RumbleOn, Inc. - Quarter Report: 2020 September (Form 10-Q)

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2020

OR

 

☐	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)

 

Nevada		46-3951329
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
901 W. Walnut Hill Lane Irving TX		75038
(Address of principal executive offices)		(Zip Code)

 

(469) 250-1185

(Registrant's telephone number, including area code)

 

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

 

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class B Common Stock, $0.001 par value		RMBL		The NASDAQ Capital Market

 

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

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

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

Large accelerated filer ☐ Non-accelerated filer ☒

Accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐

 

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

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

The number of shares of Class B Common Stock, $0.001 par value, outstanding on November 13, 2020 was 2,191,633 shares. In addition, 50,000 shares of Class A Common Stock, $0.001 par value, were outstanding on November 13, 2020.

 

RUMBLEON, INC.

QUARTERLY PERIOD ENDED September 30, 2020

Table of Contents to Report on Form 10-Q

 

 

	Page
Item 1. Financial Statements	1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosure About Market Risk	47
Item 4. Controls and Procedures	47

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	49
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3. Defaults Upon Senior Securities	49
Item 4. Mine Safety Disclosures	49
Item 5. Other Information	49
Item 6. Exhibits	50
SIGNATURES	51

 

 

 

PART I - FINANCIAL INFORMATION

RumbleOn, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

	As of September 30, 2020	As of December 31, 2019
ASSETS
Current assets:
Cash	$3,412,772	$49,660
Restricted cash	5,545,892	6,676,622
Accounts receivable, net	11,342,600	8,482,707
Inventory	11,424,094	57,381,281
Prepaid expense and other current assets	2,506,910	1,210,474
Total current assets	34,232,268	73,800,744
Property and equipment, net	6,494,940	6,427,674
Right-of-use assets	5,926,393	6,040,287
Goodwill	26,886,563	26,886,563
Other assets	174,457	237,823
Total assets	$73,714,621	$113,393,091
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$10,720,627	$12,421,094
Accrued interest payable	807,360	749,305
Current portion of convertible debt	960,338	1,363,590
Current portion of long-term debt	17,640,426	59,160,970
Total current liabilities	30,128,751	73,694,959
Long-term liabilities:
Note payable	1,974,218	1,924,733
Convertible Debt	26,681,826	20,136,229
Derivative liabilities	20,345	27,500
Other long-term liabilities	5,399,716	4,722,101
Total long-term liabilities	34,076,105	26,810,563
Total liabilities	64,204,856	100,505,522
Commitments and contingencies (Notes 4, 7, 8, 9, 13, 18)
Stockholders' equity:
Class B Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 and 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019	-	-
Common A stock, $0.001 par value, 50,000 shares authorized, 50,000 shares issued and outstanding as of September 30, 2020 and December 31, 2019	50	50
Common B stock, $0.001 par value, 4,950,000 shares authorized, 2,191,633 and 1,111,681 shares issued and outstanding as of September 30, 2020 and December 31, 2019	2,192	1,112
Additional paid in capital	108,396,284	92,268,213
Accumulated deficit	(98,888,761)	(79,381,806)
Total stockholders' equity	9,509,765	12,887,569
Total liabilities and stockholders' equity	$73,714,621	$113,393,091

 

See Notes to the Condensed Consolidated Financial Statements.

 

RumbleOn, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

	Three-Months Ended September 30,		Nine-Months Ended September 30,
	2020	2019	2020	2019
Revenue:
Pre-owned vehicle sales:
Powersports	$7,303,131	$27,144,202	$38,641,607	$84,379,049
Automotive	99,315,335	187,108,303	281,242,442	611,871,819
Transportation and vehicle logistics	10,440,367	6,058,546	25,191,459	17,417,846
Other	198,571	9,272	672,450	9,272
Total revenue	117,257,404	220,320,323	345,747,958	713,677,986
Cost of revenue:
Powersports	5,606,366	24,280,599	33,691,814	74,367,614
Automotive	86,473,154	179,672,614	257,045,834	585,163,984
Transportation and vehicle logistics	8,373,829	4,352,585	19,324,621	12,523,281
Cost of revenue before impairment loss	100,453,349	208,305,798	310,062,269	672,054,879
Impairment loss on automotive inventory	-	-	11,738,413
Total cost of revenue	100,453,349	208,305,798	321,800,682	672,054,879
Gross profit	16,804,055	12,014,525	23,947,276	41,623,107
Selling, general and administrative	13,279,151	19,010,939	42,509,865	64,458,520
Insurance recovery proceeds	-	-	(5,615,268)	-
Depreciation and amortization	536,381	473,670	1,567,697	1,283,333
Operating income (loss)	2,988,523	(7,470,084)	(14,515,018)	(24,118,746)
Interest expense	(1,488,090)	(2,031,697)	(5,187,256)	(5,351,689)
Change in derivative liability	(13,518)	630,000	7,155	820,000
Gain (Loss) on early extinguishment of debt	-	-	188,164	(1,499,250)
Income (loss) before provision for income taxes	1,486,915	(8,871,781)	(19,506,955)	(30,149,685)
Benefit for income taxes	-	-	-	-
Net income (loss)	$1,486,915	$(8,871,781)	$(19,506,955)	$(30,149,685)
Weighted average number of common shares outstanding - basic and fully diluted	2,234,838	1,158,915	2,165,167	1,098,809
Net income (loss) per share - basic and fully diluted	$.67	$(7.66)	$(9.01)	$(27.44)

 

See Notes to the Condensed Consolidated Financial Statements.

