NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1 – BUSINESS DESCRIPTION
Organization
RumbleOn, Inc.
(along with its consolidated subsidiaries, the
“Company”) was incorporated in October 2013 under the
laws of the State of Nevada, as Smart Server, Inc. (“Smart
Server”). On February 13, 2017, the Company changed its name
from Smart Server, Inc. to RumbleOn, Inc.
Nature of Operations
Smart
Server was originally formed to engage in the business of designing
and developing mobile application payment software for smart phones
and tablet computers. After Smart Server ceased its technology
development activities in 2014, it had no operations and nominal
assets, meeting the definition of a “shell company”
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and regulations
thereunder.
In July
2016, Berrard Holdings Limited Partnership (“Berrard
Holdings”) acquired 99.5% of the common stock of the Company
from the principal stockholder. Shortly after the Berrard Holdings
common stock purchase, the Company began exploring the development
of a capital light e-commerce platform facilitating the ability of
both consumers and dealers to Buy-Sell-Trade-Finance pre-owned
recreation vehicles in one online location. The Company’s
goal is for the platform to be widely recognized as the leading
online solution for the sale, acquisition, and distribution of
recreation vehicles by providing users with the most efficient,
timely and transparent experience. The Company’s initial
focus is the market for 601cc and larger on road motorcycles,
particularly those concentrated in the
“Harley-Davidson” brand. The Company will look to
extend to other brands and additional vehicle types and products as
the platform matures.
The
Company’s business plan is currently driven by a technology
platform it acquired on February 8, 2017 from NextGen Dealer
Solutions, LLC (“NextGen”), which the Company owns and
operates through its wholly-owned subsidiary NextGen Pro, LLC
(“NextGen Pro”). The NextGen platform provides vehicle
appraisal, inventory management, customer relationship management
and lead management, equity mining, and other key services
necessary to drive the online marketplace. For additional
information, see Note 3 -
“Acquisitions.”
Serving
both consumers and dealers, through our online platform, we make
cash offers for the purchase of their vehicles and intend to
provide them the flexibility to trade, list, or auction their
vehicle through our website and mobile applications. In addition,
we offer a large inventory of used vehicles for sale along with
third-party financing and associated products. Our operations are
designed to be scalable by working through an infrastructure and
capital light model that is achievable by virtue of a synergistic
relationship with dealer partners. We utilize dealer partners in
the acquisition of motorcycles as well as to provide inspection,
reconditioning and distribution services. Correspondingly, we earn
fees and transaction income, and dealer partners will earn
incremental revenue and enhance profitability through increased
sales, leads, and fees from inspection, reconditioning and
distribution programs.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The
accompanying Condensed Consolidated Financial Statements have been
prepared in accordance with United States generally accepted
accounting principles (“GAAP”) for interim financial
information and in accordance with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X promulgated by the Securities and
Exchange Commission (the “SEC”) and therefore do not
contain all of the information and footnotes required by GAAP and
the SEC for annual financial statements. The Company’s
Condensed Consolidated Financial Statements reflect all adjustments
(consisting only of normal recurring adjustments) management
believes are necessary for the fair presentation of the
Company’s financial condition, results of operations, and
cash flows for the periods presented.
Certain prior period amounts have been
reclassified to conform to the current year’s
presentation. Amounts and percentages may not total due
to rounding.
The information at December 31, 2016 in
the Company’s Condensed Consolidated Balance Sheets included
in this quarterly report was derived from the audited Consolidated
Balance Sheets included in the Company’s 2016 Annual Report
on Form 10-K filed with the SEC on February 14, 2017. The
Company’s 2016 Annual Report on Form 10-K, together with the
information incorporated by reference into such report, is referred
to in this quarterly report as the “2016 Annual
Report.” This quarterly report should be read in conjunction
with the 2016 Annual Report.
Year-end
In
October 2016, the Company changed its fiscal year-end from November
30 to December 31.
Use of Estimates
The
preparation of financial statements in conformity with GAAP
requires estimates and assumptions that affect the reported amounts
of assets and liabilities, revenue and expenses, and related
disclosures of contingent assets and liabilities in the financial
statements and accompanying notes. Estimates are used for, but not
limited to, inventory valuation, depreciable lives, carrying value
of intangible assets, sales returns, receivables valuation,
restructuring-related liabilities, taxes, and contingencies. Actual
results could differ materially from those estimates.
