics, which is applicable to all directors,
officers and employees. A copy of the Code of Business Conduct and
Ethics and the Corporate Governance Principles are available on our
corporate website at www.rumbleon.com. You also may obtain without
charge a printed copy of the Code of Ethics and Corporate
Governance Principles by sending a written request to: Investor
Relations, RumbleOn, Inc., 901 W Walnut Hill Lane, Irving, Texas
75038. Amendments or waivers of the Code of Business Conduct and
Ethics will be provided on our website within four business days
following the date of the amendment or waiver.
Board of Directors
The
business and affairs of our company are managed by or under the
direction of the Board. The Board is currently composed of seven
members. The Board has not appointed a lead independent director;
instead the presiding director for each executive session is
rotated among the Chairs of the committees of our
Board.
The
Board held five meetings and took four actions by unanimous written
consent during the year ended December 31, 2020. In 2020, each
person serving as a director attended at least 75% of the total
number of meetings of our Board and any Board committee on which he
served.
During
2020, the Board established a Special Committee of independent
directors to review strategic alternatives. The members of the
Special Committee are Denmar Dixon (Chair), Adam Alexander, Richard
Gray, and Kevin Westfall. The Special Committee held five meetings
and took one action by unanimous written consent during the year
ended December 31, 2020.
Our
directors are expected to attend our Annual Meeting of
Stockholders. Any director who is unable to attend our Annual
Meeting is expected to notify the Chairman of the Board in advance
of the Annual Meeting. All of our directors serving at the time of
the 2020 Annual Meeting of Stockholders were in
attendance.
Board Committees
Pursuant to our
bylaws, our Board may establish one or more committees of the Board
however designated, and delegate to any such committee the full
power of the Board, to the fullest extent permitted by
law.
66
Our
Board has established three separately designated standing
committees to assist the Board in discharging its responsibilities:
the Audit Committee, the Compensation Committee, and the Nominating
and Corporate Governance Committee. The charters for our Board
committees set forth the scope of the responsibilities of that
committee. The Board will assess the effectiveness and contribution
of each committee on an annual basis. These charters are available
at www.rumbleon.com,
and you may obtain a printed copy of any of these charters by
sending a written request to: Investor Relations, RumbleOn, Inc.,
901 W Walnut Hill Lane, Irving, Texas 75038.
Audit Committee. The current members of
the Audit Committee are Messrs. Marchlik (chair), Dixon, and
Westfall. Also, Messrs. Alexander and Gray served on the Audit
Committee through January 5, 2021. The Board has determined that
Mr. Marchlik is an "audit committee financial expert," as defined
in Item 407 of Regulation S-K.
The
primary function of the Audit Committee is to assist the Board in
fulfilling its responsibilities by overseeing our accounting and
financial processes and the audits of our financial statements. The
independent auditor is ultimately accountable to the Audit
Committee, as representatives of the stockholders. The Audit
Committee has the ultimate authority and direct responsibility for
the selection, appointment, compensation, retention and oversight
of the work of our independent auditor that is engaged for the
purpose of preparing or issuing an audit report or performing other
audit, review or attest services for us (including the resolution
of disagreements between management and the independent auditors
regarding financial reporting), and the independent auditor must
report directly to the Audit Committee. The Audit Committee also is
responsible for the review of proposed transactions between us and
related parties. For a complete description of the Audit
Committee's responsibilities, you should refer to the Audit
Committee Charter. The Audit Committees held four meetings and took
one action by unanimous written consent during the year ended
December 31, 2020.
Compensation Committee. The current
members of the Compensation Committee are Messrs. Alexander
(chair), Gray, and Marchlik. Also, Messrs. Westfall (chair) and
Dixon served on the Compensation Committee through January 5, 2021.
The Compensation Committee was established to, among other things,
administer and approve all elements of compensation and awards for
our executive officers. The Compensation Committee has the
responsibility to review and approve the business goals and
objectives relevant to each executive officer's compensation,
evaluate individual performance of each executive in light of those
goals and objectives, and determine and approve each executive's
compensation based on this evaluation. For a complete description
of the Compensation Committee's responsibilities, you should refer
to the Compensation Committee Charter. The Compensation Committee
held two meetings and took one action by unanimous written consent
during the year ended December 31, 2020.
Nominating and Corporate Governance
Committee. The current members of the Nominating and
Corporate Governance Committee are Messrs. Dixon (chair),
Alexander, and Marchlik. Also, Mr. Gray served on the Nominating
and Corporate Governance Committee through January 5, 2021. The
Nominating Committee is responsible for identifying individuals
qualified to become members of the Board or any committee thereof;
recommending nominees for election as directors at each annual
stockholder meeting; recommending candidates to fill any vacancies
on the Board or any committee thereof; and overseeing the
evaluation of the Board. For a complete description of the
Nominating and Corporate Governance Committee's responsibilities,
you should refer to the Nominating and Corporate Governance
Committee Charter. The Nominating and Corporate Governance
Committees held two meetings and took one action by unanimous
written consent during the year ended December 31,
2020.
The
Nominating and Corporate Governance Committee will consider all
qualified director candidates identified by various sources,
including members of the Board, management and stockholders.
Candidates for directors recommended by stockholders will be given
the same consideration as those identified from other sources. The
Nominating and Corporate Governance Committee is responsible for
reviewing each candidate's biographical information, meeting with
each candidate and assessing each candidate's independence, skills
and expertise based on a number of factors. While we do not have a
formal policy on diversity, when considering the selection of
director nominees, the Nominating and Corporate Governance
Committee considers individuals with diverse backgrounds,
viewpoints, accomplishments, cultural background and professional
expertise, among other factors.
67
Item 11.
Executive Compensation.
Executive and Director Compensation
Summary Compensation Table
The
following table provides the compensation paid to our principal
executive officer and other executive officers whose total
compensation exceeded $100,000 for the years ended December 31,
2020 and December 31, 2019.
|
Name and
Principal Position
|
Fiscal
Year
|
Salary
|
Bonus
|
Stock
Awards(1)
|
Total
|
|
Marshall
Chesrown
Chief Executive
Officer
|
2020
|
$366,923
|
$90,000
|
394,027
|
$850,950
|
|
|
2019
|
$360,000
|
$200,000
|
-
|
$560,000
|
|
Steven R.
Berrard
Chief Financial
Officer
|
2020
|
$366,923
|
$90,000
|
394,024
|
$850,947
|
|
|
2019
|
$360,000
|
$200,000
|
-
|
$560,000
|
|
Peter
Levy
Chief Operating
Officer
|
2020
|
$305,769
|
$162,500
|
364,060
|
$832,329
|
|
|
2019
|
$280,273
|
$50,500
|
204,000
|
$534,773
|
(1)
Stock awards reflect the grant date fair value of restricted stock
units determined pursuant to FASB ASC Topic 718 awarded during the
calendar year, excepting that 2019 does not include the grant date
fair value of performance and market based restricted stock units
granted to each of Mr. Chesrown and Mr. Berrard in the amount of
$838,000 and to Mr. Levy in the amount of $204,250, each as
determined pursuant to FASB ASC Topic 718, which restricted stocks
unit were terminated as described below under the section titled
Executive Employment Arrangement.
Executive Employment Arrangement
At no
time has the Company entered into employment agreements or
arrangements with Messrs. Chesrown, Berrard or Levy. Accordingly,
Messrs. Chesrown, Berrard and Levy are employees as the
Company’s Chief Executive Officer, Chief Financial Officer
and Chief Operating Officer, respectively, on an at-will
basis.
On May
25, 2019, the Compensation Committee approved an increase in the
annual base salary for Marshall Chesrown and Steven Berrard from
$240,000 to $360,000, retroactive to January 1, 2019. The
Compensation Committee also approved a discretionary bonus of up to
$500,000 for each of Messrs. Chesrown and Berrard payable as
follows: (i) $100,000 payable immediately in connection with the
Company's performance for the quarter ended March 31, 2019 and the
launch of the Company's finance business, (ii) $100,000 upon
reaching the revenue target approved by the Committee for the year
ending December 31, 2019 and payable upon completion of the
Company's audited financial statements for the year ending December
31, 2019, (iii) $100,000 payable upon achieving powersports and
automotive unit sales with a target average gross margin per unit
approved by the Committee at any time through December 31, 2019,
and (iv) $100,000 payable in two equal installments upon achieving
a certain percentage of revenue and gross margin targets approved
by the Committee for the quarters ended June 30, 2019 and September
30, 2019. Messrs. Chesrown and Berrard each achieved and were paid
$200,000 under the bonus plan.
The
Committee also approved grants of up to 20,000 restricted stock
units ("RSUs") for each of Messrs. Chesrown and Berrard, which vest
as follows: (i) 5,000 RSUs vest after two consecutive quarters of
$1.00 or greater operating income and trailing four quarter revenue
targets approved by the Committee at any time through September 30,
2020, (ii) 5,000 RSUs vest at such time as the shares of Class B
Common Stock trade at a minimum closing price of $200.00 per share
for 30 consecutive trading days at any time through September 30,
2020, and (iii) 10,000 RSUs vest at such time as the shares of
Class B Common Stock trade at a minimum closing price of $300.00
per share for thirty consecutive trading days at any time through
September 30, 2020. Messrs. Chesrown and Berrard received these
RSUs on June 3, 2019 (the "CEO and CFO RSUs").
68
On
August 22, 2019, the Compensation Committee approved two separate
RSU grants to Mr. Levy.
●
First, a grant of
2,500 RSUs to Mr. Levy, which vest (1) 20% on the last day of the
ninth month following the grant date, (2) 7.5% every three months
on the last day of each three month period beginning on the last
day of the twelfth month following the grant date through the last
of the twenty-first month following the grant date and (3) 12.5%
every three months on the last day of each three month period
beginning on the last day of the twenty-fourth month following the
grant date through the last day of the thirty-first month following
the grant date.
●
Second, grant of up
to 5,000 RSUs to Mr. Levy, which vest as follows: (i) 1,250 RSUs
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, (ii) 1,250 RSUs vest at such time
as the shares of Class B Common Stock trade at a minimum closing
price of $200.00 per share for 30 consecutive trading days at any
time through September 30, 2020, and (iii) 2,500 RSUs vest at such
time as the shares of Class B Common Stock trade at a minimum
closing price of $300.00 per share for 30 consecutive trading days
at any time through September 30, 2020 (the “COO RSUs”,
collectively with the CEO and CFO RSUs, the “Executive
RSUs”)
On May
27, 2020, the Committee terminated the Executive RSUs.
On July
15, 2020, the Committee approved the 2020 cash bonus incentive
plan. The Committee established a target bonus ranging from
approximately 70% to 115% of base salary for each executive
officer, including Messrs. Chesrown, Berrard and Levy, with a
payout based on achievement of specific financial and operational
performance objectives. The current base salaries for the executive
officers are as follows: Marshall Chesrown - $360,000; Steven
Berrard - $360,000; and Peter Levy - $300,000.
Also,
on July 15, 2020, the Committee approved grants of RSUs pursuant to
the Plan for Messrs. Chesrown, Berrard and Levy as follows: Mr.
Chesrown – 19,544 RSUs, Mr. Berrard – 19,544 RSUs and
Mr. Levy – 16,287. These RSUs vest (i) 20.0% on the
thirteenth month after the grant date, (ii) an additional 30.0%
during the subsequent twelve months, and (iii) the final 50.0%
during the following twelve months.
Also,
on July 15, 2020, the Committee approved grants of RSUs pursuant to
the Plan for Messrs. Chesrown, Berrard and Levy as follows: Mr.
Chesrown – 66,668 RSUs, Mr. Berrard – 66, 666 RSUs, and
Mr. Levy – 66,666. These RSUs vest as follows: one third
shall vest on the first trading day after the Company’s Class
B Common Stock closes 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 closes
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 B Common stock closes at a stock
price of $200 per share or greater for 30 consecutive trading days.
These RSUs have a term of 30 months.
Also,
in March 2021, the Committee completed its annual grant of RSUs to
company employees, including the grant of 38,521 RSUs to each of
Messrs. Chesrown, Berrard and Levy, subject to shareholder approval
of the Plan Increase (as defined below). These RSUs vest (i) 20.0%
on the thirteenth month after the grant date, (ii) an additional
30.0% during the subsequent twelve months, and (iii) the final
50.0% during the following twelve months.
Non-Employee Director Compensation
The
only method of non-employee director compensation is the grant of
RSUs. The Company does not pay a cash retainer, meeting fee,
committee membership fee or other such stipend, however the Company
does reimburse each non-employee director for fees travel and
expenses related to their attendance, if and when
incurred.
On
July 15, 2020, the Committee approved the annual compensation for
the Company’s non-employee directors of $150,000 of RSUs to
be granted upon a director’s initial appointment or election
to the Board of Directors and thereafter at the beginning of each
calendar year. These RSUs vest quarterly, and are subject to
prorata vesting if a director leaves the Board of Directors before
the end of each quarterly vesting period. On July 15, 2020, the
Committee approved the 2020 calendar year grants of RSUs for each
non-employee directors in the amount of $150,000, except Messrs.
Alexander and Marchlik received grants of RSUs in the amount of
$69,451 and $117,436, respectively.
69
The
following table summarizes the compensation paid to our
non-employee directors for the year ended December 31,
2020.
|
Name
|
Stock
Awards
(1)
|
Total
|
|
Adam Alexander
(2)
|
$69,451
|
$69,451
|
|
Denmar
Dixon
|
$150,000
|
$150,000
|
|
Richard
Gray
|
$150,000
|
$150,000
|
|
Kartik Kakarala
(3)
|
$-
|
$-
|
|
Mike Marchlik
(4)
|
$117,436
|
$117,436
|
|
Kevin
Westfall
|
$150,000
|
$150,000
|
(1)
Stock awards reflect the grant date fair value of restricted stock
units determined pursuant to FASB ASC Topic 718 awarded during the
calendar year.
(2)
Mr. Alexander joined the Board of Directors on July 15,
2020.
(3)
Mr. Kakarala resigned effective July 15, 2020.
(4)
Mr. Marchlik joined the Board of Directors on May 6,
2020.
70
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners and
Management
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities. In accordance with the SEC rules, shares of our common
stock that may be acquired upon exercise or vesting of equity
awards within 60 days of the date of the table below are deemed
beneficially owned by the holders of such options and are deemed
outstanding for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for
the purpose of computing the percentage of ownership of any other
person.
As of
March 26, 2021, 50,000 shares of Class A Common Stock and 2,286,404
shares of Class B Common Stock were issued and outstanding. The
following table sets forth information with respect to the
beneficial ownership of our common stock as of March 26, 2021, by
(i) each of our directors
and executive officers, (ii) all of our directors and executive
officers as a group, and (iii) each stockholder known by us to be
the beneficial owner of more than 5% of our common stock. To the
best of our knowledge, except as otherwise indicated, each of the
persons named in the table has sole voting and investment power
with respect to the shares of common stock beneficially owned by
such person, except to the extent such power may be shared with a
spouse. To our knowledge, none of the shares listed below are held
under a voting trust or similar agreement, except as noted. To our
knowledge, there is no arrangement, including any pledge by any
person of our securities or any of our parents, the operation of
which may at a subsequent date result in a change in control of our
company.
Unless
otherwise noted below, the address of each person listed on the
table is c/o RumbleOn, Inc., 901 W
Walnut Hill Lane, Irving, Texas 75038.
|
Beneficial Owner Executive Officers and Directors
|
Class A
Common Stock Beneficially Owned
|
Percentage
of Class A Common
Stock Beneficially Owned (%)(1)
|
Class B
Common Stock Beneficially Owned
|
|
Percentage of Class B Common Stock Beneficially
Owned (%)(2)
|
|
Marshall Chesrown(3)
|
43,750
|
87.5%
|
95,750
|
(7)
|
4.19%
|
|
Steven Berrard(4)
|
6,250
|
12.5%
|
108,500
|
(7)
|
4.75%
|
|
Denmar Dixon(5)
|
-
|
-
|
98,110
|
(8)
|
4.29%
|
|
Kevin
Westfall
|
-
|
-
|
23,088
|
(9)
|
1.01%
|
|
Adam
Alexander
|
-
|
-
|
9,781
|
(10)
|
*%
|
|
Peter
Levy
|
-
|
-
|
9,943
|
(7)(11)
|
*%
|
|
Richard
Gray
|
-
|
-
|
23,818
|
(12)
|
1.04%
|
|
Michael
Marchlik
|
-
|
-
|
11,908
|
(13)
|
*%
|
|
All executive
officers and directors as a group (8 persons)(6)
|
-
|
-
|
380,989
|
(14)
|
16.59%
|
*Represents beneficial ownership of less than 1%.
(1)
Based on 50,000 shares of Class A Common Stock issued and
outstanding as of March 26, 2021. The Class A Common Stock has ten
votes for each share.
(2)
Based on 2,286,404 shares of Class B Common Stock issued and
outstanding as of March 26, 2021. The Class B Common Stock has one
vote for each share.
(3)
As of March 26, 2021, Mr. Chesrown has
voting power representing approximately 19.14% of our outstanding common
stock.
(4)
Shares are owned directly through
Berrard Holdings, a limited partnership controlled by Steven R.
Berrard. Mr. Berrard has the sole power to vote and the sole power
to dispose of each of the shares of common stock which he may be
deemed to beneficially own. As of March 26, 2021, Mr. Berrard has
voting power representing approximately 6.14% of our outstanding common
stock.
(5)
62,642 shares are owned directly through Blue Flame Capital, LLC,
an entity controlled by Mr. Dixon, 638 shares are held by Mr.
Dixon's spouse, 75 shares are held by Mr. Dixon's son and 31,930
shares are directly held by Mr. Dixon (including 2,641 shares held
in a joint account with Mr. Dixon's spouse). Mr. Dixon has the sole
power to vote and the sole power to dispose of each of the shares
of common stock which he may be deemed to beneficially own. As of
March 26, 2021, Mr. Dixon has voting power representing 3.42% of
our outstanding common stock.
71
(6)
As of March 26, 2021, all directors
and executive officers as a group have voting power representing
approximately 31.24% of our
outstanding common stock.