 

 

RumbleOn, Inc.

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)

 

	Preferred Shares		Class A Common Shares		Class B Common Shares		Additional Paid in	Accumulated	Total Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance as of June 30, 2020	-	$-	50,000	$50	2,179,907	$2,180	$107,533,741	$(100,375,676)	$7,160,295
Issuance of common stock for restricted stock units	-	-	-	-	11,726	12	(12)	-	-
Stock-based compensation	-	-	-	-	-	-	862,555	-	862,555
Net income	-	-	-	-	-	-	-	1,486,915	1,486,915
Balance as of September 30, 2020	-	$-	50,000	$50	2,191,633	$2,192	$108,396,284	$(98,888,761)	$9,509,765

 

	Preferred Shares		Class A Common Shares		Class B Common Shares		Additional Paid in	Accumulated	Total Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance, as of December 31, 2019	-	-	50,000	$50	1,111,681	$1,112	$92,268,213	$(79,381,806)	$12,887,569
Issuance of common stock, net of issuance cost	-	-	-	-	1,035,000	1,035	10,779,045	-	10,780,080
Issuance of common stock for restricted stock units	-	-	-	-	37,821	38	(38)	-	-
Convertible note exchange	-	-	-	-	-	-	2,923,755	-	2,923,755
Stock-based compensation	-	-	-	-	-	-	2,425,316	-	2,425,316
Adjust for fractional shares in reverse stock split	-	-	-	-	7,131	7	(7)	-	-
Net loss	-	-	-	-	-	-	-	(19,506,955)	(19,506,955)
Balance as of September 30, 2020	-	$-	50,000	$50	2,191,633	$2,192	$108,396,284	$(98,888,761)	$9,509,765

 

	Preferred Shares		Class A Common Shares		Class B Common Shares		Additional Paid in	Accumulated	Total Shareholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance as of June 30, 2019	-	$-	50,000	$50	1,106,256	$1,106	$90,059,932	$(55,482,657)	$34,578,431
Issuance of common stock for restricted stock units	-	-	-	-	4,715	5	(5)	-	-
Stock-based compensation	-	-	-	-	-	-	689,130	-	689,130
Net loss	-	-	-	-	-	-	-	(8,871,781)	(8,871,781)
Balance as of September 30, 2019	-	$-	50,000	$50	1,110,971	$1,111	$90,749,057	$(64,354,439)	$26,395,780

 

	Preferred Shares		Class A Common Shares		Class B Common Shares		Additional Paid in	Accumulated	Total Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance, as of December 31, 2018	1,317,329	1,317	50,000	$50	874,315	$874	$65,016,379	$(34,201,114)	$30,817,506
Cumulative effect of accounting change (see Note 1)	-	-	-	-	-	-	-	(3,639)	(3,639)
Equity component of convertible senior notes, net of issuance costs	-	-	-	-	-	-	7,745,625	-	7,745,625
Issuance of common stock for restricted stock units	-	-	-	-	11,965	12	(12)	-	-
Beneficial conversion feature on convertible notes	-	-	-	-	-	-	495,185	-	495,185
Conversion of preferred shares to common stock	(1,317,329)	(1,317)	-	-	65,866	66	1,251	-	-
Issuance of common stock	-	-	-	-	158,825	159	15,155,387	-	15,155,546
Stock-based compensation	-	-	-	-	-	-	2,335,242	-	2,335,242
Net loss	-	-	-	-	-	-	-	(30,149,685)	(30,149,685)
Balance as of September 30, 2019	-	$-	50,000	$50	1,110,971	$1,111	$90,749,057	$(64,354,439)	$26,395,780

 

See Notes to the Condensed Consolidated Financial Statement

 

 