Earnings (Loss) Per Share
The
Company follows the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) Topic 260,
Earnings per share
. Basic earnings per
common share (“EPS”) calculations are determined by
dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the period. Diluted earnings
(loss) per common share calculations are determined by dividing net
income (loss) by the weighted average number of common shares and
dilutive common share equivalents outstanding. During periods when
common stock equivalents, if any, are anti-dilutive they are not
considered in the computation.
Revenue Recognition
Revenue is derived from two primary
sources:
(1)
the Company’s online marketplace, which is
our largest source of revenue and includes: (i) the sale of used
vehicles through consumer, dealers and auction sales channels;
(ii) online listing and sales fees; (iii) retail
merchandise sales; (iv) vehicle financing; and
(v) vehicle service contracts
;
and (2) subscription and other fees relating to
the RumbleOn software solution, which includes: (i) a vehicle
appraisal process; (ii) inventory management system;
(iii) customer relationship and lead management program; and
(iv) equity mining.
The
Company recognizes revenue when all of the following conditions are
satisfied: (i) there is persuasive evidence of an arrangement;
(ii) the product or service has been provided to the customer;
(iii) the amount to be paid by the customer is fixed or
determinable; and (iv) the collection of the Company’s
payment is probable.
Used Vehicle Sales
The Company sells used vehicles to consumers,
dealers and at auctions. The source of these vehicles is primarily
from the Company’s Sell Us Your Vehicle
Program and customers who trade-in their existing
vehicles when making a used vehicle purchase.
Revenue from used
vehicle sales is recognized when the vehicle is delivered to a
consumer, dealer or auction, a sales contract is signed,
and
the purchase price has either been received or
collectability has been established. We guarantee the vehicles we
sell with a 3-day, money-back guarantee. Used vehicle sales revenue
is recognized net of a reserve for returns, which is based on
historical experience and trends.
Online Listing and Sales Fees
The
Company charges a non-refundable fee for sellers to list their
vehicle on the RumbleOn website. During the listing period, the
Company manages all sales leads, handles all the documentation
necessary to complete a sale, accepts a buyer’s trade and
provides financing through third-party providers to the potential
buyer, if necessary.
Upon a successful sale, the
seller pays a fee which is based on the difference between the
actual retail sales price of the vehicle sold and the net proceeds
agreed to be paid by RumbleOn to the seller when the listing
agreement was signed. Revenue from non-refundable online listing
fees is recognized once the listing agreement is signed, the
vehicle is listed for sale and the listing fee has been received.
Revenue for selling fees is recognized upon delivery of the vehicle
to the customer, when the sales contract is signed,
and the
purchase price has either been received or collectability has been
established.
Retail Merchandise Sales
The
Company recognizes sales revenue, net of sales taxes at the time it
sells the merchandise or in the case of online sales when the
merchandise is delivered to the customer and payment has been
received.
Vehicle Financing
Consumers can pay for their vehicle
using cash or the Company offers a range of finance options through
unrelated third-parties such as banks or credit unions. These
third-party providers generally pay the Company a
fee either in a flat amount or in an
amount equal to the difference between the interest rates charged
to customers over the predetermined interest rates set by the
financial institution.
The Company may be charged back for commissions in
the event a contract is prepaid, defaulted upon, or
terminated.
Revenue
for these finance fees are recognized
upon delivery of the
vehicle to the customer, when the sales contract is signed, and the
financing has been arranged.
Vehicle Service Contracts
At the
time of vehicle sale, the Company provides customers, on behalf of
unrelated third parties who are the primary obligors, a range of
other related products and services, including extended protection
plan (“EPP”) products and vehicle appearance
protection. EPP products include extended service plans
(“ESPs”) that are designed to cover unexpected expenses
associated with mechanical breakdowns and guaranteed asset
protection (“GAP”), which is intended to cover the
unpaid balance on a vehicle loan in the event of a total loss of
the vehicle or unrecovered theft. Vehicle appearance protection
includes products aimed at maintaining vehicle appearance.
The Company
receives commissions from the sale of
these product and service contracts and
has no contractual liability to
customers for claims under these products.
The
EPPs and vehicle appearance protection currently offered to
consumers provide coverage up to 60 months (subject to mileage
limitations), while GAP covers the customer for the term of their
finance contract.