(7)
Does not include the following performance based restricted stock
units for Messrs. Chesrown, Berrard and Levy: Mr. Chesrown –
66,668 restricted stock units, Mr. Berrard – 66, 666
restricted stock units, and Mr. Levy – 66,666. These
restricted stock units vest as follows: one third shall vest on the
first trading day after the Company’s Class B Common Stock
closes 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 closes 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 B Common stock closes at a stock price of
$200 per share or greater for 30 consecutive trading
days.
(8)
Includes 1,239 restricted stock units that have vested and are
pending delivery and 1,586 restricted stock units that will vest
within 60 days.
(9)
Includes 510 restricted stock units that have vested and are
pending delivery and 1,378 restricted stock units that will vest
within 60 days.
(10)
Includes 1,232 restricted stock units that will vest within 60
days.
(11)
Includes 1,042 restricted stock units that have vested and are
pending delivery and 396 restricted stock units that will vest
within 60 days.
(12)
Includes 510 restricted stock units that have vested and are
pending delivery and 1,378 restricted stock units that will vest
within 60 days.
(13)
Includes 1,232 restricted stock units that will vest within 60
days.
(14)
Includes 3,301 restricted stock units that
have vested and are pending delivery and 7,202 restricted stock
units that will vest within 60 days.
In
connection with the RideNow Transaction, we will issue
approximately 5.8 million shares of our Class B Common Stock to the
Sellers and additional shares of our Class B Common Stock in
connection with the anticipated issuance of new equity to finance
the cash consideration. These issuances of our Class B Common
Stock may be deemed a change in control.
Securities Authorized for Issuance Under Equity Compensation
Plans
On
January 9, 2017, our Board approved the adoption of the Incentive
Plan subject to stockholder approval at our 2017 Annual Meeting of
Stockholders. On June 30, 2017, the Incentive Plan was approved by
our stockholders at the 2017 Annual Meeting of Stockholders. The
purposes of the Incentive Plan are to attract, retain, reward and
motivate talented, motivated and loyal employees and other service
providers, or the Eligible Individuals, by providing them with an
opportunity to acquire or increase a proprietary interest in our
company and to incentivize them to expend maximum effort for the
growth and success of our company, so as to strengthen the
mutuality of the interests between such persons and our
stockholders. The Incentive Plan allows us to grant a variety of
stock-based and cash-based awards to Eligible Individuals. On May
10, 2018, the Board approved, subject to stockholder approval, an
amendment to the Incentive Plan to increase the number of shares of
Class B Common Stock authorized for issuance under the Incentive
Plan from twelve percent (12%) of all issued and outstanding Class
B Common Stock from time to time to 100,000 shares of Class B
Common Stock (the "Plan Increase"). On June 25, 2018, the Plan
Increase was approved by our stockholders at the 2018 Annual
Meeting of Stockholders. 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 from
100,000 shares of Class B Common Stock to 200,000 shares of Class B
Common Stock. On August 25, 2020 the Company's stockholders
approved another amendment to the Plan to increase the number of
shares authorized for issuance under the Plan from 200,000 to
700,000 shares of Class B Common Stock. In contemplation of the
RideNow Transaction, on March 9, 2021, the Board approved, upon the
recommendation of the Compensation Committee, subject to
stockholder approval, an amendment to the Incentive Plan to
increase the authorized shares of Class B Common Stock available
under the Incentive Plan from 700,000 shares to 2,700,000 shares
and extend the terms of the Incentive Plan for an additional ten
years (the “Plan Increase”). We have not maintained any
other equity compensation plans since our inception.
72
The
following table provides information as of December 31, 2020, with
respect to all of our compensation plans under which equity
securities are authorized for issuance:
|
Plan
Category
|
Number
of securities
to be
issued upon exerciseof outstanding options, warrants and
rights
|
Number
of securities remaining available for future
issuance
|
|
Equity compensation
plans approved by stockholders
|
446,594(1)
|
195,507(2)
|
|
Equity compensation
plans not approved by stockholders
|
-
|
-
|
(1) Represents restricted stock units
or options outstanding under the Incentive
Plan.
(2) Represents securities
remaining available for future issuance under the Incentive
Plan.
Item 13.
Certain Relationships and Related Transactions, and Director
Independence.
We have
been a party to the following transactions since January 1, 2019,
in which the amount involved exceeds $120,000 and in which any
director, executive officer, or holder of more than 5% of any class
of our voting stock, or any member of the immediate family of or
entities affiliated with any of them, had or will have a material
interest.
November 2016 Private Placement
On
November 28, 2016, we completed a private placement with certain
purchasers, with respect to the sale of an aggregate of 45,000
shares of common stock of the Company at a purchase price of $30.00
per share for total consideration of $1,350,000 (the "2016 Private
Placement"). In connection with the 2016 Private Placement, the
Company also entered into loan agreements with the investors
pursuant to which the investors would loan the Company their pro
rata share of up to $1,350,000 in the aggregate upon our request
any time on or after January 31, 2017 and before
November 1, 2020, pursuant
to the terms of a convertible promissory note attached to the loan
agreements.
In
connection with the 2016 Private Placement, Blue Flame, an entity
controlled by Denmar Dixon, one of the Company's directors, paid $250,000 for 45,000
shares of the Company's Class B
Common Stock.
On
March 31, 2017, we completed funding of the second tranche of the
2016 Private Placement, pursuant to which the investors each
received their pro rata share of (1) 58,096 shares of common stock
and (2) the Private Placement Notes, in the amount of $667,000, and
cancellation of loan agreements having an aggregate principal
amount committed by the purchasers of $1,350,000. The Private
Placement Notes were not convertible. As a result, Blue Flame and
Mr. Dixon received 32,276 shares of Class B Common Stock and
promissory notes in the aggregate principal amount of $370,556 (the
"Blue Flame Notes").
Halcyon Acquisition Note
On
February 8, 2017, in connection with the acquisition of NextGen,
the Company issued the Acquisition Note in favor of NextGen (which
note was subsequently assigned to Halcyon Consulting, LLC
("Halcyon"), an entity affiliated with Kartik Kakarala, a former
director of the Company in February 2018) in the amount of
$1,333,334. Interest accrued and was paid semi-annually (i) at
a rate of 6.5% annually from the closing date through the second
anniversary of such date and (ii) at a rate of 8.5% annually
from the second anniversary of the closing date through the
Maturity Date. Upon the occurrence of any event of default, the
outstanding balance under the Acquisition Note would become
immediately due and payable upon election of the holder. The
Company's obligations under the Acquisition Note were secured by
substantially all the assets of NextGen Pro, pursuant to an
Unconditional Guaranty Agreement (the "Guaranty Agreement"),
by and among NextGen and NextGen Pro, and a related Security
Agreement between the parties, each dated as of February 8, 2017.
Under the terms of the Guaranty Agreement, NextGen Pro agreed to
guarantee the performance of all the Company's obligations under
the Acquisition Note.
2020 Note Exchange
In
connection with the closing of the 2020 Public Offering and the
2020 Note Offering, the Company repaid $500,000 plus accrued
interest related to the Acquisition Note, and certain of the
Company's investors extended the maturity of currently outstanding
promissory notes, including the Blue Flame Notes and the
Acquisition Note, 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 and each investor thereto (the
"Investors"), including Halcyon, such New Investor Note for an
aggregate principal amount of $833,333, Blue Flame, such New
Investor Note for an aggregate principal amount of $99,114 and Mr.
Dixon, individually, such New Investor Note for an aggregate
principal amount of $272,563. The New Investor Notes, having an
aggregate principal amount of approximately $1.5 million, matured
on January 31, 2021, and were convertible at any time at the
Investor's option at a price of $60.00 per share. In connection
with the issuance of the New Investor Notes, the Company also
entered into a Security Agreement, dated as of January 14, 2020
with the Investors, pursuant to which the Company granted to the
Investors a security interest in certain collateral to secure, on a
pro rata basis based on the percentage equal to the amount of
principal outstanding on each New Investor Note divided by the
amount of principal outstanding on all of the New Investor Notes to
each Investor.
On
January 31, 2021, the Company paid $837,672 and $384,292,
representing the total outstanding principal plus accrued interest
on the New Investor Notes held by (1) Halcyon and (2) Blue Flame
and Mr. Dixon, respectively.
73
Nashville Leases
In
connection with the acquisition of Wholesale, we entered into
leases for two facilities in the greater Nashville area owned by
Mr. Brewster, a former 5% or greater holder of our Class B
Common Stock. One of the leases was terminated in 2019. The other
location has a lease term expiring on October 30, 2021, for which
we have two (2) renewal options, each of which provides for five
(5) additional years with a ten percent (10.0%) increase in the
base rent. The rent for the current location is approximately
$25,000 per month, and is further described in Item 2 - Properties.
Related Party Transaction Policy
In May
2017, our Board adopted a formal policy that our executive
officers, directors, holders of more than 5.0% of any class of our
voting securities, and any member of the immediate family of and
any entity affiliated with any of the foregoing persons, are not
permitted to enter into a related party transaction with us without
the prior consent of the Audit Committee, or other independent
members of our Board if it is inappropriate for the Audit Committee
to review such transaction due to a conflict of interest. Any
request for us to enter into a transaction with an executive
officer, director, principal stockholder, or any of their immediate
family members or affiliates, in which the amount involved exceeds
$120,000 must first be presented to the Audit Committee for review,
consideration and approval. In approving or rejecting any such
proposal, the Audit Committee is to consider the relevant facts and
circumstances available and deemed relevant to the audit committee,
including, whether the transaction is on terms no less favorable
than terms generally available to an unaffiliated third party under
the same or similar circumstances and the extent of the related
party's interest in the
transaction.
Director Independence
Our
Board has determined that all of our directors, other than Messrs.
Chesrown, and Berrard qualify as "independent" directors in accordance with the listing
requirements of The NASDAQ Stock Market. The NASDAQ independence
definition includes a series of objective tests regarding a
director's independence and
requires that the Board make an affirmative determination that a
director has no relationship with us that would interfere with such
director's exercise of
independent judgment in carrying out the responsibilities of a
director. There are no family relationships among any of our
directors or executive officers.
Item 14.
Principal Accounting Fees and Services.
The
following table sets forth Grant Thornton's fees for the years
ended December 31, 2020 and 2019.
|
|
2020
|
2019
|
|
Audit
fees(1)
|
$475,200
|
$340,000
|
|
Tax
fees
|
-
|
-
|
|
All other
fees
|
-
|
-
|
|
Total
|
$475,200
|
$340,000
|
(1) Includes fees for audits of our annual financial statements,
reviews of the related quarterly financial statements and services
that are normally provided by the independent accountants in
connection with statutory and regulatory filings or engagements,
including reviews of documents filed with the SEC.
Policy for Approval of Audit and Permitted Non-Audit
Services
The
Audit Committee has adopted a policy and related procedures
requiring its pre-approval of all audit and non-audit services to
be rendered by its independent registered public accounting firm.
These policies and procedures are intended to ensure that the
provision of such services do not impair the independent registered
public accounting firm's independence. These services may include
audit services, audit related services, tax services and other
services. The policy provides for the annual establishment of fee
limits for various types of audit services, audit related services,
tax services and other services, within which the services are
deemed to be pre-approved by the Audit Committee. The independent
registered public accounting firm is required to provide to the
Audit Committee back up information with respect to the performance
of such services.
All
services provided by Grant Thornton during the fiscal year ended
December 31, 2020 and 2019 were approved by the Audit Committee.
The Audit Committee has delegated to its Chair the authority to
pre-approve services, up to a specified fee limit, to be rendered
by the independent registered public accounting firm and requires
that the Chair report to the Audit Committee any pre-approved
decisions made by the Chair at the next scheduled meeting of the
Audit Committee.
74
PART
IV
Item 15.
Exhibits, Financial Statement Schedules.
(a)
We have filed the
following documents as part of this Annual Report on Form
10-K:
1.
The financial
statements listed in the "Index to Financial Statements" on page
F-1 are filed as part of this report.
2.
Financial statement
schedules are omitted because they are not applicable, or the
required information is shown in the financial statements or notes
thereto.
3.
Exhibits included
or incorporated herein: See below.
|
Exhibit Number
|
|
Description
|
|
|
|
Agreement
and Plan of Merger, dated October 26, 2018, by and among RumbleOn,
Inc., RMBL Tennessee, LLC, Wholesale Holdings, Inc., Steven
Brewster and Janet Brewster, Wholesale, LLC, and Steven Brewster as
representative, and for limited purposes, Marshall Chesrown and
Steven R. Berrard. (Incorporated by reference to Exhibit 2.1 in the
Company's Current Report on
Form 8-K, filed on October 31, 2018).
|
||
|
|
Amendment
to the Agreement and Plan of Merger, dated October 29, 2018, by and
among RumbleOn, Inc., RMBL Tennessee, LLC, Wholesale Holdings,
Inc., Steven Brewster and Janet Brewster, Wholesale, LLC, and
Steven Brewster as representative (Incorporated by reference to
Exhibit 2.2 in the Company's
Current Report on Form 8-K, filed on October 31,
2018).
|
||
|
|
Membership Interest Purchase Agreement, dated October 26, 2018, by
and among RumbleOn, Inc. Steven Brewster, Justin Becker, and Steven
Brewster as representative. (Incorporated by reference to
Exhibit 2.3 in the Company's
Current Report on Form 8-K, filed on October 31,
2018).
|
||
|
|
Plan of Merger and Equity Purchase Agreement, dated March 12,
2021 (Incorporated by reference to Exhibit 2.1 in the
Company's Current Report on
Form 8-K, filed on March 15, 2021).
|
||
|
|
Articles
of Incorporation filed on October 24, 2013 (Incorporated by
reference to Exhibit 3(i)(a) in the Company's Registration Statement on Form S-1/A,
filed on March 20, 2014).
|
||
|
|
By-Laws,
as Amended (Incorporated by reference to Exhibit 3.2 in the
Company's Annual Report on Form
10-K, filed on February 14, 2017).
|
||
|
|
Certificate
of Amendment to Articles of Incorporation, filed on February 13,
2017 (Incorporated by reference to Exhibit 3.3 in the
Company's Annual Report on Form
10-K, filed on February 14, 2017).
|
||
|
|
Certificate
of Amendment to Articles of Incorporation, filed on June 25, 2018
(Incorporated by reference to Exhibit 3.1 in the
Company's Current Report on
Form 8-K, filed on June 28, 2018).
|
||
|
|
Certificate
of Designation for the Series B Preferred Stock (Incorporated by
reference to Exhibit 3.1 in the Company's Current Report on Form 8-K, filed on
October 31, 2018).
|
||
|
|
Certificate
of Change (Incorporated by reference to Exhibit 3.1 in the
Company's Current Report on Form 8-K, filed on May 19,
2020).
|
||
|
|
Registration
Rights Agreement, dated February 8, 2017 (Incorporated by reference
to Exhibit 10.2 in the Company's Annual Report on Form 10-K, filed on
February 14, 2017).
|
||
|
|
Stockholder's
Agreement, dated October 24, 2016 (Incorporated by reference to
Exhibit 10.1 in the Company's
Current Report on Form 8-K, filed on October 28,
2016).
|
||
|
|
Sample
Stock Certificate – Class
B Common Stock (Incorporated by reference to Exhibit 4.4 in the
Company's Registration
Statement on Form S-1/A filed on September 27, 2017).
|
||
|
|
Form of
Warrant to Purchase Class B Common Stock, dated October 18, 2017
(Incorporated by reference to Exhibit 4.1 in the
Company's Current Report on
Form 8-K, filed October 24, 2017).
|
||
|
|
Warrant,
dated April 30, 2018 (Incorporated by reference to Exhibit 4.1 in
the Company's Current Report on Form 8-K, filed on May 1,
2018).
|
||
|
|
Warrant
to Purchase Class B Common Stock, dated October 30, 2018
(Incorporated by reference to Exhibit 4.1 in the
Company's Current Report on
Form 8-K, filed on October 31, 2018).
|
||
|
|
Indenture,
dated January 14, 2020, between RumbleOn, Inc. and Wilmington Trust
National Association (Incorporated by reference to Exhibit 4.1 in
the Company's Current Report on
Form 8-K, filed on January 16, 2020).
|
||
|
|
Form of 6.75% Convertible Senior Note due 2025 (included as Exhibit
A to the Indenture filed as Exhibit 4.8) (Incorporated by
reference to Exhibit 4.2 in the Company's Current Report on Form 8-K, filed on May
15, 2019).
|
||
75
|
|
Form of
Registration Rights Agreement, dated January 14, 2020 (Incorporated
by reference to Exhibit 4.3 in the Company's Current Report on Form 8-K, filed on May
15, 2019).
|
|
|
|
Description
of Registrant's Securities (Incorporated by reference to Exhibit
4.11 in the Company's Annual
Report on Form 10-K, filed on May 29, 2020).
|
|
|
|
Warrant,
dated March 12, 2021 (Incorporated by reference to Exhibit 4.1 in
the Company's Current Report on Form 8-K, filed on March 15,
2021).
|
|
|
|
2017
RumbleOn, Inc. Stock Incentive Plan + (Incorporated by reference to
Exhibit 10.1 in the Company's
Current Report on Form 8-K, filed on January 9, 2017).
|
|
|
|
Unconditional
Guaranty Agreement (Incorporated by reference to Exhibit 10.12 in
the Company's Annual Report on
Form 10-K, filed on February 14, 2017).
|
|
|
|
Security
Agreement (Incorporated by reference to Exhibit 10.13 the
Company's Annual Report on Form
10-K, filed on February 14, 2017).
|
|
|
|
NextGen
Promissory Note, dated February 8, 2017 (Incorporated by reference
to Exhibit 10.1 in the Company's Quarterly Report on Form 10-Q, filed on
May 15, 2017).
|
|
|
|
RumbleOn,
Inc. Form of Promissory Note (Incorporated by reference to Exhibit
10.1 in the Company's Current
Report on Form 8-K, filed on April 5, 2017).
|
|
|
|
Inventory
Financing and Security Agreement, by and among RMBL Missouri, LLC,
Ally Bank and Ally Financial, Inc., dated February 16, 2018
(Incorporated by reference to Exhibit 10.1 in the
Company's Current Report on
Form 8-K, filed on February 23, 2018).