RumbleOn, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine-Months Ended September 30,
	2020	2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(19,506,955)	$(30,149,685)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,567,697	1,283,333
Amortization of debt discounts	1,498,690	1,308,061
Share based compensation	2,425,316	2,335,242
Impairment loss on inventory	11,738,413	-
Impairment loss on fixed assets	177,626	-
Loss from change in value of derivatives	(7,155)	(820,000)
Loss (gain) from extinguishment of debt	(188,164)	1,499,250
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other current assets	(1,296,436)	(261,207)
Decrease in inventory	34,218,774	5,530,532
(Increase) in accounts receivable	(2,859,892)	(1,564,145)
Decrease (increase) in other assets	63,366	(18,403)
Decrease in accounts payable and accrued liabilities	(1,691,839)	(5,824,733)
Increase in accrued interest payable	58,055	888,821
Net cash provided by (used in) operating activities	26,197,496	(25,792,934)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used for acquisitions; net of cash received	-	(835,000)
Purchase of property and equipment	(174,786)	-
Proceeds from sales of property and equipment	-	40,620
Technology development	(1,598,067)	(2,619,551)
Net cash used in investing activities	(1,772,853)	(3,413,931)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and convertible debt	8,272,375	27,455,537
Payments on notes payable	(1,713,825)	(11,134,695)
Net repayments on lines of credit	(44,707,736)	(4,660,270)
Net proceeds from sale of common stock	10,780,080	15,155,547
Proceeds from PPP loan	5,176,845	-
Net cash (used in) provided by financing activities	(22,192,261)	26,816,119
NET CHANGE IN CASH	2,232,382	(2,390,746)
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD	6,726,282	15,784,902
CASH AND RESTRICTED CASH AT END OF PERIOD	$8,958,664	$13,394,156

 

See Notes to the Condensed Consolidated Financial Statements.

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Organization

RumbleOn, Inc. was incorporated in October 2013 under the laws of the State of Nevada, as Smart Server, Inc. On February 13, 2017, the Company changed its name from Smart Server, Inc. to RumbleOn, Inc. The reference to the Company in these financial statements refers to the Company and its subsidiaries.

Description of Business

Overview

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 is 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 light trucks, via its acquisition of Wholesale, Inc. ("Wholesale") in October 2018.

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 its 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.

Acquisitions

On February 3, 2019, the Company completed the acquisition (the "Autosport Acquisition") of all of the equity interests of Autosport USA, Inc. ("Autosport"), an independent pre-owned vehicle distributor, pursuant to a Stock Purchase Agreement, dated February 1, 2019 (the "Stock Purchase Agreement"), by and among RMBL Express, LLC (the "Buyer"), a wholly owned subsidiary of Company, Scott Bennie (the "Seller"), and Autosport. Aggregate consideration for the Autosport Acquisition consisted of (i) a closing cash payment of $600,000, plus (ii) a fifteen-month $500,000 promissory note (the "Promissory Note") in favor of the Seller, plus (iii) a three-year $1,536,000 convertible promissory note (the "Convertible Note") in favor of the Seller, plus (iv) contingent earn-out payments payable in the form of cash and/or the Company's Class B Common Stock (the "Earn-Out Shares") for up to an additional $787,500 if Autosport achieves certain performance thresholds. In connection with the Autosport Acquisition, the Buyer also paid outstanding debt of Autosport of $235,000 and assumed additional debt of $257,933 pursuant to a promissory note payable to Seller (the "Second Convertible Note").

 

 

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company as of September 30, 2020 and December 31, 2019 and for the three and nine-months ended September 30, 2020 and September 30, 2019, have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All of the Company's subsidiaries are wholly owned. The condensed consolidated financial statements include the accounts of RumbleOn Inc. and its wholly owned subsidiaries. In accordance with those rules and regulations, the Company has omitted certain information and notes required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all material adjustments, except as otherwise noted, necessary for the fair presentation of the Company's financial position and results of operations for the periods presented. The year-end condensed balance sheet data as of December 31, 2019 was derived from audited financial statements. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K ("Annual Report") for the fiscal year ended December 31, 2019. The results of operations for the three-month and nine-month periods ended September 30, 2020 are not necessarily indicative of the results expected for the entire fiscal year. All intercompany accounts and material intercompany transactions have been eliminated.

Liquidity

We have incurred cumulative losses and negative cash flow from operations since inception through September 30, 2020 and expect to incur additional losses and negative cash flow in the future. As we continue to expand our business, build our brand name and awareness, and continue technology and software development efforts, we may need access to additional capital, including through debt and equity financing. Historically, we have raised additional capital to fund our expansion through equity issuances or debt instruments; refer to Note 8 — Notes Payable and Lines of Credit, Note 9 - Convertible Notes, and Note 11 - Stockholder Equity. Also, we have historically funded vehicle inventory purchases through our Line of Credit-Floor Plans. Due to the impact of COVID-19 on the economy, we have a strong focus on preserving liquidity. Our primary liquidity sources are available cash, amounts available under the NextGear Credit Line, proceeds from the Paycheck Protection Program loan, monetization of our retail loan portfolio, insurance recoveries and through rationalizing costs and expenses, including a workforce reduction.

The worldwide spread of the COVID-19 outbreak has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the outbreak is contained. This is impacting the Company's business and the powersport, automotive and transport industries as a whole. The Company has positioned its business today to be lean and flexible in this period of lower demand and higher uncertainty with the goal of preparing the Company 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.