Commission revenue
is recognized at the time of sale,
net of a reserve for estimated contract
cancellations. The reserve for cancellations is estimated based
upon historical industry experience and recent trends and is
reflected as a reduction of other sales revenue in the accompanying
Consolidated Statements of Operations and a component of accounts
payable and accrued liabilities in the accompanying Consolidated
Balance Sheets. Our risk related to contract cancellations is
limited to the revenue that we receive.
Subscription Fees
Subscription fees
are generated from dealer partners, under a license arrangement
that provides access to our software solution and ongoing support.
Select and Appraisal Dealers pay a monthly subscription fee for
access to and ongoing support for portions of the RumbleOn software
solution which includes: (i) a vehicle appraisal process;
(ii) inventory management system; (iii) customer
relationship and lead management program; and (iv) equity
mining.
Dealers may also be charged an
initial software installation and training fee. Dealers do not have
the contractual right to take possession of the software and may
cancel the license for these products and services by providing a
30-day notice. Installation and training do not have value to the
user without the license and ongoing support and maintenance.
Because the dealer partner has the right to cancel the license with
30 days’ notice, revenue for installation and training is
recognized when complete, acceptance has occurred, and
collectability of a determinable amount is probable. Revenue
recognition of monthly subscription fees commences upon completion
of installation, acceptance has occurred, and collectability of a
determinable amount is probable.
Purchase Accounting for Business Combinations
The
Company accounts for acquisitions by allocating the fair value of
the consideration transferred to the fair value of the assets
acquired and liabilities assumed on the date of the acquisition and
any remaining difference is recorded as goodwill. Adjustments may
be made to the preliminary purchase price allocation when facts and
circumstances that existed on the date of the acquisition surface
during the allocation period subsequent to the preliminary purchase
price allocation, not to exceed one year from the date of
acquisition. Contingent consideration is recorded at fair value
based on the facts and circumstances on the date of the acquisition
and any subsequent changes in the fair value are recorded through
earnings each reporting period.
Goodwill
Goodwill is not
amortized but rather tested for impairment at least annually. The
Company tests goodwill for impairment annually during the fourth
quarter of each year. Goodwill will also be tested for impairment
between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of the
reporting unit below its carrying amount. Impairment testing for
goodwill is done at the reporting unit level. A reporting unit is
an operating segment or one level below an operating segment (also
known as a component). A component of an operating segment is a
reporting unit if the component constitutes a business for which
discrete financial information is available, and management
regularly reviews the operating results of that component. The
Company has concluded that currently it has one reporting
unit.
Determining fair
value includes the use of significant estimates and assumptions.
Management utilizes an income approach, specifically the discounted
cash flow analysis as a means for estimating fair value. This
discounted cash flow analysis requires various assumptions
including those about future cash flows, transactional and customer
growth rates and discount rates. Expected cash flows are based on
historical customer growth and the growth in transactions,
including attrition, future strategic initiatives and continued
long-term growth of the business. The discount rates used for the
analysis reflect a weighted average cost of capital based on
industry and capital structure adjusted for equity risk and size
risk premiums. These estimates can be affected by factors such as
customer and transaction growth, pricing, and economic conditions
that can be difficult to predict.
Intangible Assets
Included in
“Intangible Assets” on the Company’s Condensed
Consolidated Balance Sheets are identifiable intangible assets
including customer relationships, non-compete agreements,
trademarks, trade names and internet domain names. The estimated
fair value of these intangible assets at the time of acquisition
are based upon various valuation techniques including replacement
cost and discounted future cash flow projections. Trademarks,
trade names and internet domain names are not amortized. Customer
relationships are amortized on a straight-line basis over the
expected average life of the acquired accounts, which are based
upon several factors, including historical longevity of customers
and contracts acquired and historical retention rates. Non-compete
agreements are amortized on a straight-line basis over the term of
the agreement, which will generally not exceed three years. The
Company reviews the recoverability of these assets if events or
circumstances indicate that the assets may be impaired and
periodically reevaluates the estimated remaining lives of these
assets.
Trademarks, trade
names and internet domain names are considered to be indefinite
lived intangible assets unless specific evidence exists that a
shorter life is more appropriate. Indefinite lived intangible
assets are tested for impairment, at a minimum, on an annual basis
using an income approach or sooner whenever events or changes in
circumstances indicate that an asset may be impaired.