|
|
|
|
Addendum
to Inventory Financing and Security Agreement, by and among RMBL
Missouri, LLC, Ally Bank and Ally Financial, Inc., dated February
16, 2018 (Incorporated by reference to Exhibit 10.2 in the
Company's Current Report on
Form 8-K, filed on February 23, 2018).
|
|
|
|
Cross
Collateral, Cross Default and Guaranty Agreement, by and among Ally
Bank, Ally Financial, Inc., RumbleOn, Inc., and RMBL Missouri, LLC,
dated February 16, 2018 (Incorporated by reference to Exhibit 10.3
in the Company's Current Report
on Form 8-K, filed on February 23, 2018).
|
|
|
|
General
Security Agreement, by and among RumbleOn, Inc., Ally Bank and Ally
Financial, Inc., dated February 16, 2018 (Incorporated by reference
to Exhibit 10.4 in the Company's Current Report on Form 8-K, filed on
February 23, 2018).
|
|
|
|
Amendment to the RumbleOn, Inc. 2017 Stock Incentive Plan. +
(Incorporated by reference to Exhibit 10.1 in the
Company's Current Report on
Form 8-K, filed on June 28, 2018).
|
|
|
|
Registration
Rights Agreement, dated October 30, 2018, by and among RumbleOn,
Inc., Steven Brewster and Janet Brewster, and Steven Brewster
as representative (Incorporated by reference to Exhibit 10.1 in the
Company's Current Report on
Form 8-K, filed on October 31, 2018).
|
|
|
|
Escrow
Agreement, dated October 30, 2018, by and among RumbleOn, Inc.,
Steven Brewster as representative, and Continental Stock Transfer
and Trust Company (Incorporated by reference to Exhibit 10.2 in the
Company's Current Report on
Form 8-K, filed on October 31, 2018).
|
|
|
|
Demand
Promissory Note and Loan and Security Agreement, dated October 30,
2018, by and between NextGear Capital, Inc. and Wholesale, LLC
(Incorporated by reference to Exhibit 10.4 in the
Company's Current Report on
Form 8-K, filed on October 31, 2018).
|
|
|
|
Corporate
Guaranty, in favor of NextGear Capital, Inc., dated October 30,
2018 (Incorporated by reference to Exhibit 10.5 in the
Company's Current Report on
Form 8-K, filed on October 31, 2018).
|
|
|
|
Form of
Securities Purchase Agreement, dated October 25, 2018 (Incorporated
by reference to Exhibit 10.6 in the Company's Current Report on Form 8-K, filed on
October 31, 2018).
|
|
|
|
Purchase
Agreement, dated May 9, 2019, between the Company and JMP
Securities LLC (Incorporated by reference to Exhibit 10.1 in the
Company's Current Report on Form 8-K, filed on May 15,
2019).
|
|
|
|
Form of
Securities Purchase Agreement, dated May 9, 2019 (Incorporated by
reference to Exhibit 10.1 in the Company's Current Report on Form
8-K, filed on May 15, 2019).
|
|
|
|
Amendment
to the RumbleOn, Inc. 2017 Stock Incentive Plan. + (Incorporated by
reference to Exhibit 10.1 in the Company's Current Report on Form
8-K, filed on May 22, 2019).
|
|
|
|
Form of
Note Exchange & Subscription Agreement, dated January 10, 2020
(Incorporated by reference to Exhibit 10.1 in the Company's Current
Report on Form 8-K, filed on January 16, 2020).
|
|
|
|
Form of
Joinder & Amendment, dated January 10, 2020 (Incorporated by
reference to Exhibit 10.2 in the Company's Current Report on Form
8-K, filed on January 16, 2020).
|
|
|
|
Form of
Investor Note Exchange Agreement, dated January 10, 2020
(Incorporated by reference to Exhibit 10.3 in the Company's Current
Report on Form 8-K, filed on January 16, 2020).
|
|
|
|
Form of
New Investor Note, dated January 10, 2020 (Incorporated by
reference to Exhibit 10.4 in the Company's Current Report on Form
8-K, filed on January 16, 2020).
|
76
|
|
Form of
Security Agreement, dated January 14, 2020 (Incorporated by
reference to Exhibit 10.5 in the Company's Current Report on Form
8-K, filed on January 16, 2020).
|
|
|
|
COVID-19
Stimulus Customer Agreement, dated May 1, 2020, by and between Wood
& Huston Bank and RumbleOn, Inc. (Incorporated by reference to
Exhibit 10.1 in the Company's Current Report on Form 8-K, filed on
May 7, 2020).
|
|
|
|
COVID-19
Stimulus Customer Agreement, dated May 1, 2020, by and between Wood
& Huston Bank and Wholesale, Inc. (Incorporated by reference to
Exhibit 10.2 in the Company's Current Report on Form 8-K, filed on
May 7, 2020).
|
|
|
|
COVID-19
Stimulus Customer Agreement, dated May 1, 2020, by and between Wood
& Huston Bank and Wholesale Express, LLC. (Incorporated by
reference to Exhibit 10.3 in the Company's Current Report on Form
8-K, filed on May 7, 2020).
|
|
|
|
Paycheck
Protection Program Note, dated May 1, 2020, executed by RumbleOn,
Inc. (Incorporated by reference to Exhibit 10.4 in the Company's
Current Report on Form 8-K, filed on May 7, 2020).
|
|
|
|
Paycheck
Protection Program Note, dated May 1, 2020, executed by Wholesale,
Inc. (Incorporated by reference to Exhibit 10.5 in the Company's
Current Report on Form 8-K, filed on May 7, 2020).
|
|
|
|
Paycheck
Protection Program Note, dated May 1, 2020, executed by Wholesale
Express, LLC (Incorporated by reference to Exhibit 10.6 in the
Company's Current Report on Form 8-K, filed on May 7,
2020).
|
|
|
|
Amendment
to the RumbleOn, Inc. 2017 Stock Incentive Plan. + (Incorporated by
reference to Exhibit 10.1 in the Company's Current Report on Form
8-K, filed on August 26, 2020).
|
|
|
|
Commitment
Letter, dated March 12, 2021 (Incorporated by reference to Exhibit
10.1 in the Company's Current Report on Form 8-K, filed on March
15, 2021).
|
|
|
|
Secured
Promissory Note, dated March 12, 2021 (Incorporated by reference to
Exhibit 10.2 in the Company's Current Report on Form 8-K, filed on
March 15, 2021).
|
|
|
|
Registration
Rights and Lock-Up Agreement, dated March 12, 2021 (Incorporated by
reference to Exhibit 10.3 in the Company's Current Report on Form
8-K, filed on March 15, 2021).
|
|
|
|
Subsidiaries
|
|
|
|
Consent
of Grant Thornton LLP
|
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act
|
|
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act
|
|
|
101.INS
|
|
XBRL
Instance Document.
|
|
101.SCG
|
|
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.
|
|
104
|
|
Cover
Page Interactive Data File (formatted as inline XBRL and contained
in Exhibit 101)
|
__________________
*
Furnished
herewith
+
Management
Compensatory Plan
Item 16.
Form 10-K Summary.
Registrants may
voluntarily include a summary of information required by Form 10-K
under this Item 16. The Company has elected not to include such
summary information.
77
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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, Inc.
|
|
|
|
|
|
|
Date:
March 31, 2021
|
By:
|
/s/ Marshall
Chesrown
|
|
|
|
Marshall
Chesrown
Chief
Executive Officer
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Marshall
Chesrown
|
|
Chairman
of the Board of Directors and
|
|
March
31, 2021
|
|
Marshall
Chesrown
|
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Steven R.
Berrard
|
|
Director
and Chief Financial Officer
|
|
March
31, 2021
|
|
Steven
R. Berrard
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Adam
Alexander
|
|
Director
|
|
March
31, 2021
|
|
Adam
Alexander
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Denmar
Dixon
|
|
Director
|
|
March
31, 2021
|
|
Denmar
Dixon
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard A. Gray,
Jr.
|
|
Director
|
|
March
31, 2021
|
|
Richard
A. Gray, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Michael
Marchlik
|
|
Director
|
|
March
31, 2021
|
|
Michael
Marchlik
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Kevin
Westfall
|
|
Director
|
|
March
31, 2021
|
|
Kevin
Westfall
|
|
|
|
|
78
Index to Financial Statements
|
Report of Independent Registered Public Accounting
Firm
|
F-2
|
|
RumbleOn, Inc. Consolidated Balance Sheets as of December 31, 2020
and 2019
|
F-4
|
|
RumbleOn, Inc. Consolidated Statements of Operations For the Two
Years Ended December 31, 2020 and 2019
|
F-5
|
|
RumbleOn,
Inc. Consolidated Statement of Stockholders' Equity For the Two
Years Ended December 31, 2020 and 2019
|
F-6
|
|
RumbleOn, Inc. Consolidated Statements of Cash Flows For the Two
Years Ended December 31, 2020 and 2019
|
F-7
|
|
RumbleOn, Inc. Notes to Financial Statements
|
F-8
|
F.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board
of Directors and Shareholders
RumbleOn Inc.
Opinion on the financial statements
We have
audited the accompanying consolidated balance sheets of RumbleOn,
Inc. (a Nevada corporation) and subsidiaries (the
“Company”) as of December 31, 2020 and 2019, the
related consolidated statements of operations, stockholders’
equity, and cash flows for each of the two years in the period
ended December 31, 2020, and the related notes (collectively
referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2020, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to
be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our
audits provide a reasonable basis for our
opinion.
Critical audit matters
The critical audit matters communicated below are matters arising
from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee
and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Quantitative goodwill impairment assessment of the Automotive
reporting unit
As described in Note 1 to the consolidated financial statements,
management performs its annual goodwill impairment test on December
31 or earlier upon occurrence of an indicator of potential
impairment. During the first quarter of 2020, management determined
indicators of potential impairment existed and as a result performed a quantitative
impairment test of its Automotive reporting unit as of March 31,
2020. The Company’s impairment test indicated no impairment
existed as the estimated fair value of the reporting unit exceeded
its carrying value as of March 31, 2020. We identified the goodwill
valuation impairment assessment of the Automotive reporting unit
performed during the first quarter of 2020 to be a critical audit
matter.
The principal considerations for our determination that the
goodwill impairment assessment performed during the first quarter
of 2020 is a critical audit matter include the significant
judgments and assumptions management makes when estimating the fair
value measurement of the Automotive reporting unit. Estimates of
future performance and market conditions used to arrive at the net
present value of future cash flows, which is used within the goodwill impairment analysis,
are subjective in nature. In particular, the Company’s fair
value estimate was sensitive to assumptions including the discount
rate and revenue growth rates, which are affected by expectations
about future market or economic conditions. Auditing the fair value
measurement involved a high degree of auditor judgment,
subjectivity, and audit effort in evaluating management’s
significant assumptions. In addition, the audit effort involved the
use of professionals with specialized skill and
knowledge.
F-2
Our audit procedures related to the goodwill impairment assessment
during first quarter of 2020 for the Automotive reporting unit
included the following, among others. We evaluated
management’s ability to
accurately forecast revenues and cash flows by comparing actual
results to management’s historical forecasts. With the
assistance of a valuation specialist we assessed the methodologies
and underlying assumptions used including the application of the
discount rate by the Company.
Fair value determination used in the Convertible Note
Exchange
As described further in Note 8 to the consolidated financial
statements, the Company entered into a Note Exchange and
Subscription Agreement to exchange the previous $30 million in
convertible notes (“Old Note”) issued in 2019 for a new
series of $38 million Convertible Senior Notes (“New
Note”) issued in 2020
which was determined as an extinguishment of debt. To determine the
gain on extinguishment of the Old Note, the Company measured the
fair value of the Old Note and New Note. The debt agreement
contains an equity conversion feature and a make-whole interest
provision, which were bifurcated into liability and equity
components. The fair value of the liability and equity components
at inception are deducted from the carrying value of the Notes and
amortized to interest expense using the effective interest method
over the life of the Notes. We identified the determination of the
fair value measurements of the debt instruments and allocation of
proceeds between equity and liability components, at the date of
the exchange to be a critical audit matter.
The principal considerations for the determination that the fair
value measurement of the convertible debt instruments and
allocation of proceeds between equity and liability components is
a critical audit matter are the
requirements of significant auditor judgment and effort. A high
degree of auditor judgment and subjectivity was required in
assessing the reasonableness of the significant assumptions
utilized in the determination of the respective fair values which
included the discount rate and stock price volatility. In addition,
the audit effort involved the use of professionals with specialized
skill and knowledge.
Our audit procedures related to the fair value determination of the
convertible debt instruments and allocation of proceeds between
liability and equity components included the following, among
others. We traced significant key terms including the stated
interest rate and conversion price to the respective
agreements. With the assistance of a
valuation specialist we developed an independent expectation
related to the fair values and assessed the reasonableness of the
methodology and underlying assumptions, including the discount rate
and stock price volatility used by the Company.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since
2019.
Dallas, Texas
March 31, 2021
F-3
RumbleOn, Inc.
Consolidated Balance Sheets
as of December 31, 2020 and 2019
|
|
2020
|
2019
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$1,466,831
|
$49,660
|
|
Restricted
cash
|
2,049,056
|
6,676,622
|
|
Accounts
receivable, net
|
9,407,960
|
8,482,707
|
|
Inventory
|
21,360,441
|
57,381,281
|
|
Prepaid expense and
other current assets
|
3,446,225
|
1,210,474
|
|
Total current
assets
|
37,730,513
|
73,800,744
|
|
|
|
|
|
Property and
equipment, net
|
6,521,446
|
6,427,674
|
|
Right-of-use
assets
|
5,689,637
|
6,040,287
|
|
Goodwill
|
26,886,563
|
26,886,563
|
|
Other
assets
|
151,076
|
237,823
|
|
Total
assets
|
$76,979,235
|
$113,393,091
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts payable
and accrued liabilities
|
$12,707,448
|
$12,421,094
|
|
Accrued interest
payable
|
1,485,854
|
749,305
|
|
Current portion of
convertible debt, net
|
562,502
|
1,363,590
|
|
Current portion of
long-term debt
|
20,688,651
|
59,160,970
|
|
Total current
liabilities
|
35,444,455
|
73,694,959
|
|
|
|
|
|
Long -term
liabilities:
|
|
|
|
Notes
payable
|
4,691,181
|
1,924,733
|
|
Convertible debt,
net
|
27,166,019
|
20,136,229
|
|
Derivative
liabilities
|
16,694
|
27,500
|
|
Operating
lease liabilities and other long-term liabilities
|
5,090,221
|
4,722,101
|
|
Total long-term
liabilities
|
36,964,115
|
26,810,563
|
|
Total
liabilities
|
72,408,570
|
100,505,522
|
|
|
|
|
|
Commitments and
contingencies (Notes 4, 7, 8, 9, 13, 16)
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
Class B Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 and 0
shares issued and outstanding as of December 31, 2020 and 2019,
respectively
|
-
|
-
|
|
Common A stock,
$0.001 par value, 50,000 shares authorized, 50,000 shares issued
and outstanding as of December 31, 2020 and 2019,
respectively
|
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 December 31, 2020 and
2019, respectively
|
2,192
|
1,112
|
|
Additional paid in
capital
|
108,949,204
|
92,268,213
|
|
Accumulated
deficit
|
(104,380,781)
|
(79,381,806)
|
|
Total
stockholders'
equity
|
4,570,665
|
12,887,569
|
|
|
|
|
|
Total liabilities
and stockholders'
equity
|
$76,979,235
|
$113,393,091
|
See
Accompanying Notes to Financial Statements.
F-4
RumbleOn, Inc.
Consolidated
Statements of Operations
For the Two Years
Ended December 31, 2020 and 2019
|
|
2020
|
2019
|
|
Revenue:
|
|
|
|
Pre-owned vehicle
sales:
|
|
|
|
Powersports
|
$46,653,668
|
$101,008,976
|
|
Automotive
|
337,084,959
|
717,042,511
|
|
Transportation and
vehicle logistics
|
31,816,157
|
22,577,860
|
|
Other
|
872,459
|
|
|
Total
revenue
|
416,427,243
|
840,629,347
|
|
|
|
|
|
Cost of
revenue:
|
|
|
|
Powersports
|
40,060,571
|
88,673,515
|
|
Automotive
|
308,800,631
|
685,313,894
|
|
Transportation and
vehicle logistics
|
24,200,229
|
16,023,962
|
|
Cost of revenue
before impairment loss
|
373,061,431
|
790,011,371
|
|
Impairment loss on
automotive inventory
|
11,738,413
|
-
|
|
Total cost of
revenue
|
384,799,844
|
790,011,371
|
|
|
|
|
|
Gross
profit
|
31,627,399
|
50,617,976
|
|
|
|
|
|
Selling, general
and administrative
|
53,659,348
|
86,624,249
|
|
|
|
|
|
Insurance recovery
proceeds
|
(5,615,268)
|
-
|
|
|
|
|
|
Depreciation and
amortization
|
2,142,939
|
1,786,426
|
|
|
|
|
|
Operating
loss
|
(18,559,620)
|
(37,792,699)
|
|
|
|
|
|
Interest
expense
|
(6,638,325)
|
(7,187,604)
|
|
Decrease in
derivative liability
|
10,806
|
1,302,500
|
|
Gain (loss) on
early extinguishment of debt
|
188,164
|
(1,499,250)
|
|
Net loss before
provision for income taxes
|
(24,998,975)
|
(45,177,053)
|
|
|
|
|
|
Benefit for income
taxes
|
-
|
-
|
|
|
|
|
|
Net
loss
|
$(24,998,975)
|
$(45,177,053)
|
|
|
|
|
|
Weighted average
number of common shares outstanding - basic and fully
diluted
|
2,184,441
|
1,114,714
|
|
|
|
|
|
Net loss per share
- basic and fully diluted
|
$(11.44)
|
$(40.53)
|
See
Accompanying Notes to Financial Statements.
F-5
RumbleOn, Inc.