The Company's condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which assumes the continuity of operations, the realization of assets and the satisfaction of liabilities as they come due in the normal course of business. Although the Company believes that it will be able to generate sufficient liquidity from the measures described above, its current circumstances including uncertainties due to COVID-19 pandemic raise substantial doubt about the Company's ability to operate as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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.

 

 

Recent Pronouncements

Adoption of New Accounting Standards

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASU 2016-13"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as "CECL". In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. On November 15, 2019, the FASB issued ASU No. 2019-10 "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)" ("ASU 2019-10"), which provides a framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. ASU 2019-10 amends the effective dates for ASU 2016-13 for smaller reporting companies with fiscal years beginning after December 15, 2022, and interim periods within those years. The Company is evaluating the level of impact adopting ASU 2016-13 will have on the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that the rights and obligations created by leases with a duration greater than 12 months be recorded as assets and liabilities on the balance sheet of the lessee. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has adopted 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 nine-months ended September 30, 2019. The standard did not have a material impact on the Company's condensed consolidated statements of operations or statements of cash flows.

NOTE 2 – ACCOUNTS RECEIVABLE, NET

Accounts receivable consists of the following as of:

	September 30, 2020	December 31, 2019
Trade	$12,585,367	$9,369,733
Finance	27,333	147,893
Other	23,326	-
	12,636,026	9,517,626
Less: allowance for doubtful accounts	(1,293,426)	(1,034,919)
	$11,342,600	$8,482,707

 

NOTE 3 – INVENTORY

Inventory consists of the following as of:

	September 30, 2020	December 31, 2019
Pre-owned vehicles:
Powersport vehicles	$1,801,234	$10,365,050
Automobiles and trucks	12,078,123	47,599,433
	13,879,357	57,964,483
Less: Reserve	(2,455,263)	(583,202)
	$11,424,094	$57,381,281

 

Included in the inventory reserve at September 30, 2020 is an impairment loss on automotive inventory of $1,976,525 for vehicles that were declared a total loss from the tornado that occurred on March 3, 2020 at the Company’s Nashville, Tennessee facility. The total impairment on inventory related to the tornado was $11,738,413 and is recorded as part of cost of revenue on the statement of operations for the nine-months ended September 30, 2020. See Note 13 – Loss Contingencies and Insurance Recoveries.

 

 

NOTE 4 – ACQUISITIONS

On February 3, 2019, the Company completed the Autosport Acquisition pursuant to the Stock Purchase Agreement. Aggregate consideration for the Autosport Acquisition consisted of (i) a closing cash payment of $600,000, plus (ii) the Promissory Note in favor of the 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 September 30, 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

 

Supplemental pro forma unaudited information (unaudited)

The following unaudited supplemental pro forma information presents the financial results as if the Autosport Acquisition was made as of January 1, 2019 for the three-months and nine-months ended September 30, 2019.

Pro-forma adjustments for the three-month and nine-month periods ended September 30, 2019 primarily include adjustments to reflect the: (i) amortization of stock compensation expense of $0 and $18,351, respectively, and (ii) interest expense on convertible and promissory notes of $0 and $20,174, respectively.

	Three-Months Ended September 30, 2019	Nine-Months Ended September 30, 2019
Unaudited
Pro forma revenue	$220,320,323	$719,996,595
Pro forma net loss	$(8,871,781)	$(30,186,709)
Loss per share - basic and fully diluted	$(7.66)	$(27.06)
Weighted-average common shares and common stock equivalents outstanding basic and fully diluted	1,158,915	1,115,735

 

NOTE 5 – PROPERTY AND EQUIPMENT, NET

The following table summarizes property and equipment, net of accumulated depreciation and amortization as of September 30, 2020 and December 31, 2019:

 

 

Included in Technology development and software above on September 30, 2020 is capitalized technology development costs of $10,253,304, which includes $2,900,000 of software acquired in the NextGen transaction. Total technology development costs incurred for the three-months and nine-month periods ended September 30, 2020 were $1,164,015 and $2,635,286, respectively, of which $983,954 and $1,598,067, respectively, was capitalized and $180,061 and $1,037,219, respectively, was charged to expense in the accompanying condensed consolidated statements of operations. Depreciation expense for the three-month and nine-month periods ended September 30, 2020 were $536,381 and $1,567,697, respectively, which included the amortization of capitalized technology development costs of $477,420 and $1,366,996, respectively. Total technology development costs incurred for the three-month and nine-month periods ended September 30, 2019 were $1,420,405 and $4,371,267, respectively, of which $699,982 and $2,619,551, respectively, was capitalized and $720,423 and $1,751,716, respectively, was charged to expense in the accompanying condensed consolidated statements of operations. Depreciation expense for the three-month and nine-month periods ended September 30, 2019 was $473,671 and $1,283,334 respectively, which included the amortization of capitalized technology development costs of $386,519 and $1,018,551, respectively.