Long-Lived Assets
Property and
equipment are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of an asset or
asset group may not be recoverable. Recoverability of assets to be
held and used are measured by a comparison of the carrying amount
of an asset to the future net cash flows expected to be generated
by the asset. If such assets or asset groups are considered to be
impaired, the impairment to be recognized will be measured by the
amount by which the carrying amount of the assets or asset groups
exceeds the related fair values. The Company also performs a
periodic assessment of the useful lives assigned to the long-lived
assets.
Technology Development Costs
Technology
development costs are accounted for pursuant to ASC
350,
Intangibles
— Goodwill and Other.
Technology development costs include internally developed software
and website applications that are used by the Company for its own
internal use and to provide services to its customers, which
include consumers, dealer partners and ancillary service providers.
Under the terms of these customer arrangements the Company retains
the revenue generating technology and hosts the applications on its
servers
and mobile
applications. The customer does not have a contractual right to
take possession of the software during the term of the arrangement
and are not permitted to run the software itself or contract with
another party unrelated to the entity to host the software.
Technology development costs consist principally of
(i) development activities including payroll and related
expenses billed by a third-party contractor involved in
application, content, production, maintenance, operation, and
platform development for new and existing products and services,
(ii) technology infrastructure expenses, and (iii) costs
of Company employees devoted to the development and maintenance of
software products. Technology and content costs for design,
maintenance and post-implementation stages of
internal-use software and general website development are expensed
as incurred. For costs incurred to develop new website
functionality as well as new software products and significant
upgrades to existing internally used platforms or
modules, capitalization begins during the application
development stage and ends when the software is available for
general use. Capitalized technology development is amortized
on a straight-line basis over periods ranging from 3 to 7 years.
The Company will perform periodic assessment of the useful lives
assigned to capitalized software applications. Additionally,
the Company from time-to-time may abandon additional development
activities relating to specific software projects or applications
and charge accumulated costs to technology development expense in
the period such determination is made.
Vehicle Inventory
Vehicle
inventory is accounted for pursuant to ASC 330,
Inventory
and consists of the cost to
acquire and recondition a used vehicle. Reconditioning costs are
billed by third-party providers and includes parts, labor, and
other repair expenses directly attributable to a specific vehicle.
Transportation costs are expensed as incurred. Inventory is stated
at the lower of cost or net realizable value. Vehicle inventory
cost is determined by specific identification. Net realizable value
is the estimated selling price less costs to complete, dispose and
transport the vehicles. Selling prices are derived from historical
data and trends, such as sales price and inventory turn times of
similar vehicles, as well as independent market resources. Each
reporting period, the Company recognizes any necessary adjustments
to reflect vehicle inventory at the lower of cost or net realizable
value through cost of sales in the accompanying Condensed
Consolidated Statements of Operations.
Valuation Allowance for Accounts Receivable
The
Company estimates the allowance for doubtful accounts for accounts
receivable by considering a number of factors, including overall
credit quality, age of outstanding balances, historical write-off
experience and specific account analysis that projects the ultimate
collectability of the outstanding balances. Ultimately, actual
results could differ from these assumptions.
Cash and Cash Equivalents
The
Company considers all cash accounts and all highly liquid
short-term investments purchased with an original maturity of three
months or less to be cash or cash equivalents. As of September 30,
2017 and 2016, the Company did not have any investments with
maturities greater than three months.
Property and Equipment, Net
Property and
equipment is stated at cost less accumulated depreciation and
amortization and consists of capitalized technology development
costs, furniture and equipment. Depreciation and amortization is
recorded on a straight-line basis over the estimated useful life of
the assets. Costs of significant additions, renewals and
betterments, are capitalized and depreciated. Maintenance and
repairs are charged to expense when incurred.
Fair Value of Financial Instruments
Fair
value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of
September 30, 2017. The respective carrying value of certain
on-balance-sheet financial instruments approximated their fair
values. These financial instruments include cash, prepaid expenses
and accounts payable. Fair values were assumed to approximate
carrying values for cash and payables because they are short term
in nature and their carrying amounts approximate fair values or
they are payable on demand.
ASC
Topic 820,
Fair Value
Measurement,
establishes a fair value hierarchy for inputs
used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring
the most observable inputs be used when available. Observable
inputs are from sources independent of the Company, whereas
unobservable inputs reflect the Company’s assumptions about
the inputs market participants would use in pricing the asset or
liability developed on the best information available in the
circumstances. The fair value hierarchy is categorized into three
levels based on the inputs as follows:
Level
1: The preferred inputs to valuation efforts are “quoted
prices in active markets for identical assets or
liabilities,” with the caveat that the reporting entity must
have access to that market. Information at this level is based on
direct observations of transactions involving the same assets and
liabilities, not assumptions, and thus offers superior reliability.