Consolidated Statement of Stockholders' Equity
For the Two Years Ended December 31, 2020 and 2019
|
|
Preferred
Shares
|
Common A
Shares
|
Common B
Shares
|
Additional
Paid in
|
Accumulated
|
Total
Stockholders' Equity
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
|
Balance,
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
|
-
|
-
|
-
|
-
|
12,675
|
13
|
(13)
|
-
|
-
|
|
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
|
15,173,268
|
-
|
15,173,427
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
3,836,518
|
-
|
3,836,518
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(45,177,053)
|
(45,177,053)
|
|
Balance,
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)
|
-
|
-
|
|
Adjustment for
fractional shares in reverse stock split
|
-
|
-
|
-
|
-
|
7,131
|
7
|
(7)
|
-
|
-
|
|
Convertible
note exchange
|
-
|
-
|
-
|
-
|
-
|
-
|
2,923,755
|
-
|
2,923,755
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
2,978,236
|
-
|
2,978,236
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(24,998,975)
|
(24,988,975)
|
|
Balance,
December 31, 2020
|
-
|
-
|
50,000
|
$50
|
2,191,633
|
2,192
|
$108,949,204
|
$(104,380,781)
|
$4,570,655
|
See
Accompanying Notes to Financial Statements.
F-6
RumbleOn, Inc.
Consolidated
Statements of Cash Flows
For the Two Years
Ended December 31, 2020 and 2019
|
|
2020
|
2019
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$(24,998,975)
|
$(45,177,053)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
2,142,939
|
1,786,426
|
|
Amortization of
debt discount
|
2,027,046
|
1,664,000
|
|
Bad debt
expense
|
310,721
|
1,123,739
|
|
Stock based
compensation expense
|
2,978,236
|
3,836,518
|
|
Impairment loss on
inventory
|
11,738,413
|
-
|
|
Impairment loss on
property and equipment
|
177,626
|
-
|
|
Gain from change in
value of derivatives
|
(10,806)
|
(1,302,500)
|
|
Loss from
extinguishment of debt
|
(188,164)
|
1,499,250
|
|
Goodwill
impairment
|
-
|
1,850,000
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Decrease (increase)
in accounts receivable
|
(1,235,974)
|
2,037,023
|
|
(Increase) decrease
in inventory
|
24,282,427
|
(2,327,754)
|
|
(Increase) in
prepaid expenses and other current assets
|
(2,235,751)
|
(113,529)
|
|
(Increase) decrease
in other assets
|
86,747
|
(135,645)
|
|
Increase in other
liabilities
|
720,067
|
-
|
|
(Decrease) increase
in accounts payable and accrued liabilities
|
152,126
|
(5,031,073)
|
|
Increase in accrued
interest payable
|
1,196,549
|
543,268
|
|
Net cash provided
by (used in) operating activities
|
17,143,227
|
(39,747,330)
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES
|
|
|
|
Net cash used for
acquisitions
|
-
|
(835,000)
|
|
Proceeds from sales
of property and equipment
|
38,436
|
169,268
|
|
Technology
development
|
(2,145,055)
|
(3,085,743)
|
|
Purchase of
property and equipment
|
(174,786)
|
(119,748)
|
|
Net cash used in
investing activities
|
(2,281,405)
|
(3,871,223)
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES
|
|
|
|
Proceeds from notes
payable and convertible debt
|
8,272,375
|
27,455,537
|
|
Repayments for
notes payable
|
(1,767,758)
|
(10,857,500)
|
|
Net proceeds from
(payments on) lines of credit
|
(40,533,759)
|
2,788,469
|
|
Proceeds from PPP
Loan
|
5,176,845
|
-
|
|
Proceeds from sale
of common stock
|
10,780,080
|
15,173,427
|
|
Net cash (used in)
provided by financing activities
|
(18,072,217)
|
34,559,933
|
|
|
|
|
|
NET CHANGE IN
CASH
|
(3,210,395)
|
(9,058,620)
|
|
|
|
|
|
CASH AND RESTRICTED
CASH AT BEGINNING OF PERIOD
|
6,726,282
|
15,784,902
|
|
|
|
|
|
CASH AND RESTRICTED
CASH AT END OF PERIOD
|
$3,515,887
|
$6,726,282
|
See
Accompanying Notes to Financial Statements.
F-7
Notes
to Financial Statements
NOTE 1 –DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Organization
RumbleOn, Inc. (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.
Description of Business
In July
2016, Berrard Holdings Limited Partnership ("Berrard Holdings")
acquired 99.5% of the common stock of the Company from the
principal stockholder. Shortly after the Berrard Holdings common
stock purchase, the Company began exploring the development of a
capital light e-commerce platform facilitating the ability of both
consumers and dealers to Buy-Sell-Trade-Finance pre-owned vehicles
in one online location and in April 2017, the Company launched its
platform. The Company's goal was to transform the way pre-owned
vehicles are bought and sold by providing users with the most
efficient, timely and transparent transaction experience. While the
Company's initial customer facing emphasis through most of 2018 was
on motorcycles and other powersports, the Company continues to
enhance its platform to accommodate nearly any VIN-specific vehicle
including motorcycles, ATVs, boats, RVs, cars and trucks, and via
its acquisition of Wholesale, Inc. in October 2018, the Company
wanted to make a concerted effort to grow its cars and light truck
categories.
On
October 26, 2018, the Company entered into an Agreement and Plan of
Merger (as amended, the "Merger Agreement") with the Company's
newly-formed acquisition subsidiary RMBL Tennessee, LLC, a Delaware
limited liability company ("Merger Sub"), Wholesale Holdings, Inc.,
a Tennessee corporation ("Holdings"), Wholesale, LLC, a Tennessee
limited liability company ("Wholesale"), Steven Brewster and
Janelle Brewster (each a "Stockholder," and together the
"Stockholders"), Steven Brewster, a Tennessee resident, as the
representative of each Stockholder (the "Representative"), and
Marshall Chesrown and Steven R. Berrard, providing for the merger
of Holdings with and into Merger Sub, with Merger Sub surviving the
merger as a wholly-owned subsidiary of the Company (the "Wholesale
Transaction"). On October 29, 2018, the Company entered into
an Amendment to the Merger Agreement making a technical correction
to the definition of "Parent Consideration Shares" contained in the
Merger Agreement.
Also,
on October 26, 2018, the Company entered into a Membership Interest
Purchase Agreement (the "Purchase Agreement"), by and among the
Company, Steven Brewster and Justin Becker (together the "Express
Sellers"), and Steven Brewster as representative of the Express
Sellers, pursuant to which the Company acquired all of the
membership interests (the "Express Transaction," and together with
the Wholesale Transaction, the "Transactions") in Wholesale
Express, LLC, a Tennessee limited liability company ("Wholesale
Express"). The Transactions were both completed on October 30, 2018
(the "Acquisition Date"). As consideration for the Wholesale
Transaction, the Company (i) paid cash consideration of
$12,353,941, subject to certain customary post-closing adjustments,
and (ii) issued to the Stockholders 1,317,329 shares (the "Stock
Consideration") of the Company's Series B Non-Voting Convertible
Preferred Stock, par value $0.001 (the "Series B Preferred"). As
consideration for the Express Transaction, the Company paid cash
consideration of $4,000,000, subject to certain customary
post-closing adjustments. Wholesale Inc. is one of the largest
independent distributors of pre-owned vehicles in the United States
and Wholesale Express, LLC is a related logistics
company.
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").
F-8
Serving
both consumers and dealers, through its online marketplace
platform, the Company makes cash offers for the purchase of
pre-owned vehicles. In addition, the Company offers a large
inventory of pre-owned vehicles for sale along with third-party
financing and associated products. The 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 both dealers and regional partners, which are
primarily auctions. The Company utilizes regional partners in the
acquisition of pre-owned vehicles to provide inspection,
reconditioning and distribution services. These regional partners
earn incremental revenue and enhance profitability through fees
from inspection, reconditioning and distribution
programs.
Our
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.
The
rapid spread of COVID-19 since March 2020 has resulted in
authorities implementing numerous measures to try to contain the
virus, such as travel bans and restrictions, quarantines, shelter
in place orders and shutdowns. These measures have impacted and may
further impact all or portions of our workforce and operations, the
behavior of our customers, and the operations of our partners,
vendors, and suppliers. While the federal and state governments
have taken measures to try to contain the COVID-19 pandemic, there
is considerable uncertainty regarding such measures and potential
future measures. The COVID-19 situation has created an
unprecedented and challenging time for our Company. Our current
focus is on positioning the Company for a strong recovery when this
crisis is over. During 2020 we took steps to reduce our inventory
and align our operating expenses to the state of the business. We
plan to continue to operate as permitted to support our
customers’ needs for reliable vehicles and to provide as many
jobs as possible for our associates; however, in April 2020 we
laid-off 169 associates. Future restrictions on our access to and
utilization of our logistics and distribution network, our
corporate offices, the inspection and reconditioning centers of our
partners, and/or our support operations or workforce, or similar
limitations for our partners, vendors, or suppliers, and
restrictions or disruptions of transportation, could further limit
our ability to conduct our business and have a material adverse
effect on our business, operating results, financial condition and
prospects. There is no certainty that measures taken by
governmental authorities will be sufficient to mitigate the risks
posed by the COVID-19 pandemic, and our ability to perform critical
functions could be harmed.
The
extent to which the COVID-19 outbreak ultimately impacts our
business, sales, results of operations, financial condition, and
liquidity will depend on the success of the roll out of the
vaccines and the efficacy of the vaccines and other future
developments, which are highly uncertain and cannot be predicted.
Even after the COVID-19 outbreak has subsided, we may continue to
experience significant impacts to our business as a result of its
global economic impact, including any economic downturn or
recession that has occurred or may occur in the
future.
Basis of Presentation
The accompanying consolidated financial
statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("U.S. GAAP"). All of the Company’s subsidiaries are
wholly owned. The consolidated financial statements include
the accounts of RumbleOn Inc. and its wholly owned subsidiaries
(the Company). All
intercompany accounts and material intercompany transactions have
been eliminated.
F-9
Liquidity
The accompanying
consolidated financial statements of the Company have been prepared
in conformity with U.S. GAAP, which contemplate continuation of the
Company as a going concern. The Company has incurred losses from
inception through December 31, 2020 and may incur additional
losses in the future. As the Company continues to expand its
business, build its brand name and awareness and continues
technology and software development efforts, it may need access to
additional capital. Historically, the Company has raised additional
equity or debt instruments to fund the expansion; refer to Note 8
— NOTES PAYABLE and Note 9 — STOCKHOLDER'S
EQUITY. Management believes that current working capital,
availability of equity under its current shelf registration
statement, results of operations, and expected continued inventory
financing are sufficient to fund operations for at least one year
from the financial statement issuance
date.
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 for a strong recovery as 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.
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 have a
material impact on the carrying value of certain assets and
liabilities, disclosures of contingent assets and liabilities and
the reported amounts of revenue and expenses during the reporting
period, which management considers to be critical accounting
estimates. The judgments, assumptions and estimates used by
management are based on historical experience, management's
experience, and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and
assumptions made by management, actual results could differ
materially from these judgments and estimates. 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
valuations, fair value measurements, asset impairment charges and
discount rate assumptions.
Loss Per Share
The
Company follows the 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 year. 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. Common share and dilutive common share equivalents
include: (i) Class A common: (ii) Class B common; (iii) Class B
participating preferred shares; (iv) restrictive stock units; (v)
stock options; (vi) warrants to acquire Class B common stock; and
(vii) shares issued in connection with convertible
debt.
F-10
Revenue Recognition
Revenue
for our powersports and automotive segments is derived from our
online marketplace and auctions and primarily includes the sale of
pre-owned vehicles to consumer and dealers.
Revenue
from our vehicle logistics and transportation service segment is
derived by providing automotive transportation services between
dealerships and auctions throughout the United States.
We
adopted ASC 606, Revenue from
Contracts with Customers on January 1, 2018 using the
modified retrospective method. ASC 606 prescribes a five-step model
that includes: (1) identify the contract; (2) identify the
performance obligations; (3) determine the transaction price; (4)
allocate the transaction price to the performance obligations; and
(5) recognize revenue when (or as) performance obligations are
satisfied. Based on the manner in which we historically
recognized revenue, the adoption of ASC 606 did not have a material
impact on the amount or timing of our revenue recognition, and we
recognized no cumulative effect adjustment upon
adoption.
For
vehicles sold at wholesale to dealers we satisfy our performance
obligation when the wholesale purchaser obtains control of the
underlying vehicle, which is upon delivery when the transfer of
title, risks and rewards of ownership and control pass to the
dealer. We recognize revenue at the amount we expect to
receive for the used vehicle, which is the fixed price determined
at the auction. The purchase price of the wholesale vehicle is
typically due and collected within 30 days of delivery of the
wholesale vehicle.
For
vehicles sold to consumers the purchase price is set forth in the
customer contracts at a stand-alone selling price which is agreed
upon prior to delivery. We satisfy our performance obligation for
used vehicle sales upon delivery when the transfer of title, risks
and rewards of ownership and control pass to the customer. We
recognize revenue at the agreed upon purchase price stated in the
contract, including any delivery charges, less an estimate for
returns. Our return policy allows customers to initiate a
return during the first three days after delivery. Estimates
for returns are based on an analysis of historical experience,
trends and sales data. Changes in these estimates are reflected as
an adjustment to revenue in the period identified. The amount
of consideration received for used vehicle sales to consumers
includes noncash consideration representing the value of trade-in
vehicles, if applicable, as stated in the contract. Prior to the
delivery of the vehicle, the payment is received, or financing has
been arranged. Payments from customers that finance their purchases
with third parties are typically due and collected within 30 days
of delivery of the used vehicle. In future periods additional
provisions may be necessary due to a variety of factors, including
changing customer return patterns due to the maturation of the
online vehicle buying market, macro- and micro-economic factors
that could influence customer return behavior and future pricing
environments. If these factors result in adjustments to sales
returns, they could significantly impact our future operating
results. Revenue exclude any sales taxes, title and registration
fees, and other government fees that are collected from
customers.
Vehicle
logistics and transportation services revenue is generated
primarily by entering into freight
brokerage agreements with dealers, 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 customer's contract.
A performance obligation is created when the customer under a
transportation contract submits a bill of lading for the transport
of goods from origin to destination. These performance obligations
are satisfied as the shipments move from origin to
destination. The freight
brokerage agreements are fulfilled by independent
third-party transporters. While the Company is primarily
responsible for fulfilling to customers, these transporters are
obligated to meet our performance obligations and standards.
Performance
obligations are short-term, with transit days less than one week.
Generally, customers are billed either upon shipment of the vehicle
or on a monthly basis, and remit payment according to approved
payment terms, generally not to exceed 30 days. Revenue is
recognized as risks and rewards of transportation of the vehicle
are transferred to the owner 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.
F-11
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. During the year ended December 31,
2019, the Company finalized the preliminary purchase price
allocation recorded at the acquisition date for Wholesale Express
and made a measurement period adjustment to the preliminary
purchase price allocation which resulted in a decrease in goodwill
of $334,861. The Company made this measurement period adjustment to
reflect facts and circumstances related to accounts receivable and
accounts payable that existed as of the acquisition date and did
not result from intervening events subsequent to such
date.
Goodwill
Goodwill represents
the excess of the consideration transferred over the fair value of
the identifiable assets acquired and liabilities assumed in
business combinations. Goodwill is tested for impairment annually
as of December 31, or whenever events or changes in circumstances
indicate that an impairment may exist. 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. In performing
our annual goodwill impairment test, we first review qualitative
factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount.
If, after assessing qualitative factors, we determine that it is
not more likely than not that the fair value of a reporting unit is
less than its carrying amount, then performing the quantitative
test is unnecessary and our goodwill is not considered to be
impaired. However, if based on the qualitative assessment we
conclude that it is more likely than not that the fair value of the
reporting unit is less than its carrying amount, or if we elect to
bypass the optional qualitative assessment as provided for under
GAAP, we proceed with performing the quantitative impairment
test.
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 as of 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. In
connection with its annual goodwill impairment test as of
December 31, 2020, the Company performed impairment
assessments by reviewing qualitative factors for each of its
reporting units. The results of the assessments indicated that it
was not more likely than not that the fair value of the reporting
units were less than the carrying values and no goodwill impairment
was determined to exist for the years ended December 31,
2020.
In
connection with its annual goodwill impairment test as of December
31, 2019 for the
three reportable segments we
performed quantitative impairment testing of the fair value of our
reporting units using an income and market valuation approach. The
income valuation approach estimates our enterprise value using a
net present value model, which discounts projected free cash flows
of our business using the weighted average cost of capital as the
discount rate. We also validated the fair value for each reporting
unit using the income approach by calculating a cash earnings
multiple and determining whether the multiple was reasonable
compared to recent market transactions completed in the industry.
As part of that assessment, we also reconcile the estimated
aggregate fair values of our reporting units to our market
capitalization. We believe this reconciliation process is
consistent with a market participant perspective. This
consideration would also include a control premium that represents
the estimated amount an investor would pay for our equity
securities to obtain a controlling interest, and other significant
assumptions including revenue and profitability growth, profit
margins, residual values and the cost of
capital. For
the year ended December 31, 2019, we recognized an impairment loss
on goodwill of $1,850,000 related to powersports, which is recorded
in selling, general and administrative expenses in the Consolidated
Statement of Operations. No goodwill impairment resulted from the
quantitative impairments tests of the remaining reporting units as
of December 31, 2019.
F-12
Leases
Effective January
1, 2019, the Company adopted ASC 842, Leases. In accordance
with ASC 842, the Company first determines if an arrangement
contains a lease and the classification of that lease, if
applicable, at inception. This standard requires the recognition of
right-of-use ("ROU") assets and lease liabilities for the Company's
operating leases. For contracts with lease and non-lease
components, the Company has elected not to allocate the contract
consideration, and to account for the lease and non-lease
components as a single lease component. The Company has also
elected not to recognize a lease liability or ROU asset for leases
with a term of 12 months or less and recognize lease payments for
those short-term leases on a straight-line basis over the lease
term in the Consolidated Statements of Operations. Operating leases
are included in Right-of-use assets, Accounts payable and accrued
liabilities and Operating lease liabilities, long-term portion in
the Consolidated Balance Sheets.