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS

The following is a summary of the carrying amount of goodwill and other indefinite-lived assets as of December 31, 2019 and September 30, 2020. Due to the significant decline in the Company's stock price and the economic effect of COVID-19, the Company determined a triggering event for Goodwill impairment existed at March 31, 2020. As a result, the Company performed a quantitative impairment analysis for the Automotive segment. The Company's impairment test indicated no impairment existed as the estimated fair value of the reporting unit exceeded its carrying value at March 31, 2020. Management determined no triggering event occurred during the quarters ended June 30, 2020 or September 30, 2020.

	September 30, 2020	December 31, 2019
Goodwill	$26,886,563	$26,886,563
Indefinite lived intangible asset	$45,515	$45,515

The $45,515 of indefinite lived intangible asset is included in other assets in the Company's condensed consolidated balance sheets.

NOTE 7 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

The following table summarizes accounts payable and other accrued liabilities as of September 30, 2020 and December 31, 2019:

	September 30, 2020	December 31, 2019
Accounts payable	$4,096,927	$8,730,624
Operating lease liability-current portion	1,556,705	1,423,610
Accrued payroll	1,275,557	715,658
State and local taxes	633,116	912,062
Other accrued expenses	3,158,322	639,140
Total	$10,720,627	$12,421,094

 

NOTE 8 – NOTES PAYABLE AND LINES OF CREDIT

Notes payable and lines of credit consisted of the following as of September 30, 2020 and December 31, 2019:

	September 30, 2020	December 31, 2019
Notes payable-NextGen dated February 8, 2017 and exchanged January 14, 2020. Interest payable semi-annually at 6.5% through February 9, 2019 and 10.0% quarterly through maturity, which is January 31, 2021.	$833,334	$1,333,334
Notes payable-private placement dated March 31, 2017 and exchanged January 14, 2020. Interest payable semi-annually at 6.5% through September 30, 2019 and 10.0% quarterly through maturity which is January 31, 2021.	669,175	667,000
Line of credit-floor plan-Ally dated February 16, 2018. Facility provides up to $25,000,000 of available credit secured by vehicle inventory and other assets. Principal and interest are payable on demand.	-	8,419,897
Line of credit-floor plan-NextGear dated October 30, 2018. Secured by vehicle inventory and other assets. Interest rate at September 30, 2020 was 5.25%. Principal and interest is payable on demand.	11,950,284	50,741,073
PPP Loans dated May 1, 2020. Interest is payable monthly at 1.0% through maturity which is April 30, 2022. Payments of principle and interest is deferred until October 30, 2020.	5,176,845	-
Revolving Line of Credit note secured by the loans and other assets of RumbleOn Finance, LLC. Interest rate at September 30, 2019 was 7.25%. Principal and interest is payable on demand.	985,006	-
Less: Debt discount	-	(75,601)
Total notes payable and lines of credit	$19,614,644	$61,085,703
Less: Current portion	(17,640,426)	59,160,970
Long-term portion	$1,974,218	$1,924,733

 

Line of Credit-Floor Plan-NextGear

On October 30, 2018, Wholesale, as borrower, entered into a $70,000,000 floorplan vehicle financing credit line (the "NextGear Credit Line") with NextGear Capital, Inc. ("NextGear"). During the quarter ended September 30, 2020 the Company and NextGear agreed to reduce the credit line to $55,000,000 with Wholesale and Autosport limiting the aggregate amount of advances under the credit line to $25,000,000 through March 31, 2021, at which time the credit line will be repaid in full.

Advances under the NextGear Credit Line require Wholesale to maintain at least $2,500,000 cash collateral in a reserve account in favor of NextGear, which amount is subject to change in NextGear's sole discretion. Advances under the NextGear Credit Line will bear interest at an initial per annum rate of 5.25%, based upon a 360-day year, and compounded daily, and the per annum interest rate will vary based on a base rate, plus the contract rate, which is currently negative 2.0%, until the outstanding liabilities to NextGear are paid in full. Interest expense on the NextGear Credit Line for the three-month and nine-month periods ended September 30, 2020 was $239,785 and $1,450,944, respectively. Interest expense on the NextGear Credit Line for the three-month and nine-month periods ended September 30, 2019 was $693,024 and $2,203,915, respectively.