However, relatively few items, especially physical assets, actually
trade in active markets.
Level
2: FASB acknowledged that active markets for identical assets and
liabilities are relatively uncommon and, even when they do exist,
they may be too thin to provide reliable information. Inputs other
than quoted market prices included in Level 1, that are observable
for the asset or liability, either directly or indirectly, are
Level 2 inputs.
Level
3: If inputs from Levels 1 and 2 are not available, FASB
acknowledges that fair value measures of many assets and
liabilities are less precise. The board describes Level 3 inputs as
“unobservable,” and limits their use by saying they
“shall be used to measure fair value to the extent that
observable inputs are not available.” This category allows
“for situations in which there is little, if any, market
activity for the asset or liability at the measurement date.”
Earlier in the standard, FASB explains that “observable
inputs” are gathered from sources other than the reporting
company and that they are expected to reflect assumptions made by
market participants.
Beneficial Conversion Feature
From
time to time, the Company may issue convertible notes that may have
conversion prices that create an embedded beneficial conversion
feature pursuant to the guidelines established by the ASC Topic
470-20,
Debt with Conversion and
Other Options
. The Beneficial Conversion Feature
(“BCF”) of a convertible security is normally
characterized as the convertible portion or feature of certain
securities that provide a rate of conversion that is below market
value or in-the-money when issued. The Company records a BCF
related to the issuance of a convertible security when issued and
also records the estimated fair value of any conversion feature
issued with those securities. Beneficial conversion features that
are contingent upon the occurrence of a future event are recorded
when the contingency is resolved.
The BCF
of a convertible note is measured by allocating a portion of the
note’s proceeds to the conversion feature, if applicable, and
as a reduction of the carrying amount of the convertible note equal
to the intrinsic value of the conversion feature, both of which are
credited to additional paid in capital. The debt discount is
amortized to interest expense over the life of the note using the
effective interest method. The Company calculates the fair value of
the conversion feature embedded in any convertible security using
either a) the Black Scholes valuation model or b) a discount cash
flow analysis tested for sensitivity to key Level 3 inputs using
Monte Carlo simulation.
Cost of Revenue
Cost of
vehicle sales includes the cost to acquire vehicles and the
reconditioning and transportation costs associated with preparing
the vehicles for resale. Vehicle acquisition costs are driven by
the mix of vehicles the Company acquires, the source of those
vehicles, and supply and demand dynamics in the vehicle market.
Reconditioning costs are billed by third-party providers and
include parts, labor, and other repair expenses directly
attributable to specific vehicles. Transportation costs consist of
costs incurred to transport the vehicles from the point of
acquisition or delivery. Cost of sales also includes any necessary
adjustments to reflect vehicle inventory at the lower of cost or
net realizable value.
Cost of
subscription and other fee revenue includes the (i) various
data feeds from third parties; (ii) hosting of the customer
facing website; (iii) commissions for new sales; and
(iv) implementation and training of new and existing
customers. These costs and expenses are charged to cost of revenue
as incurred.
Selling, General and Administrative Expenses
Selling, general
and administrative (“SG&A”) expenses primarily
include compensation and benefits, advertising and marketing,
professional fees, technology development expenses, rent and other
occupancy costs, insurance, travel and other administrative
expenses.
Advertising and Marketing Costs
Advertising and
marketing costs are expensed as incurred and are included in
selling, general and administrative expenses in the accompanying
Condensed Consolidated Statements of Operations. Advertising and
marketing expenses were $775,456 and $1,071,398, respectively for
the three and nine-month periods ended September 30, 2017. There
were no
advertising and
marketing costs incurred for the same periods in 2016.