ROU
assets represent the Company's right to use an underlying asset for
the lease term and lease liabilities represent the Company's
obligation to make lease payments under the lease. ROU assets and
lease liabilities are recognized at the lease commencement date
based on the present value of lease payments over the lease term.
The implicit rate within the Company's leases is generally not
determinable and therefore the incremental borrowing rate at the
lease commencement date is utilized to determine the present value
of lease payments. The determination of the incremental borrowing
rate requires judgment. Management determines the incremental
borrowing rate for each lease using the Company's estimated
borrowing rate, adjusted for various factors including level of
collateralization, term and currency to align with the terms of the
lease. The ROU asset also includes any lease prepayments, offset by
lease incentives. Certain of the Company's leases include options
to extend or terminate the lease. An option to extend the lease is
considered in connection with determining the ROU asset and lease
liability when the Company is reasonably certain that the option
will be exercised. An option to terminate is considered unless the
Company is reasonably certain the option will not be
exercised.
Other Assets
Included in
"Other assets" on the
Company's Consolidated Balance
Sheets are amounts related to acquired internet domain names which
are considered to be an indefinite lived intangible assets.
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. There was no impairment of indefinite lived assets
as of December 31, 2020 and 2019.
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. For
the year ended December 31, 2020, the Company recorded an
impairment loss on property and equipment of $177,626 due to the
Nashville Tornado. No impairment charges on property and equipment
were recorded during the year ended December 31, 2019. See Note 5
— Property and Equipment, Net for additional information on
property and equipment.
F-13
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 5
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 pre-owned
vehicle. Reconditioning costs are billed by third-party providers
and includes parts, labor, and other repair expenses directly
attributable to a specific vehicle. Pre-owned inventory is stated
at the lower of cost or net realizable value. Pre-owned 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 pre-owned vehicle inventory at the
lower of cost or net realizable value through cost of revenue in
the accompanying Consolidated Statements of
Operations.
Accounts Receivable, Net
Accounts receivable,
net of an allowance for doubtful accounts, includes certain amounts
due from customers. 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. The allowance
for doubtful accounts was approximately $1,569,086 and $1,034,919
as of December 31, 2020 and 2019, respectively.
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 December 31,
2020, and 2019, the Company did not have any investments with
maturities greater than three months. At times, the Company has
cash balances in domestic bank accounts that exceed Federal Deposit
Insurance Corporation limits. The Company has not experienced any
losses related to these cash concentrations.
Restricted Cash
In
connection with the execution of the Inventory Financing and
Security Agreement (the "Credit Facility") by and among the
Company's subsidiary, RMBL Missouri, LLC ("RMBL MO"), Ally Bank
("Ally") and Ally Financial, Inc., dated February 16, 2018 the
parties entered into a Credit Balance Agreement, and so long as the
Company owes any debt to Ally or until the bank otherwise consents,
the Company agreed to maintain a Credit Balance at Ally of 1) at
least 10.0% of the amount of the Company's approved and available
credit line under the Credit Facility and 2) no greater than 25.0%
of the total principal amount owed to Ally for inventory financed
under the Credit Facility. The Credit Facility ended in February
2020.
F-14
In
connection with the inventory financing contract (the "NextGear
Facility"), entered into by the Company, its wholly owned
subsidiary RMBL Tennessee, Inc, Wholesale, Inc. and NextGear
Capital, Inc. ("NextGear"), dated 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
$20,000,000 through June 30, 2021, at which time the credit line
will be repaid in full. Advances under the NextGear Credit Line
require Wholesale to maintain at least $2,000,000 cash collateral
in a reserve account in favor of NextGear, which amount is subject
to change in NextGear's sole discretion.
Upon
the satisfaction of all obligations and the termination by NextGear
of the NextGear Facility, NextGear will return to Wholesale, Inc.,
upon its written request to NextGear no earlier than ten (10
business days from the date the obligations were indefeasibly paid
and satisfied in full and the NextGear Facility and terminated by
Lender.
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
December 31, 2020 and December 31, 2019. 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 820-10-30-2-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.
F-15
Embedded Conversion Features
The
Company evaluates embedded conversion features within convertible
debt under ASC 815, Derivatives and Hedging to determine
whether the embedded conversion feature(s) should be bifurcated
from the host instrument and accounted for as a derivative at fair
value with changes in fair value recorded in earnings. If the
conversion feature does not require derivative treatment under ASC
815, the instrument is evaluated under ASC 470-20; Debt with
Conversion and Other Options. Under the ASC 470-20, an entity must
separately account for the liability and equity components of the
convertible debt instruments that may be settled entirely or
partially in cash upon conversion in a manner that reflects the
issuer's economic interest cost. The effect of ASC 470-20 on the
accounting for our convertible debt instruments is that the equity
component is required to be included in the additional paid-in
capital section of stockholders' equity on the consolidated balance
sheets and the value of the equity component is treated as original
issue discount for purposes of accounting for the debt component of
the notes. As a result, we are required to record non-cash interest
expense as a result of the amortization of the discounted carrying
value of the convertible debt to their face amount over the term of
the convertible debt.
From
time to time, the Company has issued convertible notes that have
conversion prices that create an embedded beneficial conversion
feature pursuant to the guidelines established by the ASC Topic
470-20. 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
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) an open-form binomial option pricing model
(“lattice model”) that simulates, in a non-linear,
risk-neutral framework, the stock price of the Company’s
common stock.
Common Stock Warrants
The
Company accounts for common stock warrants in accordance with
applicable accounting guidance provided in Accounting Standards
Codification (ASC) 815, Derivatives and Hedging
– Contracts in Entity's Own Equity, as either
derivative liabilities or as equity instruments depending on the
specific terms of the warrant agreement. Any warrants that
(i) require physical
settlement or net-share settlement or (ii) provide the Company with a choice of
net-cash settlement or settlement in its own shares (physical
settlement or net-share settlement) provided that such warrants are
indexed to the Company's own
stock is classified as equity. The Company classifies as assets or
liabilities any warrants that (i) require net-cash settlement
(including a requirement to net cash settle the contract if an
event occurs and if that event is outside the Company's control), (ii) gives the counterparty a choice of
net-cash settlement or settlement in shares (physical settlement or
net-share settlement) or (iii) that contain reset provisions that do
not qualify for the scope exception. The Company assesses
classification of its common stock warrants at each reporting date
to determine whether a change in classification between assets and
liabilities is required. The Company's freestanding derivatives financing
satisfy the criteria for classification as equity instruments as
these warrants do not contain cash settlement features or variable
settlement provision that cause them to not be indexed to the
Company's own stock. There are
16,530 warrants to purchase common stock outstanding at December
31, 2020 consisting of: (i) 10,913 warrants issued to underwriters
in connection with the October 23, 2017 public offering of Class B
common stock; (ii) 5,617 warrants issued to Hercules in connection
with the 2018 financings.
In July
2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260);
Distinguishing Liabilities from
Equity (Topic 480); Derivatives and Hedging (Topic 815):
Accounting for Certain Financial Instruments with Down Round
Features. The amendments of this ASU update the classification
analysis of certain equity-linked financial instruments, or
embedded features, with down round features, as well as clarify
existing disclosure requirements for equity-classified instruments.
When determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity's own stock. The
guidance in this ASU is effective for fiscal years beginning after
December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020, with early adoption permitted.
The Company adopted ASU 2017-11 during 2018. The adoption of this
standard did not have a material effect on the Company's
Consolidated Financial Statements.
F-16
Debt Issuance Costs
Debt
issuance costs are accounted for pursuant to FASB ASU
2015-03,
"Simplifying the Presentation of Debt Issuance Costs" ("ASU
2015-03"). ASU 2015-03 requires that debt issuance costs be
presented as a direct deduction from the carrying amount of the
related debt liability, consistent with the presentation of debt
discounts.
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. Cost of revenue also includes any necessary
adjustments to reflect vehicle inventory at the lower of cost or
net realizable value.
Selling, General and Administrative Expenses
Selling, general
and administrative 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, transportation cost
associated with selling vehicles, establishing our dealer partner
arrangements, and other corporate overhead expenses, including
expenses associated with technology development, legal, accounting,
finance, and business development.
Advertising and Marketing Costs
Advertising and
marketing costs are expensed as incurred and are included in
Selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations. Advertising and marketing
expenses was $5,287,284 and $18,228,262 for the years ended
December 31, 2020 and 2019, respectively.
Stock-Based Compensation
On June
30, 2017 the Company's shareholders approved a Stock Incentive Plan
(the "Plan") reserving for issuance under the Plan in the form of
restricted stock units ("RSUs"), stock options ("Options"),
Performance Units, and other equity awards (collectively "Awards")
for our employees, consultants, directors, independent contractors
and certain prospective employees who have committed to become an
employee (each an "Eligible Individual") of up to 12.0% 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 to increase the number of shares authorized for issuance
under the Plan from 12.0% of the Company's issued and outstanding
shares of Class B Common Stock from time to time to 100,000 shares
of Class B Common Stock (the "First Plan Amendment"). 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 from 100,000 shares of Class B Common Stock to 200,000
shares of Class B Common Stock (the "Second Plan Amendment").
On August 25, 2020, the Company's
stockholders approved another amendment to the Plan to increase the
number of shares authorized for issuance under the Plan from
200,000 shares of Class B Common Stock to 700,000 shares of Class B
Common Stock (the "Third Plan Amendment"). To date, the vesting of
RSU and Option awards is service / time based. Substantially all
service/time based RSU and Option awards issued typically vest over
a three-year period approximating the following vesting schedule:
(i) 20.0% vesting anywhere from eight-months to thirteen months
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. Performance-based awards and
market condition-based awards granted to date have vesting
schedules that are typically dependent on achieving a particular
objective within thirty (30) months.
F-17
The
Company estimates the fair value of awards granted under the Plan
on the date of grant. In the case of time or service based RSU
awards, the fair value based on the share price of the Class B
Common Stock on the date of the award. Performance Awards use the
share prices of the Class B Common Stock but the Company, both at
grant and each subsequent quarter, considers whether to a apply
discount to the fair in situations where the Company believes there
is risk that the relevant performance metrics may not be met.
Options are calculated using the Black-Scholes option valuation
model while market-condition based awards are estimated using a
Monte Carlo simulation model as these awards are tied to a market
condition. Both the Black-Sholes and Monte-Carlo simulations
utilize multiple input variables to determine the probability of
the Company’s Class B stock price being at certain prices
over certain time periods, resulting in an implied value to the
holder; the 2020 market-condition based awards assumed expected
volatility to be 125% and a risk-free interest rate of 1.0%. We
generally expense the grant-date fair value of all awards on a
straight-line basis over the vesting period.
During
the year ended December 31, 2020, the Company granted 416,685 RSUs
and 250 Options under the Plan to members of the Board of
Directors, officers and employees. Compensation expense for the
years ended December 31, 2020 and 2019 was $2,978,236 and
$3,836,518, respectively, and is included in selling, general and
administrative expenses in the consolidated statements of
operations. At December 31, 2020, total unrecognized
compensation cost related to awards issued under the Plan and still
outstanding and unvested was $3,258,746 and the weighted average
period over which this cost is expected to be recognized is
approximately 1.04 years.
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 December 31, 2020, 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 does not anticipate any significant changes to its total
unrecognized tax positions within the next 12 months.
F-18
Recent Pronouncements
Adoption of
New Accounting Standards.
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 this 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 842): Targeted
Improvements, whereby initial application of the new lease standard
would occur at the adoption date and a cumulative-effect
adjustment, if any, would be recognized to the opening balance of
retained earnings in the period of adoption. For comparability
purposes, the Company will continue to comply with previous
disclosure requirements in accordance with existing lease guidance
for all periods presented in the year of 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 year ended December 31, 2020. The
standard did not have a material impact on the Company's
consolidated statements of operations or statements of cash
flows.
In June
2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses
(Topic 326): Measurement of Credit Losses on Financial
Instruments ("ASU 2016-13"), which amends the
guidance on the impairment of financial instruments by requiring
measurement and recognition of expected credit losses for financial
assets held. ASU 2016-13 is effective for fiscal years,
and for interim periods within those fiscal years, beginning after
December 15, 2019, and earlier adoption is permitted beginning
in the first quarter of fiscal 2019. In November 2019, the FASB issued ASU No.
2019-10, Financial Instruments - Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815), and
Leases (Topic 842): Effective Dates
("ASU 2019-10"). The
purpose of this amendment is to create a two tier rollout of major
updates, staggering the effective dates between larger public
companies and all other entities. This granted certain classes of
companies, including Smaller Reporting Companies ("SRCs"),
additional time to implement major FASB standards, including ASU
2016-13. Larger public companies will still have an effective date
for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. All other entities are
permitted to defer adoption of ASU 2016-13, and its related
amendments, until the earlier of fiscal periods beginning after
December 15, 2022. Under the current SEC definitions, the Company
meets the definition of an SRC as of the ASU 2019-10 issuance date
and is adopting the deferral period for ASU 2016-13. Finance
receivables originated in connection with the Company's vehicle
sales are held for sale and are subsequently sold. At December 31,
2020 and 2019, finance receivables were $2,117,809 and $147,893,
respectively.
NOTE 2 –ACCOUNTS RECEIVABLE, NET
Accounts receivable
consists of the following as of December 31,
|
|
2020
|
2019
|
|
Trade
|
$8,859,237
|
$9,369,733
|
|
Finance
|
2,117,809
|
147,893
|
|
10,977,046
|
9,517,626
|
|
|
Less:
allowance for doubtful accounts
|
1,569,086
|
1,034,919
|
|
$9,407,960
|
$8,482,707
|
F-19
NOTE 3 – INVENTORY
Inventory consists
of the following as of December 31,
|
|
2020
|
2019
|
|
Pre-owned vehicles:
|
|
|
|
Powersport
vehicles
|
$1,869,830
|
$10,365,050
|
|
Automobiles
and trucks
|
19,592,896
|
47,599,433
|
|
|
21,462,726
|
57,964,483
|
|
Less:
Reserve
|
102,285
|
583,202
|
|
|
$21,360,441
|
$57,381,281
|
NOTE 4 – ACQUISITIONS
On
February 3, 2019, the Company completed the Autosport Acquisition
pursuant to the Stock Purchase Agreement, by and among the Buyer,
the Seller and Autosport. 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 Seller, plus (iii)
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 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
Second Convertible Note. The fair
value of the contingent earn-out payment was considered immaterial
at the date of acquisition and was excluded from the purchase price
allocation. As of December 31, 2020, there have been no payments
earned under the performance threshold. See Note 1 –
Description of Business and Significant Accounting Policies for
additional information on the Autosport Acquisition.
The
following table summarizes the final allocation of the purchase
price based on the estimated fair value of the acquired assets and
assumed liabilities of Autosport as of December 31,
2019.
|
Purchase
price consideration:
|
|
|
Cash
|
$835,000
|
|
|
|
|
$1,536,000
convertible note
|
1,536,000
|
|
$500,000
promissory note
|
500,000
|
|
$257,933
Promissory note
|
257,933
|
|
Total purchase
price consideration
|
$3,128,933
|
|
|
|
|
Estimated
fair value of assets:
|
|
|
Accounts
receivable
|
3,177,660
|
|
Inventory
|
2,862,004
|
|
|
6,039,664
|
|
|
|
|
Estimated
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
|
$3,128,933
|
F-20
Supplemental pro forma unaudited information
(unaudited)
There
were no acquisitions in 2020. Pro forma adjustments for the year
ended December 31, 2019 related to the Autosport Acquisition
primarily include adjustments to reflect the: (i) amortization of
stock compensation expense of $18,351; and (ii)
interest expense of $20,174.
|
|
Year Ended December
31,
|
|
Unaudited
|
2019
|
|
Pro forma
revenue
|
$846,947,956
|
|
Pro forma net
loss
|
$(45,296,568)
|
|
Loss per share -
basic and fully diluted
|
$(40.37)
|
|
Weighted-average
common shares and common stock equivalents outstanding basic and
fully diluted
|
1,122,058
|
NOTE 5 – PROPERTY AND EQUIPMENT, NET
The
following table summarizes property and equipment, net of
accumulated depreciation and amortization as of
December 31,
|
|
2020
|
2019
|
|
Vehicles
|
$240,603
|
$158,327
|
|
Furniture and
equipment
|
191,047
|
448,074
|
|
Technology
development and software
|
11,008,302
|
8,863,247
|
|
Leasehold
improvements
|
321,082
|
246,135
|
|
Total property and
equipment
|
11,761,035
|
9,715,783
|
|
Less: accumulated
depreciation and amortization
|
5,239,589
|
3,288,109
|
|
Total
|
$6,521,446
|
$6,427,674
|
Amortization and
depreciation on Property and Equipment is determined on a
straight-line basis over the estimated useful lives ranging from 3
to 5 years.
On
December 31, 2020, capitalized technology development costs were
$10,800,292 which
includes $2,900,000 of
software acquired in the NextGen transaction. Total technology
development costs incurred was $3,529,743 for
the year ended December 31, 2020 of which $2,145,055, was
capitalized and $1,384,688, was
charged to expense in the accompanying Consolidated Statements of
Operations. Depreciation expense for the year ended December 31,
2020 was $2,142,939, which
included the amortization of capitalized technology costs of
$1,887,305. Total technology development costs incurred was
$5,494,082 for
the year ended December 31, 2019 of which $3,085,743 was
capitalized and $2,408,338 was
charged to expense in the accompanying Consolidated Statements of
Operations. Depreciation expense for the year ended December 31,
2019 was $1,786,426, which
included the amortization of capitalized technology costs of
$1,436,088.