Line of Credit-Floor Plan-Ally

On February 16, 2018, the Company, through its wholly-owned subsidiary RMBL MO, entered into an Inventory Financing and Security Agreement (the "Credit Facility") with Ally Bank ("Ally") and Ally Financial, Inc., a Delaware corporation ("Ally" together with Ally Bank, the "Lender"), pursuant to which the Lender may provide up to $25,000,000 in financing, or such lesser sum which may be advanced to or on behalf of RMBL MO from time to time, as part of its floorplan vehicle financing program. Advances under the Credit Facility required that the Company 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. Advances under the Credit Facility, if not demanded earlier, were due and payable for each vehicle financed under the Credit Facility as and when such vehicle was sold, leased, consigned, gifted, exchanged, transferred, or otherwise disposed of. Interest under the Credit Facility was due and payable upon demand, but, in general, in no event later than 60 days from the date of request for payment. Upon any event of default (including, without limitation, RMBL MO's obligation to pay upon demand any outstanding liabilities of the Credit Facility), the Lender could, at its option and without notice to the RMBL MO, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to Lender and its affiliates by RMBL MO and its affiliates. The Credit Facility was secured by a grant of a security interest in the vehicle inventory and other assets of RMBL MO and payment was guaranteed by the Company pursuant to a guaranty in favor of the Lender and secured by the Company pursuant to a General Security Agreement. Interest expense on the Credit Facility for the three-month and nine-month periods ended September 30, 2020 was $0 and $77,266. Interest expense on the Credit Facility for the three-month and nine-month periods ended September 30, 2019 was $157,343 and $416,017, respectively. The Credit Facility ended in February 2020.

 

 

RumbleOn Finance Line of Credit

On June 23, 2020, RumbleOn Finance, LLC, a wholly owned subsidiary of the Company ("RumbleOn Finance"), entered into a loan agreement providing for up to $1,500,000 in proceeds (the "RumbleOn Finance Facility") with CL Rider Finance, L.P. (the "CL Rider") as evidenced by the loan commitment dated as of June 17, 2020. In connection with the loan agreement, RumbleOn Finance pledged its assets to CL Rider to secure the RumbleOn Finance Facility and executed a promissory note in favor of the CL Rider pursuant to which the RumbleOn Finance Facility will accrue interest at an initial rate of 4.0% per annum. Accrued interest is payable monthly. Outstanding accrued interest and the principal balance are payable on demand by CL Rider. On July 16, 2020, the Company received net proceeds of $1,156,632. Interest expense on the Facility was $16,619 for the three and nine-months ended September 30, 2020.

Loan Agreement-Hercules Capital Inc.

On May 14, 2019, the Company made a payment to Hercules Capital Inc. ("Hercules") of $11,134,695, representing the principal, accrued and unpaid interest, fees, costs and expenses outstanding under its Loan and Security Agreement (the "Loan Agreement") with Hercules dated April 30, 2018 (the "Hercules Indebtedness"). Upon the payment, all outstanding indebtedness and obligations of the Company owed to Hercules under the Loan Agreement were paid in full, and the Loan Agreement was terminated. The Company used a portion of the net proceeds from the Note Offering (described below) to pay the Hercules Indebtedness. In accordance with the guidance in ASC 470-50, Debt, the Company accounted for the extinguishment of the Loan Agreement as an extinguishment and recognized a loss on early extinguishment of debt of $1,499,250 during the nine-months ended September 30, 2019. The loss on early extinguishment consisted primarily of the prepayment penalty paid to Hercules and unamortized debt discounts including the remaining portion of warrant values and debt issuance costs. There was no interest expense on the Hercules loan for the three-month and nine-month periods ended September 30, 2020. For the three-month and nine-month periods ended September 30, 2019, interest expense on the Hercules loan was $0 and $758,466, respectively, and included $0 and $343,841, respectively, of debt issuance cost amortization.

Notes Payable

NextGen

On February 8, 2017, in connection with the acquisition of NextGen, the Company issued a subordinated secured promissory note in favor of NextGen (which note was subsequently assigned to Halcyon Consulting LLC ("Halcyon") in February 2018) in the amount of $1,333,334. Interest accrues and will be paid semi-annually (i) at a rate of 6.5% annually from the closing date through the second anniversary of such date and (ii) at a rate of 8.5% annually from the second anniversary of the closing date through the January 31, 2021 maturity date (the "NextGen Note"). Upon the occurrence of any event of default, the outstanding balance under the 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, LLC, the Company's wholly-owned subsidiary ("NextGen Pro"), pursuant to an Unconditional Guaranty Agreement (the "Guaranty Agreement"), by and among NextGen and NextGen Pro, and a related Security Agreement between the parties, each dated as of February 8, 2017. Under the terms of the Guaranty Agreement, NextGen Pro has agreed to guarantee the performance of all the Company's obligations under the NextGen Note. Interest expense on the NextGen Note for the three-month and nine-month periods ended September 30, 2020 were $21,005 and $66,123, respectively, as compared to $28,566 and $81,818, respectively, for the same periods of 2019. In connection with the Investor Note Exchange Agreement (described below), in January 2020, $500,000 of the NextGen Note was paid down and the NexGen Note was exchanged for a New Investor Note (as defined below).