Stock-Based Compensation
On
January 9, 2017, the Company’s Board of Directors approved,
subject to stockholder approval, the RumbleOn, Inc. 2017 Stock
Incentive Plan (the “Plan”) under which restricted
stock units (“RSUs”) and other equity awards may be
granted to employees and non-employee members of the Board of
Directors. On June 30, 2017, the Plan was approved by the Company's
stockholders at the 2017 Annual Meeting of Stockholders. The
Company estimates the fair value of awards granted under the Plan
on the date of grant. The fair value of an RSU is based on the
average of the high and low market prices of the Company’s
Class B Common Stock on the date of grant and is recognized as an
expense on a straight-line basis over its vesting period; to date,
the Company has only issued RSUs that vest over a three-year period
utilizing the following vesting schedule: (i) 20% on the first
anniversary of the grant date; (ii) 30% on the second
anniversary of the grant date; and (iii) 50% on the third
anniversary of the grant date. During the nine-month period ended
September 30, 2017, the Company granted 560,000 RSUs under the Plan
to members of the Board of Directors, officers and employees.
Compensation expense associated with RSU grants for the three and
nine-month periods ended September 30, 2017 was
$157,763
and $287,550,
respectively and is included in selling, general and administrative
expenses in the Condensed Consolidated Statements of
Operations.
Income Taxes
The
Company follows ASC Topic 740,
Income Taxes,
for recording the
provision for income taxes. Deferred tax assets and liabilities are
computed based upon the difference between the financial statement
and income tax basis of assets and liabilities using the enacted
marginal tax rate applicable when the related asset or liability is
expected to be realized or settled. Deferred income tax expenses or
benefits are based on the changes in the asset or liability each
period. If available evidence suggests that it is more likely than
not that some portion or all of the deferred tax assets will not be
realized, a valuation allowance is required to reduce the deferred
tax assets to the amount that is more likely than not to be
realized. Future changes in such valuation allowance are included
in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences
resulting from income and expense items reported for financial
accounting and tax purposes in different periods.
The
Company applies a more-likely-than-not recognition threshold for
all tax uncertainties. ASC Topic 740 only allows the recognition of
those tax benefits that have a greater than fifty percent
likelihood of being sustained upon examination by the taxing
authorities. As of September 30, 2017, the Company reviewed its tax
positions and determined there were no outstanding, or retroactive
tax positions with less than a fifty percent likelihood of being
sustained upon examination by the taxing authorities, therefore
this standard has not had a material effect on the
Company.
The
Company classifies tax-related penalties and net interest as income
tax expense. As of September 30, 2017, no income tax expense has
been incurred.
Recent Pronouncements
The
Company has adopted Accounting Standards Update 2015-11 Inventory
(Topic 330),
Simplifying the
Measurement of Inventory,
which requires inventory to be
stated at the lower of cost or net realizable value. Vehicle
inventory cost is determined by specific identification. Net
realizable value is the estimated selling price less costs to
complete, dispose and transport the vehicles. Selling prices are
derived from historical data and trends, such as sales price and
inventory turn times of similar vehicles, as well as independent,
market resources. Each reporting period the Company recognizes any
necessary adjustments to reflect vehicle inventory at the lower of
cost or net realizable value through cost of revenue in the
accompanying Condensed Consolidated Statements of
Operations.
NOTE 3 – ACQUISITIONS
On
February 8, 2017, the Company acquired substantially all of the
assets of NextGen in exchange for $750,000 in cash, plus 1,523,809
unregistered shares of Class B Common Stock of the Company, which
were issued at a negotiated fair value of $1.75 per share and a
subordinated secured promissory note issued by the Company in favor
of NextGen in the amount of $1,333,334 (the “NextGen
Note”). The NextGen Note matures on the third anniversary of
the closing date (the “Maturity Date”).
The
following table presents the purchase price consideration as of
September 30, 2017:
|
Issuance of
shares
|
$
2,666,666
|
|
Debt
|
1,333,334
|
|
Cash
paid
|
750,000
|
|
|
$
4,750,000
|
|
|
|
|
Net tangible assets
acquired:
|
|
|
Technology
development
|
$
1,400,000
|
|
Customer
contracts
|
10,000
|
|
Non-compete
agreements
|
100,000
|
|
Tangible assets
acquired
|
1,510,000
|
|
Goodwill
|
3,240,000
|
|
Total purchase
price
|
4,750,000
|
|
Less: Issuance of
shares
|
(2,666,666
)
|
|
Less: Debt
issued
|
(1,333,334
)
|
|
|
|
|
Cash
paid
|
$
750,000
|
Supplemental pro forma information
The
results of operations of NextGen since the acquisition date are
included in the accompanying Condensed Consolidated Financial
Statements.