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
Following is a
summary of the changes in the carrying amount of goodwill and other
indefinite-lived asset during the years ended December 31, 2020 and
2019.
|
|
Goodwill
|
Indefinite Lived
Intangible Assets
|
|
Balance at December
31, 2018
|
$26,107,146
|
$45,515
|
|
Acquisitions
|
2,964,278
|
-
|
|
Impairment
|
(1,850,000)
|
-
|
|
Measurement period
adjustment
|
(334,861)
|
-
|
|
Balance at December
31, 2019
|
26,886,563
|
45,515
|
|
Acquisitions
|
-
|
-
|
|
Impairment
|
-
|
-
|
|
Balance at December
31, 2020
|
$26,886,563
|
$45,515
|
F-21
The
following is a summary of the changes in the carrying amount of
goodwill by reportable segment during the years ended December 31,
2020 and 2019.
|
|
Powersports
|
Automotive
|
Vehicle
Logistics
|
Total
|
|
Balance at December
31, 2018
|
$1,850,000
|
$23,074,775
|
$1,182,371
|
$26,107,146
|
|
Acquisitions
|
-
|
2,964,278
|
-
|
2,964,278
|
|
Impairment
|
(1,850,000)
|
-
|
-
|
(1,850,000)
|
|
Measurement period
adjustment
|
-
|
-
|
(334,861)
|
(334,861)
|
|
Balance at December
31, 2019
|
-
|
26,039,053
|
847,510
|
26,886,563
|
|
Acquisitions
|
-
|
-
|
-
|
-
|
|
Impairment
|
-
|
-
|
-
|
-
|
|
Balance at December
31, 2020
|
$-
|
$26,039,053
|
$847,510
|
$26,886,563
|
We test
for impairment of our intangible assets at least annually. During
the year ended December 31, 2020, we did not recognize any
impairment loss on goodwill. During the year ended December 31,
2019, we recognized an impairment loss on goodwill of $1,850,000
related to powersports, which is recorded in selling, general and
administrative expenses in the Consolidated Statement of
Operations. During the quarter ended September 30, 2019, the
Company
finalized the preliminary purchase price allocation recorded at the
acquisition date for Wholesale Express and made a measurement
period adjustment to the preliminary purchase price allocation
which resulted in a decrease in goodwill of $334,861. The Company
made this measurement period adjustment to reflect facts and
circumstances related to accounts receivable and accounts payable
that existed as of the acquisition date and did not result from
intervening events subsequent to such date.
NOTE 7 – ACCOUNTS PAYABLE AND OTHER ACCRUED
LIABILITIES
The
following table summarizes accounts payable and other accrued
liabilities as of December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Accounts
payable
|
$8,167,957
|
$8,730,624
|
|
Operating lease
liability-current portion
|
1,630,002
|
1,423,610
|
|
Accrued
payroll
|
1,079,771
|
715,658
|
|
State and local
taxes
|
856,341
|
912,062
|
|
Other accrued
expenses
|
973,377
|
639,140
|
|
Total
|
$12,707,448
|
$12,421,094
|
F-22
NOTE 8 – NOTES PAYABLE AND LINES OF CREDIT
Notes
payable consisted of the following as of December 31,
|
|
2020
|
2019
|
|
Notes
payable-NextGen dated February 8, 2017. Interest is payable
semi-annually at 6.5% through February 9, 2019 and 8.5% through
February 10, 2020 and 10.0% thereafter through maturity, which is
January 31, 2021.
|
$833,334
|
$1,333,334
|
|
|
|
|
|
Notes
payable-private placement dated March 31, 2017. Interest is payable
semi-annually at 8.5% through March 31, 2020 and 10.0% thereafter
through maturity which is June 30, 2021. Unamortized debt discount
was $0 and $75,601 as of December 31, 2020 and December 31, 2019,
respectively.
|
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. Interest rate at December 31, 2019 was 7.05%.
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 December 31,
2020 was 4.75%. Principal and interest is payable on
demand.
|
17,811,626
|
50,741,073
|
|
|
|
|
|
Revolving Line of
Credit note secured by the loans and other assets of RumbleOn
Finance, LLC. Interest rate at December 31, 2020 was
7.25%
|
888,852
|
-
|
|
|
|
|
|
PPP Loans dated May
1, 2020. Payments of principal and interest were deferred until
September 1, 2021, at which time the Company will make equal
payments of principal and interest through maturity, which is April
1, 2025.
|
5,176,845
|
-
|
|
|
|
|
|
Less: Debt
discount
|
-
|
(75,601)
|
|
Total notes payable
and lines of credit
|
25,379,832
|
61,085,703
|
|
Less: Current
portion
|
20,688,651
|
59,160,970
|
|
|
|
|
|
Long-term
portion
|
$4,691,181
|
$1,924,733
|
As of
December 31, 2020, future principal debt payments are due as
follows:
|
2021
|
$485,664
|
|
2022
|
1,391,145
|
|
2023
|
1,405,367
|
|
2024
|
1,419,732
|
|
2025
|
474,936
|
|
Total debt
payments
|
$5,176,845
|
Line of Credit-Floor Plan-NextGear
On
October 30, 2018, Wholesale, as borrower, entered into a floorplan
vehicle financing credit line (the "NextGear Credit Line") with
NextGear. As of the date of this filing, based on on-going
discussions with NextGear, we will limit our advances under the
NextGear Credit Line for Wholesale and Autosport to $55,000,000
with
Wholesale and Autosport limiting the aggregate amount of advances
under the credit line to $20,000,000 through June 30, 2021, at
which time the credit line will be repaid in full. 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
line of credit-floor plan for the years ended December 31, 2020 and
2019, was $1,634,802 and $2,697,591,
respectively.
F-23
Line of Credit-Floor Plan-Ally
On February 16, 2018, the Company, through its wholly owned
subsidiary RMBL MO entered into an Inventory Financing and Security
Agreement (the "Credit Facility") with Ally and Ally Financial,
Inc., a Delaware corporation ("Ally" together with Ally Bank, the
"Lender"), pursuant to which the Lender could 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 maintain 10.0% of the advance
amount as restricted cash. Advances under the Credit Facility bore
interest at a per annum 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. Interest
expense on the Credit Facility for the years ended December 31,
2020 and 2019 was $77,266 and $541,702, respectively. The Ally Line
of Credit ended in February 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 has been 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 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. 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.
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 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;
(ii) at a rate of 8.5%
annually from the second anniversary of the closing date through
February 10, 2020; and 10.0% thereafter through the Maturity Date.
Upon the occurrence of any event of default, the outstanding
balance under the NextGen Note shall become immediately due and
payable upon election of the holder. The Company's obligations under the NextGen Note are
secured by substantially all the assets of NextGen Pro, pursuant to
an Unconditional Guaranty Agreement (the "Guaranty Agreement"), by and among NextGen and NextGen Pro,
and a related Security Agreement between the parties, each dated as
of February 8, 2017. Under the terms of the Guaranty Agreement,
NextGen Pro has agreed to guarantee the performance of all the
Company's obligations under the
NextGen Note. As discussed below the note was exchanged for a new
note in January 2020 which extended the maturity date of the note
until January 31, 2021. Interest expense on the Credit Facility
for the years ended December 31, 2020 and 2019 was $87,128 and
$110,484, respectively. The NextGen Note plus
accrued interest was paid in full on January 31,
2021.
Private Placement
On
March 31, 2017, the Company completed funding of the second tranche
of the 2016 Private Placement (as defined below). The investors
were issued 58,096 shares of Class B Common Stock of the Company
and promissory notes (the "Private Placement Notes") in the amount of $667,000, in
consideration of cancellation of loan agreements having an
aggregate principal amount committed by the purchasers of
$1,350,000. Under the terms of the Private Placement Notes,
interest shall accrue on the outstanding and unpaid principal
amounts until paid in full. The Private Placement Notes mature on
January 31, 2021. Interest accrues at a rate of 6.5% annually from
the closing date through the second anniversary of such date; at a
rate of 8.5% annually from the second anniversary of the closing
date through March 31, 2020; and at a rate of 10% thereafter
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-in capital. The debt discount was amortized to
interest expense until the scheduled maturity of the Private
Placement Notes in January 2021 using the effective interest
method. The effective interest rate at December 31, 2020 was 26.0%.
Interest expense on the Private Placement Notes was $140,136 and $316,091, respectively for the years ended
December 31, 2020 and 2019, which included debt discount
amortization of $75,601 and
$70,565, respectively for the
years ended December 31, 2020 and 2019. On January 31, 2021, a
payment of $371,000 was made on the Private Placement Note and the
remaining balance of $297,411 was extended through June 30,
2021.
F-24
Exchange of Notes Payable
Certain
of the Company's investors extended the maturity of currently
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 and each investor
thereto (the "Investors"), including Halcyon, an entity affiliated
with Kartik Kakarala, a former director of the Company, such New
Investor Note for an aggregate principal amount of $833,333 (after
taking account of a $500,000 pay down of the previously outstanding
Halcyon note), Blue Flame Capital, LLC ("Blue Flame"), an entity
affiliated with Denmar Dixon, a director of the Company, such New
Investor Note for an aggregate principal amount of $99,114, and Mr.
Dixon, individually, such New Investor Note for an aggregate
principal amount of $272,563. The Halcyon and Blue Flame
outstanding principal plus accrued interest were paid in full on
January 31, 2021.
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 Paycheck Protection Program (the "PPP")
established under the CARES Act, in the aggregate amount of
$5,176,845 (the "Loan Proceeds"). The Borrowers received the Loan
Proceeds on May 1, 2020, and under the SBA Loan Documents, the SBA
Loans had an initial maturity date of April 30, 2022 and an annual
interest rate of 1.0%. Payment of principal and interest, to be
paid monthly, on the PPP Loans can be prepaid by the Company at any
time and was originally deferred through October 30, 2020. On
October 7, 2020, the Small Business Administration published
guidance of its interpretation of the CARES ACT and of the Paycheck
Protection Program Interim Final Rules that indicates, pursuant to
the PPP Flexibility Act of 2020, the deferral period for borrow
payments of principal, interest and fees on all PPP was extended 10
months after the borrower’s loan forgiveness period.
Additionally, the SBA lender agreed to extend the maturity pursuant
to the Interim Final Rules. As a result, monthly equal payments of
principal and interest will begin September 1, 2021, with the last
payment due April 1, 2025.
Pursuant to the
terms 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 used a portion
of the proceeds of the PPP Loans for Qualifying Expenses. However,
no assurance is provided that the Company will be able to obtain
forgiveness of the PPP Loans in whole or in part. The
Company and its PPP lender have not yet discussed extending the
maturity, nor has the Company applied for loan
forgiveness. Interest expense on the PPP Notes for the
year ended December 31, 2020 as $30,960.
Convertible Notes
As of
December 31, 2020, the outstanding convertible promissory notes net
of debt discount and issue costs are summarized as
follows:
|
|
December 31,
2020
|
December 31,
2019
|
||||
|
|
Face
Amount
|
Debt
Discount
|
Carrying
Amount
|
Face
Amount
|
Debt
Discount
|
Carrying
Amount
|
|
Convertible senior
notes
|
$38,750,000
|
$11,737,521
|
$27,012,479
|
$30,000,000
|
$10,402,024
|
$19,597,976
|
|
Convertible
notes-Autosport
|
|
|
|
|
|
|
|
$1,536,000 unsecured
note
|
1,024,000
|
307,958
|
716,042
|
1,536,000
|
379,616
|
1,156,384
|
|
$500,000 unsecured
note
|
-
|
-
|
-
|
500,000
|
6,092
|
493,908
|
|
$257,933 unsecured
note
|
-
|
-
|
-
|
257,933
|
6,382
|
251,551
|
|
|
39,774,000
|
12,045,479
|
27,728,521
|
32,293,933
|
10,794,114
|
21,499,819
|
|
Less: Current
portion
|
(768,000)
|
(205,498)
|
(562,502)
|
(1,461,933)
|
(98,343)
|
(1,363,590)
|
|
Long-term
portion
|
$39,006,000
|
$11,839,981
|
$27,166,019
|
$30,832,000
|
$10,695,771
|
$20,136,229
|
F-25
Convertible Senior Notes
On May
9, 2019, the Company entered into a purchase agreement (the
"Purchase Agreement") with JMP Securities LLC ("JMP Securities") 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 Company paid JMP
Securities a fee of 7.0% of the gross proceeds in 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.
The 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
January 10, 2020, the Company entered 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.
F-26
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 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 notes) or
beneficial owner of a New Note shall have the right to receive
shares of the Class B Common Stock upon conversion to the extent
that, following receipt of such shares, such holder or beneficial
owner would be the beneficial owner of more than 4.99% of the
outstanding shares of the Class B Common Stock.
The 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 least 25% in principal amount of the outstanding New
Notes by notice to the Company and the Trustee, may declare 100.0%
of the principal of and accrued and unpaid interest, if any, on all
the New Notes then outstanding to be due and payable.
F-27
In
connection with the 2020 Note Offering, on January 14, 2020, the
Company entered into a registration rights agreement with the Note
Investors, pursuant to which the Company 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
December 31, 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 Old Notes was
in excess of 10 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 $20,673 on the issuance date based on a
lattice model. This amount was recorded as a debt discount and is
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, 2020. The derivative
liability is remeasured at each reporting date with an increase in
value of $10,806
being
recorded in other income for the year ended December 31, 2020. The
value of the derivative liability as of December 31, 2020 was
$16,694.
The
interest expense recognized with respect to the Convertible Senior
Notes for the years ended December 31, 2020 and 2019 were as
follows:
|
|
2020
|
2019
|
|
Contractual
interest expense
|
$2,566,171
|
$1,305,000
|
|
Amortization of
debt discounts
|
1,867,313
|
1,218,064
|
|
Total
|
$4,433,485
|
$2,523,064
|
Convertible Notes-Autosport USA
On
February 3, 2019, in connection with the Autosport Acquisition, the
Company issued (i) the Promissory Note, and (ii) the
Convertible Note in favor of the Seller. In connection with the
Autosport Acquisition, the Buyer also assumed additional debt of
$257,933 pursuant to the Second Convertible Note.
F-28
The
$500,000 Promissory Note had a term of fifteen months and accrued
interest at a simple rate of 5.0% per annum. Interest under the
Promissory Note was 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. Any interest
and principal due under the Promissory Note was 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 Buyer elected not to convert any principal or interest
and the loan has been repaid in full.
The
$1,536,000 Convertible Note matures on January 31, 2022 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 year ended December 31, 2020.
For the
years ended December 31, 2020 and 2019, interest expense on the
convertible notes was $187,751 and $228,001, respectively, and
included $84,131 and $103,095, respectively of debt discount
amortization.
NOTE 9 – STOCKHOLDERS' EQUITY
Share-Based Compensation
On June
30, 2017 the Company's shareholders approved a Stock Incentive Plan
(the "Plan") reserving for issuance under the Plan in the form of
restricted stock units ("RSUs"), stock options ("Options"),
Performance Units, and other equity awards (collectively "Awards")
for our employees, consultants, directors, independent contractors
and certain prospective employees who have committed to become an
employee (each an "Eligible Individual") of up to 12.0% 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 to increase the number of shares authorized for issuance
under the Plan from 12.0% of the Company's issued and outstanding
shares of Class B Common Stock from time to time to 100,000 shares
of Class B Common Stock (the "First Plan Amendment"). 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 from 100,000 shares of Class B Common Stock to 200,000
shares of Class B Common Stock (the "Second Plan Amendment"). On
August 25, 2020, the Company's stockholders approved another
amendment to the Plan to increase the number of shares authorized
for issuance under the Plan from 200,000 shares of Class B Common
Stock to 700,000 shares of Class B Common Stock (the "Third Plan
Amendment"). To date, the vesting of RSU and Option awards is
service / time based. Substantially all service/time based RSU and
Option awards issued typically vest over a three-year period
approximating the following vesting schedule: (i) 20.0% vesting
anywhere from eight-months to thirteen months 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. Performance-based awards and market condition-based
awards granted to date have vesting schedules that are typically
dependent on achieving a particular objective within thirty (30)
months. The Company estimates the fair value of awards
granted under the Plan on the date of grant.
The
Company estimates the fair value of awards granted under the Plan
on the date of grant. In the case of time or service based RSU
awards, the fair value based on the share price of the Class B
Common Stock on the date of the award. Performance Awards use the
share prices of the Class B Common Stock but the Company, both at
grant and each subsequent quarter, considers whether to a apply
discount to the fair in situations where the Company believes there
is risk that the relevant performance metrics may not be met.
Options are calculated using the Black-Scholes option valuation
model while market-condition based awards are estimated using a
Monte Carlo simulation model as these awards are tied to a market
condition. Both the Black-Sholes and Monte-Carlo simulations
utilize multiple input variables to determine the probability of
the Company’s Class B stock price being at certain prices
over certain time periods, resulting in an implied value to the
holder; the 2020 market-condition based awards assumed expected
volatility to be 125% and a risk-free interest rate of 1.0%. We
generally expense the grant-date fair value of all awards on a
straight-line basis over the vesting period.
F-29
|
|
For the Years Ended
December 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Restricted stock
units
|
$2,957,415
|
$3,812,993
|
|
|
|
|
|
Options
|
20,821
|
23,525
|
|
|
|
|
|
Total stock-based
compensation
|
$2,978,236
|
$3,836,518
|
As of December 31, 2020, unrecognized stock-based amortization
related to outstanding RSU and stock awards and the related
weighted-average period over which it is expected to be recognized
subsequent to December 31, 2020 is presented in the table below.
Total unrecognized equity will be adjusted for actual
forfeitures.
|
|
Unrecognized Stock
Based Compensations Related to Outstanding
Awards
|
Remaining
Weighted-Average Amortization Period (in years)
|
|
|
|
|
|
Restricted stock
units
|
$3,210,906
|
1.08
|
|
|
|
|
|
Options
|
47,840
|
.83
|
|
|
|
|
|
Total unrecognized
stock-based amortization
|
$3,258,746
|
1.91
|
Restricted Stock Units
RSU activity during the years ending December 31, 2020 and December
31, 2019 was as follows:
|
|
Number
of
RSUs
|
Weighted
-Average Grant Date Fair Value
|
|
Outstanding at
December 31, 2018
|
75,389
|
$104.63
|
|
Granted
|
80,050
|
$60.81
|
|
Vested
|
(9,000)
|
$86.54
|
|
Forfeited
|
(16,501)
|
$61.45
|
|
Outstanding at
December 31, 2019
|
129,938
|
$99.00
|
|
Granted
|
416,435
|
$6.60
|
|
Vested
|
(35,274)
|
$87.91
|
|
Forfeited
|
(67,256)
|
$98.53
|
|
Outstanding at
December 31, 2020
|
443,843
|
$13.26
|
|
|
|
|
|
Expected to
vest
|
443,843
|
$ 13.26
|
Non-qualified Stock Options
Non-qualified stock
options allow recipients to purchase shares of Class B common stock
at a fixed exercise price. The fixed exercise price is equal to the
price of a share of Class B common stock at the time of grant. The
options expire ten years after the grant date and typically vest
20% between nine-months and one-year after the grant date and
thereafter in quarterly installments of 7.5% and 12.5% during the
2nd and
3rd
vesting years, respectively.