Private Placement

On March 31, 2017, the Company completed funding of the second tranche of a private placement commenced in 2016 (the "2016 Private Placement"). 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 and at a rate of 8.5% annually from the second anniversary of the closing date through the maturity date. Upon the occurrence of any event of default, the outstanding balance under the Private Placement Notes shall become immediately due and payable upon election of the holders. Based on the relative fair values attributed to the Class B Common Stock and promissory notes issued in the 2016 Private Placement, the Company recorded a debt discount on the promissory notes of $667,000 with the corresponding amounts recorded as an addition to paid-in capital. The debt discount was amortized to interest expense using an effective interest rate of 26.0%. Interest expense on the Private Placement Notes for the three-month and nine-month periods ended September 30, 2020 was $16,867 and $125,443, respectively, and included $0 and $75,601, respectively, of debt discount amortization as compared to interest expense of $80,899 and $231,235, respectively, which included $66,608 and $188,831, respectively, of debt discount amortization for the same periods of 2019. In connection with the Investor Note Exchange Agreement (described below) the Private Placement Notes were exchanged for New Investor Notes (as defined below).

 

 

Exchange of Notes Payable

Certain of the Company's investors extended the maturity of outstanding promissory notes, and exchanged such notes for new notes (the "New Investor Notes"), pursuant to that certain Note Exchange Agreement, dated January 14, 2020 (the "Investor Note Exchange Agreement"), by and between the Company 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 NextGen 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 New Investor Notes, having an aggregate principal amount of approximately $1,500,000, will mature on January 31, 2021, and will be convertible at any time at the Investor's option at a price of $60.00 per share. Interest under the New Investor Notes accrue on the outstanding and unpaid principal amount at the rate of 10.0% per annum and shall be paid quarterly in arrears on the last day of each of the Company's fiscal quarters beginning on March 30, 2020, and, if applicable, on the January 31, 2021 maturity date.

PPP Loans

On May 1, 2020, the Company, and its wholly-owned subsidiaries Wholesale and Wholesale Express (together, the "Subsidiaries," and with the Company, the "Borrowers"), each entered into loan agreements and related promissory notes (the "SBA Loan Documents") to receive U.S. Small Business Administration Loans (the "SBA Loans") pursuant to the 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. Under the SBA Loan Documents, the SBA Loans have current terms of two years with maturity dates of April 30, 2022 and an annual interest rate of 1.0%. Payments of principal and interest on the PPP Loans will be deferred for the first six-months of the term of the PPP Loans until October 30, 2020. Principal and interest are payable monthly and may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

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 has been using 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. Interest expense on the PPP Note for the three-month and nine-month periods ended September 30, 2020 was $11,626 and $19,334, respectively.

NOTE 9 – CONVERTIBLE NOTES

As of September 30, 2020, the outstanding convertible promissory notes net of debt discount and issue costs are summarized as follows:

	Principal Amount	Debt Discount	Carrying Amount
Convertible senior notes	$38,750,000	$(12,237,622)	$26,512,378
Convertible notes-Autosport:
$1,536,000 unsecured note	1,088,000	(336,214)	751,786
$500,000 unsecured note	378,000	-	378,000
	40,216,000	(12,573,836)	27,642,164
Less: Current portion	(1,146,000)	185,662	(960,338)
Long-term portion	$39,070,000	$(12,388,174)	$26,681,826

 

Convertible Senior Notes

On 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.

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.

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 September 30, 2020, the conditions allowing holders of the New Notes to convert have not been met and therefore the New Notes are not yet convertible.

The Company accounted for the exchange of the Old Notes and the issuance of the New Notes in accordance with the conversion guidance in ASC 470-20 "Debt – Debt with Conversion and Other Option" (ASC 470-20) and determined that the exchange of the Old Notes for the New Notes required derecognition of the Old Notes given that the difference in the fair value of the embedded the conversion feature of the New Notes relative to the 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 $13,518 being recorded in other income for the three-months ended September 30, 2020. The value of the derivative liability as of September 30, 2020 was $20,345.

 

 

The interest expense recognized with respect to the Convertible Senior Notes was as follows:

	Three-Months Ended September 30, 2020	Nine-Months Ended September 30, 2020
Contractual interest expense	$653,906	$1,912,265
Amortization of debt discounts	479,077	1,367,213
Total	$1,132,983	$3,279,478

Convertible Notes-Autosport USA

On 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.

The $500,000 Promissory Note has a term of fifteen months and will accrue interest at a simple rate of 5.0% per annum. Interest under the Promissory Note is payable upon maturity. In June 2020, principal payments of $122,000 were made and the promissory note maturity date was extended to October 1, 2020 and the remaining principal balance of $378,000 will be repaid in four equal principal plus interest payments beginning July 1, 2020 through maturity. Any interest and principal due under the Promissory Note is convertible, at the Buyer's option into shares of the Company's Class B Common Stock at a conversion price equal to the weighted average trading price of the Company's Class B Common Stock on the Nasdaq Stock Exchange for the twenty (20) consecutive trading days preceding the conversion date. The number of shares of the Company's Class B Common Stock issuable pursuant to the Promissory Note is indeterminate at this time.