The
following supplemental pro forma information presents the financial
results as if the acquisition of NextGen was made as of
January 1, 2017 for both the three and nine-month periods
ended September 30, 2017 and on January 1, 2016 for both the
three and nine-month periods ended
September 30, 2016.
Pro
forma adjustments for the nine-month period ended September 30,
2017 and 2016 primarily include adjustments to reflect additional
depreciation and amortization of $29,866 and $48,788, respectively,
related to technology development and identifiable intangible
assets recorded as part of the acquisition, and interest expense
related to the NextGen Note of $27,353 and $42,833,
respectively.
|
|
Three-Months
Ended
September
30,
|
Nine-Months
Ended
September
30,
|
|
|
|
|
|
|
|
Pro forma
revenue
|
$
3,706,142
|
$
45,606
|
$
3,868,079
|
$
100,006
|
|
Pro forma net
loss
|
$
(2,317,503
)
|
$
(567,401
)
|
$
(5,237,814
)
|
$
(1,625,690
)
|
|
Loss per share
- basic and fully diluted
|
$
(0.23
)
|
$
(0.08
)
|
$
(0.58
)
|
$
(0.23
)
|
|
Weighted-average
common shares and common stock equivalents outstanding basic and
fully diluted
|
10,018,541
|
7,023,809
|
9,105,429
|
7,023,809
|
NOTE 4 – PROPERTY AND EQUIPMENT, NET
The
following table summarizes property and equipment, net of
accumulated depreciation and amortization as of
September 30, 2017 and December 31,
2016:
|
|
|
|
|
Vehicles
|
$
472,870
|
$
-
|
|
Furniture and
equipment
|
127,306
|
-
|
|
Technology
development
|
1,835,097
|
-
|
|
Total property and
equipment
|
2,435,273
|
-
|
|
Less: accumulated
depreciation and amortization
|
268,947
|
-
|
|
Property and
equipment, net
|
$
2,166,326
|
$
-
|
At
September 30, 2017, capitalized technology development costs were
$1,835,097, which includes $1,400,000 of software acquired in the
NextGen transaction. For additional information, see Note 3 -
“Acquisitions.” Total technology development costs
incurred for the nine-month period ended September 30, 2017 were
$713,766, of which $435,097 was capitalized and $278,669 was
charged to expense in the accompanying Condensed Consolidated
Statements of Operations. The amortization of capitalized
technology development costs for the three and nine-month periods
ended September 30, 2017 was $89,429 and $219,374, respectively.
There were no technology development costs incurred and no
amortization of capitalized development costs for the same periods
in 2016. Depreciation expense on vehicles, furniture and equipment
for the three and nine-month periods ended September 30, 2017 was
$28,598 and $49,573, respectively. Depreciation on furniture and
equipment for the three and nine-month periods ended September 30,
2016 was $475 and $1,425, respectively.
NOTE 5 – INTANGIBLE ASSETS, NET
Intangible assets,
net consist of the following at September 30, 2017 and December 31,
2016:
|
|
|
|
Amortized Identifiable Intangible Assets:
|
|
|
|
|
|
Customer agreements
|
|
|
Balance
at December 31, 2016
|
$
-
|
|
Customers
acquired
|
10,000
|
|
Amortization
|
(3,750
)
|
|
Balance
at September 30, 2017
|
$
6,250
|
|
|
|
|
Non-compete agreements
|
|
|
Balance
at December 31, 2016
|
$
-
|
|
Agreements
|
100,000
|
|
Amortization
|
(30,000
)
|
|
Balance
at September 30, 2017
|
$
70,000
|
|
|
|
|
Unamortized Identifiable Intangible Assets:
|
|
|
Domain names
|
|
|
Balance
at December 31, 2016
|
$
45,515
|
|
Domain
names acquired
|
-
|
|
Impairment
or write down
|
-
|
|
Balance
at September 30, 2017
|
$
45,515
|
|
|
|
|
Intangible assets, net at September 30, 2017
|
$
121,765
|
Amortization
expense related to intangible assets for the three and nine-month
periods ended September 30, 2017 was $11,250 and $33,750,
respectively. The estimated future amortization expenses related to
identifiable intangible assets is as follows:
|
Remainder
through December 31, 2017
|
$
11,250
|
|
2018
|
45,000
|
|
2019
|
20,000
|
|
|
$
76,250
|
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES
The
following table summarizes accounts payable and other accrued
liabilities as of September 30, 2017 and December 31,
2016:
|
|
|
|
|
Accounts
payable
|
$
1,539,572
|
$
219,101
|
|
Sales
taxes
|
296
|
-
|
|
Accrued
compensation and benefits
|
354,790
|
-
|
|
Other
|
7,885
|
-
|
|
Total accounts
payable and accrued liabilities
|
$
1,902,543
|
$
219,101
|
NOTE 7 – NOTES PAYABLE
Notes
payable consisted of the following as of September 30, 2017
and December 31, 2016:
|
|
|
|
|
Notes
payable-NextGen dated February 8, 2017. Interest is payable
semi-annually at 6.5% through February 9, 2019 and 8.5% through
maturity which is February 8, 2020.