F-30
|
|
Number of
Options
|
Weighted Average
Exercise Price
|
Weighted-Average
Remaining Contractual Life (in years)
|
Aggregate Intrinsic
Value
|
|
Outstanding at
December 31, 2018
|
-
|
n/a
|
|
n/a
|
|
Options
granted
|
5,608
|
78.10
|
|
n/a
|
|
Options
exercised
|
-
|
n/a
|
|
n/a
|
|
Options forfeited
or expires
|
(521)
|
81.60
|
|
n/a
|
|
Outstanding at
December 31, 2019
|
5,087
|
78.10
|
9.6
|
n/a
|
|
|
|
|
|
|
|
Options
granted
|
250
|
$61.40
|
|
$n/a
|
|
Options
exercised
|
-
|
n/a
|
|
n/a
|
|
Options forfeited
or expires
|
(2,586)
|
74.72
|
|
$n/a
|
|
Outstanding at
December 31, 2020
|
2,751
|
$79.76
|
8.7
|
$n/a
|
|
|
|
|
|
|
|
Vested /
exercisable at December 31, 2020
|
937
|
80.13
|
8.7
|
$n/a
|
|
Expected to vest as
of December 31, 2020
|
2,751
|
79.57
|
8.7
|
$n/a
|
Fair
value of all option awards is based on the share price of the Class
B Common Stock on the date of the award and is calculated using the
Black-Scholes option valuation model using the assumptions in the
following table:
|
|
2020
|
2019
|
|
Risk-free
rate
|
0.3%
|
1.5%
|
|
Expected
volatility
|
194.75%
|
85.0%
|
|
Expected life (in
years)
|
5.48
|
5.75
|
|
Expected dividend
yield
|
-
|
-
|
|
Weighted average
grant date fair value per option
|
$29.66
|
$34.20
|
Security Offerings
On February 11, 2019, the Company completed an underwritten public
offering of 63,825 shares of its Class B Common Stock at a price of
$111.00 per share for net proceeds to the Company of $6,543,655.
The completed offering included 8,325 shares of Class B Common
Stock issued upon the underwriter's exercise in full of its
over-allotment option.
On May 9, 2019, the
Company entered into a Securities Purchase Agreement with certain
accredited investors (the "Investors") pursuant to which the
Company agreed to sell in a private placement (the "Private
Placement") an aggregate of 95,000 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 gross 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 900,000 shares of Class B Common Stock 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 issued an additional
135,000 shares of Class B Common Stock and 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, 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 the Company's officers and directors participated in the
2020 Public Offering.
F-31
The
Company used the net proceeds of the 2020 Public Offering for
working capital and general corporate purposes, which included
further technology development, increased spending on marketing and
advertising and capital expenditures necessary to grow the
business.
Reverse Stock Split
On May
18, 2020, the Company filed a Certificate of Change to the
Company’s Articles of Incorporation with the Secretary of
State of the State of Nevada to effect a one-for-twenty reverse
stock split of its issued and outstanding Class A Common Stock and
Class B Common Stock (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
Reverse Stock Split. There was a 7,131 fractional share adjustment
as a result of rounding up to the nearest whole share in connection
with the Reverse Stock Split. The authorized preferred stock of the
Company was not impacted by the Reverse Stock Split. The Company
has retrospectively adjusted the per share and share amounts
included in this Annual Report on Form 10-K for the Reverse Stock
Split.
NOTE 10 – COMMON STOCK WARRANTS
In
connection with the October 23, 2017 public offering of 145,500 shares of Class B common
stock the Company issued to underwriters warrants to purchase
10,913 shares of Class B common stock, which was equal to 7.5% of
the aggregate number of shares of Class B common stock sold in the
Offering. The Warrants are exercisable at a per share price of
$126.50, which was equal to 115.0% of the Offering price per share
of the shares sold in the Offering and mature on April 20, 2023. In
April, 2018, pursuant to the Loan Agreement by and among Hercules
Capital, the Company, and its wholly owned subsidiaries, the
Company issued Hercules a warrant to purchase 4,091 (increasing to
5,455 if a fourth tranche in the principal amount of up to
$5,000,000 is advanced at the parties agreement) shares of the
Company's Class B Common Stock (the "Hercules April Warrant") at an
exercise price of $110.00 per share (the "Hercules April Warrant
Price"). The Hercules April Warrant is immediately exercisable and
expires on April 30, 2023. In October, 2018, under an amendment to
the Loan Agreement, the company issued Hercules a warrant to
purchase 1,048 shares of the Company's Class B Common Stock (the
"Hercules October Warrant") at an exercise price of $143.13 per
share (the "Hercules October Warrant Price"). The Hercules October
Warrant is immediately exercisable and expires on October 30, 2023.
The Hercules warrants contain anti-dilutive provisions that
increase the number of shares covered by the warrants in the event
the Company makes a New Issuance (as defined in the Loan Agreement)
for no consideration or consideration that is less than the Warrant
Prices. The following table summarizes the warrants outstanding as
of December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Warrants
outstanding at the beginning of the year
|
16,530
|
16,051
|
|
New warrant
issuances to Hercules
|
-
|
-
|
|
Adjustment to the
Hercules warrants due to the anti-dilutive provisions
|
-
|
479
|
|
Warrants
outstanding at the end of the year
|
16,530
|
16,530
|
The
Company has classified the warrants as equity in accordance with
ASC 815. The fair value of the warrants were valued at issuance
using the Black-Scholes option pricing model with the following
assumptions:
|
|
Underwriter
Warrants
|
Hercules April
Warrants
|
Hercules October
Warrants
|
|
Warrants exercise
price
|
$126.50
|
$110.00
|
$143.20
|
|
Fair value price
per share of common stock
|
$110.00
|
$101.40
|
$114.60
|
|
Volatility
|
62.0%
|
70.0%
|
70.0%
|
|
Expected term
remaining (years)
|
5.0
|
5.0
|
5.0
|
|
Risk-free interest
rate
|
1.31%
|
2.79%
|
2.94%
|
|
Discount for lack
of marketability
|
20.0%
|
20.0%
|
20.0%
|
|
Dividend
yield
|
-
|
-
|
-
|
|
Fair value at
initial valuation date
|
$505,273
|
$208,369
|
$59,292
|
F-32
NOTE 11 – SELLING, GENERAL AND ADMINISTRATIVE
The
following table summarizes the detail of selling, general and
administrative expense for the years ended December
31,
|
|
2020
|
2019
|
|
Compensation and
related costs
|
$25,734,308
|
$33,502,020
|
|
Advertising and
marketing
|
5,287,284
|
18,228,262
|
|
Professional
fees
|
3,148,381
|
2,542,357
|
|
Technology
development
|
1,421,138
|
2,408,338
|
|
General and
administrative
|
18,068,237
|
29,943,272
|
|
|
$53,659,348
|
$86,624,249
|
NOTE 12 – 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 loss was comprised of
three components: (1) inventory loss, assessed by the insurance
carrier at approximately $13,000,000; (2) building and personal
property loss, primarily impacting our leased facilities, assessed
by the insurance carrier at $2,783,000; 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 or when any such
recoveries will be made.
As a result of the damage caused by the tornado the Company
concluded that the utility of the inventory damaged by the storm
was 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.
During the year ended December 31, 2020 the Company recorded an
impairment loss on inventory of $11,738,413 comprised of
$4,453,775 for vehicles that were a total loss and
$7,284,638 in loss in value for vehicles partially damaged and
subject to repair. The impairment loss is reported in cost of
revenue in the 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 operating loss for the year
ended December 31, 2020.
F-33
NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION
The
following table includes supplemental cash flow information,
including noncash investing and financing activity for the years
ended December 31, 2020 and 2019:
|
|
2020
|
2019
|
|
Cash
paid for interest
|
$3,834,758
|
$4,888,070
|
|
|
|
|
|
Convertible
notes payable issued in acquisition
|
$-
|
$2,293,933
|
|
|
|
|
The
following table provides a reconciliation of cash and restricted
cash reported within the accompanying consolidated balance sheets
that sum to the total of the same amounts shown in the accompanying
consolidated statements of cash flows as of December
31,
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Cash and cash
equivalents
|
$1,466,831
|
$49,660
|
|
Restricted cash
(1)
|
2,049,056
|
6,676,622
|
|
Total cash, cash
equivalents, and restricted cash
|
$3,515,887
|
$6,726,282
|
(1)
Amounts included in restricted cash represent the deposits required
under the Company's short-term revolving facilities.
NOTE 14 – INCOME TAXES
U.S. Tax Reform
On
December 22, 2017, legislation commonly known as the Tax Cuts and
Jobs Act, or the Act, was signed into law. The Tax Act, among other
changes, reduced the U.S. federal corporate tax rate from 35.0% to
21.0%, required taxpayers to pay a one-time transition tax on
earnings of certain foreign subsidiaries that were previously tax
deferred and created new taxes on certain foreign sourced earnings.
For the two years ended December 31, 2020, the Company did not have
any foreign subsidiaries and the international aspects of the Tax
Act are not applicable.
In
connection with the initial analysis of the impact of the Tax Act,
the Company remeasured certain deferred tax assets and liabilities
based on the rates at which they are expected to reverse in the
future, which is generally 26.0% including state income taxes. The
remeasurement of the Company's deferred tax balance was primarily
offset by application of its valuation allowance. On March 27,
2020, the Coronavirus Aid, Relief and Economic Security
(“CARES”) Act was enacted in response to the novel
coronavirus (COVID-19) pandemic. The CARES Act includes numerous
provisions relating to, among other things, refundable payroll tax
credits, deferment of employer portion of certain payroll taxes,
net operating loss amounts and carryback periods, alternative
minimum tax credit refunds, modifications to the net interest
deduction limitations and technical corrections to tax depreciation
methods for qualified improvement property. Due to the recent
enactment of the CARES Act, the Company is currently analyzing the
potential impacts of this legislation on its financial position and
results of operations.
F-34
Deferred income
taxes reflect the net tax effect of temporary difference between
amounts recorded for financial reporting purposes and amounts used
for tax purposes. The major components of deferred tax assets and
liabilities are as follows as of December 31,
|
|
2020
|
2019
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforward
|
$21,494,873
|
$17,380,733
|
|
Business interest
carryforward
|
1,651,179
|
645,165
|
|
Stock-based
compensation
|
518,320
|
1,287,424
|
|
Accounts receivable
allowance
|
361,606
|
269,403
|
|
Lease
liabilities
|
1,568,773
|
1,599,651
|
|
Inventory
reserve
|
26,574
|
151,815
|
|
Basis difference in
goodwill
|
351,993
|
385,570
|
|
Accrued
liabilities
|
122,644
|
-
|
|
Property and
equipment
|
372,896
|
191,259
|
|
Total deferred
income tax assets
|
26,468,858
|
21,911,020
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Right-of-use
assets
|
1,478,224
|
1,572,368
|
|
Debt issuance costs
amortization
|
1,248,455
|
28,818
|
|
Total deferred tax
liabilities
|
2,726,679
|
1,601,186
|
|
|
|
|
|
Net deferred tax
asset before valuation allowance
|
23,742,179
|
20,309,834
|
|
|
|
|
|
Valuation
allowance
|
(23,742,179)
|
(20,309,834)
|
|
Net deferred
taxes
|
$-
|
$-
|
A
reconciliation of the statutory U.S. Federal income tax rate to the
Company's effective income tax
rate for the years ended December 31, 2020 and 2019.
|
|
2020
|
2019
|
|
U.S. Federal
statutory rate
|
21.0%
|
21.0%
|
|
State and local,
net of federal benefit
|
5.0%
|
5.0%
|
|
Permanent
difference
|
(1.4)%
|
(1.1)%
|
|
Valuation
allowance
|
(24.6)%
|
(24.9)%
|
|
Effective tax
rate
|
-%
|
-%
|
No
current provision for Federal income taxes was recorded for the
years ended December 31, 2020 and 2019 due to the
Company's operating losses. As
of December 31, 2020 and 2019, the Company has operating loss
carryforwards of $82,733,046 and $66,717,013, respectively, a
portion of which begin to expire in 2033. We have provided a
valuation allowance on the deferred tax assets of
$23,742,179 and
$20,309,834 for the periods ended December 31, 2020 and 2019,
respectively. In assessing
the recovery of the deferred tax assets, management considers
whether it is more likely than not that some portion or all the
deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income in the periods in which those temporary differences
become deductible. Management considers the scheduled reversals of
future deferred tax assets, projected future taxable income, and
tax planning strategies in making this assessment.
F-35
NOTE 15 – LOSS PER SHARE
The
Company computes basic and diluted net loss per share attributable
to common stockholders in conformity with the two-class method
required for participating securities. Under the two-class method,
basic net loss per share attributable to common stockholders is
calculated by dividing the net loss attributable to common
stockholders by the weighed-average number of shares of common
stock outstanding during the period. The diluted net loss
per share attributable to common stockholders is computed giving
effect to all potential dilutive common stock equivalents
outstanding for the period. For purposes of this calculation,
443,843 of RSUs, 2,751 of stock options, 16,530 of warrants to
purchase shares of Class B Common Stock and 982,107 shares of Class
B Common Stock issuable in connection with convertible debt are
considered common stock equivalents but have been excluded from the
calculation of diluted net loss per share attributable to common
stockholders as the effect is antidilutive.
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 voting. The Series B Preferred automatically converted
to Class B Common Stock 21 days after the mailing of a definitive
information statement prepared in accordance with Regulation 14C of
the Exchange Act, without further action on the part of the
Company, to the holders of Series B Preferred. The conversion of
Series B Preferred to Class B Common was effected on March 4, 2019.
The Company applies the two-class method of calculating earnings
per share, but as the rights of the Series B Non-Voting Convertible
Preferred Stock and Class A and Class B Common Stock are identical,
except in respect of voting, basic and diluted earnings per share
are the same for all classes. Weighted average number of shares
outstanding of Class A Common Stock, Class B Common Stock, and
Series B Preferred Stock at December 31, 2020 were 50,000,
2,191,633, and 0,
respectively.
NOTE 16 – RELATED PARTY TRANSACTIONS
As of
December 31, 2020 and 2019, the Company had promissory notes of
$370,556 and $370,556 and accrued interest of $9,370 and $23,731,
respectively, due to Blue Flame, an entity controlled by a Denmar
Dixon, a director of the Company. The promissory notes were issued
in connection with the completion of the 2016 Private Placement on
March 31, 2017. Interest expense on the promissory notes due to
Blue Flame, for the years ended December 31, 2020 and 2019 was
$77,853 and $183,286, respectively, which included debt discount
amortization of $42,001 and $144,409, respectively. The interest
was charged to interest expense in the Consolidated Statements of
Operations. The Blue Flame Notes plus accrued interest were paid in
full on January 31, 2021.
Nashville Leases
In
connection with the acquisition of Wholesale, we entered into
leases for two facilities in the greater Nashville area owned by
Mr. Brewster, a former 5% or greater holder of our Class B
Common Stock. One of the leases was terminated in 2019. The other
location has a lease term expiring on October 30, 2021, for which
we have two (2) renewal options, each of which provides for five
(5) additional years with a ten percent (10.0%) increase in the
base rent. The rent for the current location is approximately
$25,000 per month.
NOTE 17 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
We
determine whether an arrangement is a lease at inception and
whether such leases are operating or financing leases. For each
lease agreement, the Company determines its lease term as the
non-cancellable period of the lease and includes options to extend
or terminate the lease when it is reasonably certain that it will
exercise that option. We use these options in determining our
right-of-use assets and lease liabilities. Our lease agreements do
not contain any material residual value guarantees or material
restrictive covenants. As our leases do not provide an implicit
rate, we use our incremental borrowing rate based on the
information available at commencement date in determine the present
value of the lease payments.
F-36
Operating lease
expense is recognized on a straight-line basis over the lease term.
Total operating lease expenses for the year ended December 31, 2020
and 2019 was $2,200,288 and $1,661,649, respectively. The current
portion of our operating lease liabilities as of December 31, 2020
is $1,630,002 and is included in accounts payable and accrued
liabilities. The long-term portion of our operating lease
liabilities as of December 31, 2020 is $4,370,154.
The
weighted-average remaining lease term and discount rate for our
operating leases are as follows:
|
|
2020
|
|
Weighted-average
remaining lease term
|
3.7
|
|
Weighted-average
discount rate
|
6.2%
|
Supplemental cash
flow information related to operating leases for the year ended
December 31, 2020 was as follows:
|
|
2020
|
|
Cash payments for
operating leases
|
$1,691,637
|
|
|
|
|
New operating lease
assets obtained in exchange for operating lease
liabilities
|
$2,901,318
|
The following table summarizes the future minimum payments for
operating leases at December 31, 2020 due in each year ending
December 31,
|
2021
|
$1,957,188
|
|
2022
|
1,955,037
|
|
2023
|
1,222,866
|
|
2024
|
835,309
|
|
2025
|
553,334
|
|
thereafter
|
285,500
|
|
Total lease
payments
|
6,809,234
|
|
Less imputed
interest
|
(809,078)
|
|
Present value of
lease liabilities
|
$6,000,156
|
Legal Matters
From
time to time, the Company is involved in various claims and legal
actions that arise in the ordinary course of business. Although the
results of litigation and claims cannot be predicted with
certainty, as of December 31, 2020 and 2019, the Company does not
believe that the ultimate resolution of any legal actions, either
individually or in the aggregate, will have 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 18 – 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.
The Company believes that its relationships with these providers
are satisfactory.