The $1,536,000 Convertible Note matures on January 31, 2022 and accrues interest at a rate of 6.5% per annum. Interest under the Convertible Note is payable monthly for the first 12 months, and thereafter monthly payments of amortized principal and interest will be due. Any interest and principal due under the Convertible Note is convertible into shares of the Company's Class B Common Stock at a conversion price of $115.00 per share, (i) at the Seller's option, or (ii) at the Buyer's option, on any day that (a) any portion of the principal of the Convertible Note remains unpaid and (b) the weighted average trading price of the Company's Class B Common Stock on Nasdaq for the twenty (20) consecutive trading days preceding such day has exceeded $140.00 per share. The maximum number of shares issuable pursuant to the Convertible Note is 15,962 shares of the Company's Class B Common Stock.

The Second Convertible Note had a term of one year and accrued interest at a simple rate of 5.0% per annum. The note was repaid in full during the nine-months ended September 30, 2020.

For the three and nine-months ended September 30, 2020, interest expense on convertible notes was $47,140 and $141,000, respectively, and included $22,442 and $55,876, respectively, of debt discount amortization. Interest Expense for the three-month and nine-months ended September 30, 2019 for the convertible notes was $67,634 and $163,730, respectively, and included $31,045 and $81,084, respectively, of debt discount amortization.

NOTE 10 – EQUITY-BASED COMPENSATION

Share-Based Compensation

On June 30, 2017, the Company's shareholders approved a Stock Incentive Plan (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 the Company's employees, consultants, directors, independent contractors and certain prospective employees who have committed to become an employee (each an "Eligible Individual") of up to 12% of the shares of Class B Common Stock outstanding from time to time. On June 25, 2018, the Company's shareholders approved an amendment to the Plan 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. 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 shares of Class B Common Stock to 700,000 shares of Class B Common Stock. To date, the vesting of RSU and Option awards for most employees is service/time based. Substantially all service/time based RSU and Option awards issued typically vest over a three-year period with the following vesting schedule: (i) 20.0% vesting anywhere from eight-months to thirteen month after grant date, (ii) an additional 30.0% during the subsequent twelve months of the initial vesting, and (iii) the final 50.0% during the following twelve months. In 2019 the Company granted to certain members of management an aggregate of (i) 12,213 performance-based awards that vest after two consecutive quarters of $1.00 or greater operating income and trailing four quarter revenue of $900,000,000 at any time through September 30, 2020, and (ii) 36,938 market-based awards; these awards were terminated effective as of December 31, 2019 and the entire expense for the fair-value of the market based awards was recognized in 2019. On July 15, 2020 the Company granted to certain members of management an aggregate of 200,000 market based RSUs (the “2020 Grant”). These RSUs vest as follows: 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. The 2020 Grant has a term of 30 months, the fair market value of the 2020 Grant is $650,000 and the derived term is 20 months. The Company estimates the fair value of awards granted under the Plan on the date of grant. Stock-based compensation expense is recognized as an expense on a straight-line basis over the vesting periods described above and is recognized in Selling, General and Administrative expense. A summary of equity-based compensation expense recognized during the three and nine-months ended September 30, 2020 and 2019 is as follows

 

 

	Three-Months Ended September 30,		Nine-Months Ended September 30,
	2020	2019	2020	2019
Restricted Stock Units	$847,096	$956,991	$2,379,273	$1,646,112
Options	15,459	-	46,041	-
				-
Total stock-based compensation	$862,555	$956,991	$2,425,314	$1,646,112

As of September 30, 2020, the total unrecognized compensation expense related to outstanding equity awards was approximately $4,439,150, which the Company expects to recognize over a weighted-average period of approximately 10 months. Total unrecognized equity-based compensation expense will be adjusted for actual forfeitures.

NOTE 11 – STOCKHOLDER EQUITY

2019 Offerings

On February 11, 2019, the Company completed an underwritten public offering of 63,825 shares of its Class B Common Stock 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 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.

The Company intends to use the net proceeds of the 2020 Public Offering for working capital and general corporate purposes, which may include further technology development, increased spending on marketing and advertising and capital expenditures necessary to grow the business. Pending these uses, the Company may invest the net proceeds in short-term interest-bearing investment grade instruments.

Reverse Stock Split

On 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 were 7,131 fractional shares issued 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 Quarterly Report on Form 10-Q for the Reverse Stock Split.

 

 

NOTE 12 – SELLING, GENERAL AND ADMINISTRATIVE

The following table summarizes the detail of selling, general and administrative expense for the three-month and nine-month periods ended September 30, 2020 and 2019:

	Three-Months Ended September 30,		Nine-Months Ended September 30,
	2020	2019	2020	2019
Compensation and related costs	$7,169,435	$8,056,730	$20,496,326	$24,274,523
Advertising and marketing	839,752	3,288,545	4,329,830	14,740,227
Professional fees	533,303	440,575	2,451,837	1,730,792
Technology development	180,061	720,423	1,037,219	1,751,716
General and administrative	4,556,600	6,504,666	14,194,653	21,961,262
	$13,279,151	$19,010,939	$42,509,865	$64,458,520