F-37
NOTE 19 - SEGMENT REPORTING
Business segments are defined as components of an enterprise about
which discrete financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing operating performance. Our
operations are organized by management into operating segments by
line of business. We have determined that we have three reportable
segments as defined in 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 principally of
motorcycles and other powersports vehicles, while the automotive
segment distributes cars and trucks. Our vehicle logistics and
transportation service segment provides nationwide automotive
transportation services between dealerships and auctions. Our
vehicle logistics and transportation service reportable segment has
been determined to represent one operating segment and reporting
unit. The accounting policies of the segments are the same and are
described in Note 1.
The following table summarizes revenue, operating income (loss),
Depreciation and Amortization and interest expense which are the
measure by which management allocates resources to its segments to
each of our reportable segments.
|
|
Powersports
|
Automotive
|
Vehicle
Logistics and Transportation
|
Eliminations(1)
|
Total
|
|
Year
Ended
December 31,
2020
|
|
|
|
|
|
|
Total
assets
|
$45,694,127
|
$47,841,306
|
$10,535,065
|
$(27,091,263)
|
76,979,235
|
|
Revenue
|
$47,526,127
|
$337,084,959
|
$35,887,132
|
$(4,070,975)
|
416,427,243
|
|
Operating income
(loss)
|
$(19,865,965)
|
$(1,364,786)
|
$2,671,131
|
$ -
|
(18,559,620)
|
|
Depreciation and
amortization
|
$1,997,142
|
$139,734
|
$6,063
|
$-
|
2,142,939
|
|
Interest
expense
|
$(4,793,732)
|
$(1,839,529)
|
$(5,064)
|
$-
|
(6,638,325)
|
|
Gain on early
extinguishment of debt
|
$188,164
|
$-
|
$-
|
$-
|
188,164
|
|
|
|
|
|
|
|
|
Year
Ended
December
31, 2019
|
|
|
|
|
|
|
Total
assets
|
$55,992,165
|
$77,033,326
|
$7,921,578
|
$(27,553,978)
|
113,393,091
|
|
Revenue
|
$101,008,976
|
$717,042,511
|
$31,931,488
|
$(9,353,628)
|
840,629,347
|
|
Operating income
(loss)
|
$(34,402,724)
|
$(5,318,549)
|
$1,928,574
|
$-
|
(37,792,699)
|
|
Depreciation and
amortization
|
$1,543,023
|
$235,998
|
$7,405
|
$-
|
1,786,426
|
|
Interest
expense
|
$(4,453,549)
|
$(2,732,869)
|
$(1,186)
|
$-
|
(7,187,604)
|
|
Loss on early
extinguishment of debt
|
$(1,499,250)
|
$-
|
$-
|
$-
|
(1,499,250)
|
(1) Intercompany investment
balances related to the acquisitions of Wholesale, Inc. and
Wholesale Express, and receivables and other balances related
intercompany freight services of Wholesale Express are eliminated
in the Consolidated Balance Sheets. Revenue and costs for these
intercompany freight services have been eliminated in the
Consolidated Statements of Operations.
F-38
NOTE 20 – SUBSEQUENT EVENTS
RideNow Definitive Agreement
On
March 12, 2021, the Company entered into a Plan of Merger and
Equity Purchase Agreement (the “RideNow Agreement”)
with RO Merger Sub I, Inc., an Arizona corporation and wholly owned
subsidiary of the Company (“Merger Sub I”), RO Merger
Sub II, Inc., an Arizona corporation and wholly owned subsidiary of
the Company (“Merger Sub II”), RO Merger Sub III, Inc.,
an Arizona corporation and wholly owned subsidiary of the Company
(“Merger Sub III”), RO Merger Sub IV, Inc., an Arizona
corporation and wholly owned subsidiary of the Company
(“Merger Sub IV,” and together with Merger Sub I,
Merger Sub II, and Merger Sub III, the “Merger Subs”),
C&W Motors, Inc., an Arizona corporation, Metro Motorcycle,
Inc., an Arizona corporation, Tucson Motorcycles, Inc., an Arizona
corporation, and Tucson Motorsports, Inc., an Arizona corporation,
William Coulter, an individual (“Coulter”), Mark Tkach,
an individual (“Tkach” and together with Coulter, the
“Principal Owners”), and certain other persons who own
equity interests in the Acquired Companies (as defined in the
RideNow Agreement) and execute a Seller Joinder (as defined in the
RideNow Agreement) (together with the Principal Owners, the
“Sellers” and each, a “Seller”), and Tkach,
as the representative of the Sellers (the “Sellers’
Representative”). The Acquired Companies own and operate
powersports retail dealerships under the RideNow brand which
include sales, financing, and parts and service of new and used
motorcycles, ATVs, UTVs, scooters, side by sides, sport bikes,
cruisers, watercraft, and other vehicles and ancillary businesses
and activities relating thereto.
The
RideNow Agreement provides that, upon the terms and subject to the
conditions set forth in the RideNow Agreement, (i) the Company will
acquire all of the equity interests (the “Equity
Purchases”) in the Transferred Entities (as defined in the
RideNow Agreement), (ii) Merger Sub I will merge with and into
C&W Motors, Inc., with C&W Motors, Inc. continuing as a
surviving corporation, (iii) Merger Sub II will merge with and into
Metro Motorcycle, Inc., with Metro Motorcycle, Inc. continuing as a
surviving corporation, (iv) Merger Sub III will merge with and into
Tucson Motorcycles, Inc., with Tucson Motorcycles, Inc. continuing
as a surviving corporation, and (v) Merger Sub IV will merge with
and into Tucson Motorsports, Inc., with Tucson Motorsports, Inc.
continuing as a surviving corporation, in each case under the laws
of the State of Arizona and each as a wholly-owned subsidiary of
the Company (the “Mergers”). The Equity Purchases and
the Mergers will result in the acquisition from the Sellers of up
to 46 Acquired Companies (the “RideNow Transaction”).
The RideNow Transaction is expected to close (the
“Closing”) in the second or third quarter of 2021.
Effective as of the Closing, Tkach and Coulter will become
executive officers and directors of the Company.
The
RideNow Agreement provides that the Company will acquire the
Acquired Companies in exchange for (i) $400,400,000 in cash plus or
minus any adjustments for net working capital and closing
indebtedness, and (ii) shares of the Company's Class B Common Stock
having a value of $175,000,000 (the “Closing Payment
Shares”), valued equally, on a per share basis, based upon
the lowest value of (A) $30.00; (B) the VWAP of the Company's Class
B Common Stock for the twenty (20) trading days immediately
preceding the Closing, and (C) the value on a per share basis paid
for the Class B Common Stock or any shares underlying securities
convertible into or exercisable for Class B Common Stock by any
person which purchases Class B Common Stock or any shares
underlying securities convertible into or exercisable for Class B
Common Stock from the Company from the date of the RideNow
Agreement until the Closing not including purchases of Class B
Common Stock underlying currently outstanding options, warrants,
convertible notes, or other derivative securities. Ten percent
(10%) of the Closing Payment Shares will be escrowed at Closing and
will be released pursuant to the terms of the RideNow Agreement.
The Company will finance the cash consideration through a
combination of approximately $280,000,000 of debt provided by the
Initial Lender (as defined below) and through the issuance of new
equity for the remainder thereof.
Each of
the Company, the Merger Subs, and the Sellers has provided
customary representations, warranties and covenants in the RideNow
Agreement. The completion of the RideNow Transaction is subject to
various closing conditions, including (a) the making of all filings
and other notifications required to be made under any Antitrust Law
(as defined in the RideNow Agreement) for the consummation of the
RideNow Transaction, the expiration or termination of all waiting
periods relating thereto, and the receipt of all clearances,
authorizations, actions, non-actions, or other consents required
from a governmental authority under any Antitrust Law for the
consummation of the RideNow Transaction, (b) performance in all
respects by each party of its covenants and agreements, (c) the
Company obtaining stockholder approval of the RideNow Transaction
and related matters, (d) the Closing Payment Shares being approved
for listing on Nasdaq, and (e) the receipt of consent to the
RideNow Transaction from certain powersports
manufacturers.
F-39
Certain
RideNow minority equity holders are not initially parties to the
RideNow Agreement and some of such minority holders have rights of
first refusal (“ROFR”) with respect to the RideNow
entity in which they own a stake. If any of these equity
holders either decide not to sell their interests to the Company or
to exercise their ROFR, RumbleOn will not be able to acquire all of
the Equity Interests of the Acquired Companies, or in certain cases
any interests in an Acquired Company, and the consideration payable
therefor in the RideNow Transaction will be correspondingly
reduced. RideNow anticipates that all minority owners will
participate in the RideNow Transaction and that no minority owners
will exercise their ROFR, but there is no assurance this will
occur.
The
RideNow Agreement contains certain termination rights for both the
Company and the Sellers' Representative. Both the Company and the
Sellers' Representative have the right to terminate the RideNow
Agreement if the Closing does not occur on or before June 30, 2021,
subject to certain rights of the parties to extend the termination
date to July 31, 2021, as set forth in the RideNow
Agreement.
Commitment Letter
On
March 12, 2021, the Company entered into a commitment letter (the
“Commitment Letter”) with Oaktree Capital Management,
L.P. ( “Oaktree”). The Commitment Letter provides that,
subject to the conditions set forth therein, Oaktree or certain
funds or accounts within its Strategic Credit Strategy (the
“Initial Lender”) commits to provide senior secured
term loan facilities in an aggregate principal amount of up to
$400,000,000 (the “Credit Facility”), comprised of (i)
an initial advance of $280,000,000 to fund the RideNow Transaction,
consummate the Refinancing (as defined in the Commitment Letter)
and pay the RideNow Transaction costs and (ii) a delayed draw term
facility of up to $120,000,000 to fund permitted acquisitions and
similar investments and related fees and expenses.
The
Credit Facility interest rates will be, at the option of the
Company, (a) Adjusted LIBOR (as defined in the Commitment Letter)
plus 8.25%, of which (i) Adjusted LIBOR plus 7.25% shall be paid in
cash and (ii) 1.00% shall be payable in kind or (b) ABR (as defined
in the Commitment Letter) plus 7.25%, of which (i) ABR plus 6.25%
shall be paid in cash and (ii) 1.00% shall be payable in kind. The
Credit Facility shall mature on the fifth anniversary of the
Closing date of the RideNow Transaction (subject to extension with
the consent of only the extending lender).
The
Company and its subsidiaries will grant certain security interests
to the Initial Lender to secure the Credit Facility, subject to
certain exceptions and permitted liens, all to be more fully set
forth in the definitive documentation for the Credit Facility. The
Credit Facility will be subject to prepayment with the proceeds of
certain events including 50% of excess cash flow, 100% of certain
asset sales, 100% of proceeds of certain debt issuances, and 50% of
certain public or private equity financings. The Commitment Letter
provides that the Credit Facility will contain customary
affirmative and negative covenants, and events of default, subject
to certain carve-outs and exceptions as more fully described in the
Commitment Letter.
The
commitment to provide the Credit Facility is subject to certain
conditions, including: the receipt of customary closing documents,
completion of applicable “know your customer” requests
and delivery of documentation related thereto, no material adverse
change, delivery of customary financial reporting, specified
representations and warranties, perfection of certain security
interests, and delivery of customary legal opinions. The Company
will pay certain fees and expenses in connection with obtaining the
Credit Facility.
F-40
Warrant
In
connection with the Commitment Letter, in lieu of a commitment fee,
the Company has agreed to issue to Oaktree a warrant to purchase a
number of shares of Class B Common Stock at an exercise price per
share to be determined either at Closing or at termination of the
Commitment Letter (the “Warrant”). If issued at
Closing, the Warrant will be for that number of shares equal to
$40,000,000 divided by the lowest price per share at which equity
is issued in connection with financing the RideNow Transaction,
which price shall also be the exercise price. If issued in
connection with a termination of the Commitment Letter, the Warrant
will be issued to purchase that number of shares equal to five
percent (5%) of the Company's fully diluted market capitalization
at the close of business on the day after a termination of the
Commitment Letter is publicly announced divided by the weighted
average price of the Company's Class B Common Stock for the five
days immediately preceding such date, which price shall also be the
exercise price. The Warrant is immediately exercisable upon the
Closing or five days after the termination of the Commitment Letter
and expires eighteen (18) months after the Closing or termination
of the Commitment Letter.
Bridge Loan
Also in
connection with the RideNow Transaction, on March 12, 2021, the
Company and its subsidiary, NextGen Pro, LLC (“NextGen
Pro”), executed a secured promissory note with BRF Finance
Co., LLC (“BRF Finance”), an affiliate of B. Riley
Securities, Inc., pursuant to which BRF Finance has loaned the
Company $2,500,000 (the “Bridge Loan”). The Bridge Loan
matures on the earlier of September 30, 2021 or upon the issuance
of debt or equity above a threshold. The Bridge Loan is secured by
certain intellectual property assets held by NextGen Pro as set
forth in Exhibit A to the secured promissory note. Interest will
accrue on the Bridge Loan until maturity (by acceleration or
otherwise) at a rate of 12% annually.
Certificate of Amendment and Changes to Incentive Plan
In
contemplation of the RideNow Transaction, on March 9, 2021, the
Board of Directors (the "Board") approved, subject to stockholder
approval, (i) an amendment to the Articles of Incorporation of the
Company to increase the number of shares of authorized Class B
Common Stock to 100,000,000 (the “Certificate of
Amendment”), and (ii) an amendment to the RumbleOn, Inc. 2017
Stock Incentive Plan (the “Incentive Plan”) to increase
the authorized shares of Class B Common Stock available under the
Incentive Plan from 700,000 shares to 2,700,000 shares and extend
the term of the Incentive Plan for an additional ten
years.
Registration Rights and Lock-Up Agreement
In
connection with the RideNow Transaction, on March 12, 2021, the
Company entered into a registration rights and lock-up agreement,
by and among the Company and certain equity holders of the Acquired
Companies (the “Registration Rights Agreement”).
Pursuant to the Registration Rights Agreement (i) the Company
agreed to file a resale registration statement for the Registrable
Securities (as defined in the Registration Rights Agreement) no
later than thirty (30) days following the Closing, and to use
commercially reasonable efforts to cause it to become effective as
promptly as practicable following such filing, (ii) the equity
holders were granted certain piggyback registration rights with
respect to registration statements filed subsequent to the Closing,
and (iii) the Lock-Up Holders (as defined in the Registration
Rights Agreement) agreed, subject to certain customary exceptions,
not to sell, transfer or dispose of any Company common stock for a
period of one hundred and eighty (180) days from the
Closing.
F-41
Exhibit 21
Subsidiaries of the Registrant
|
Name of Subsidiary
|
|
State of Organization
|
|
Autosport
USA, Inc.
|
|
Delaware
|
|
NextGen
Pro, LLC
|
|
Delaware
|
|
RMBL
Express, LLC
|
|
Delaware
|
|
RMBL
Missouri, LLC
|
|
Delaware
|
|
RumbleOn
Dealers, Inc.
|
|
Delaware
|
|
RMBL
Texas, LLC
|
|
Delaware
|
|
RumbleOn
Finance, LLC
|
|
Nevada
|
|
RumbleOn
Tennessee, LLC
|
|
Delaware
|
|
Wholesale
Express, LLC
|
|
Tennessee
|
|
Wholesale,
Inc.
|
|
Tennessee
|
|
RO Merger Sub I, Inc.
(1)
|
|
Arizona
|
|
RO Merger Sub II, Inc. (1)
|
|
Arizona
|
|
RO Merger Sub III, Inc.
(1)
|
|
Arizona
|
|
RO Merger Sub IV, Inc. (1)
|
|
Arizona
|
|
RO Merger Sub V, Inc. (1)
|
|
Delaware
|
(1) Incorporated in March 2021
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
We have
issued our report dated March 31, 2021, with respect to the
consolidated financial statements included in the Annual Report of
RumbleOn, Inc. on Form 10-K for the year ended December 31, 2020.
We consent to the incorporation by reference of said report in the
Registration Statements of RumbleOn, Inc. on Forms S-3 (file No.
333-223425, File No. 333-226514, File No. 333-228483, File No.
333-231631, File No. 333-234340, File No. 333-233399, and File No.
333-239285) and on Forms S-8 (File No. 333-219203, File No.
333-223428, File No. 333-226440, File No. 333-231884, and File No.
333-248926).
/s/
Grant Thornton LLP
Dallas,
Texas
March
31, 2021
Exhibit 31.1
CERTIFICATION
I, Marshall Chesrown, certify that:
(1) I have reviewed this Annual Report on Form 10-K of RumbleOn,
Inc.;
(2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
(4) The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
(5) The registrant’s other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant’s internal control over financial
reporting.
|
March 31, 2021
|
By:
|
/s/ Marshall
Chesrown
|
|
|
|
|
Marshall Chesrown
|
|
|
|
|
Chairman and Chief Executive Officer
|
|
Exhibit 31.2
CERTIFICATION
I, Steven R. Berrard, certify that:
(1) I have reviewed this Annual Report on Form 10-K of RumbleOn,
Inc.;
(2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
(4) The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
(5) The registrant’s other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant’s internal control over financial
reporting.
|
March 31, 2021
|
By:
|
/s/ Steven
R. Berrard
|
|
|
|
|
Steven R. Berrard
|
|
|
|
|
Chief Financial Officer
|
|
Exhibit 32.1
CERTIFICATION PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the accompanying Annual Report on Form 10-K of
RumbleOn, Inc. (the "Company") for the year ended December 31,
2020, as filed with the U.S. Securities and Exchange Commission
(the “Report”), the undersigned hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge
and belief, that:
|
(1)
|
the
Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended;
and
|
|
(2)
|
the
information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
|
|
March
31, 2021
|
By:
|
/s/ Marshall
Chesrown
|
|
|
|
|
Marshall
Chesrown
|
|
|
|
|
Chairman
and Chief Executive Officer
|
|
Exhibit 32.2
CERTIFICATION PURSUANT
TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the accompanying Annual Report on Form 10-K of
RumbleOn, Inc. (the "Company") for the year ended December 31,
2020, as filed with the U.S. Securities and Exchange Commission
(the “Report”), the undersigned hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge
and belief, that:
|
(1)
|
the Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended; and
|
|
(2)
|
the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
|
|
March
31, 2021
|
By:
|
/s/ Steven
R. Berrard
|
|
|
|
|
Steven R. Berrard
|
|
|
|
|
Chief
Financial Officer
|
|