|
$
1,333,334
|
$
-
|
|
Notes
payable-private placement dated March 31, 2017. Interest is payable
at maturity and accrues at 6.5% through March 31, 2019 and 8.5%
through maturity which is March 31, 2020.
|
667,000
|
-
|
|
Convertible note
payable-related party dated July 13, 2016. Interest rate of 6.0%
which is accrued and paid at maturity. Note matures on July 26,
2026. Note is convertible into common stock, in whole at any
time before maturity at the option of the holder at $.75 per
share.
|
-
|
197,358
|
|
Senior Secured
Promissory Notes dated September 5, 2017. Interest rate of 5.0%
through December 31, 2017 and a rate of 10% through maturity which
is accrued and paid at maturity. Note matures on September 5,
2018.
|
1,650,000
|
|
|
Less: Debt
discount
|
(725,123
)
|
(196,076
)
|
|
|
$
2,925,211
|
$
1,282
|
|
Current portion
(net of $139,726 of debt discount)
|
1,510,274
|
-
|
|
Long-term
portion
|
$
1,414,937
|
$
1,282
|
Convertible Note Payable-Related Party
On July
13, 2016, the Company entered into an unsecured convertible note
(the “BHLP Note”) with Berrard Holdings, an entity
owned and controlled by a current officer and director, Mr.
Berrard, pursuant to which the Company was required to repay
$191,858 on or before July 13, 2026 plus interest at 6% per annum.
The BHLP Note was also convertible into common stock, in whole, at
any time before maturity at the option of the holder at the greater
of $0.06 per share or 50% of the price per share of the next
qualified financing which is defined as $500,000 or greater.
Effective August 31, 2016, the principal amount of the BHLP Note
was amended to include an additional $5,500 loaned to the Company,
on the same terms. On November 28, 2016, the Company completed its
qualified financing at $1.50 per share which established the
conversion price per share for the BHLP Note of $0.75 per share,
resulting in the principal amount of the BHLP Note being
convertible into 263,144 shares of Class B Common Stock. As
such, November 28, 2016 became the “commitment date”
for determining the value of the BHLP Note conversion feature.
Because there had been no trading in the Company’s common
stock since July 2014, other than the purchase by Berrard Holdings
of 99.5% of the outstanding shares in a single transaction, the
Company used the Monte Carlo simulation to determine the intrinsic
value of the conversion feature of the BHLP Note, which resulted in
a value in excess of the principal amount of the BHLP Note. Thus,
the Company recorded a note discount of $197,358 with the
corresponding amount as an addition to paid in capital. This note
discount was amortized to interest expense until the scheduled
maturity of the BHLP Note in July 2026 or until it was converted
using the effective interest method. On March 31, 2017, the Company
issued 275,312 shares of Class B Common Stock upon full conversion
of the BHLP Note, having an aggregate principal amount, including
accrued interest, of $206,484 and a conversion price of $0.75 per
share. In connection with the conversion of the BHLP Note, the
remaining debt discount of $196,076 was charged to interest expense
in the Condensed Consolidated Statements of Operations and the
related deferred tax liability was credited to additional paid in
capital in the Condensed Consolidated Balance Sheets.
Note Payable-NextGen
On
February 8, 2017, in connection with the acquisition of NextGen,
the Company issued a subordinated secured promissory note in favor
of NextGen in the amount of $1,333,334. Interest accrues and will
be paid semi-annually (i) at a rate of 6.5% annually from the
closing date through the second anniversary of such date and
(ii) at a rate of 8.5% annually from the second anniversary of
the closing date through the Maturity Date. Upon the occurrence of
any event of default, the outstanding balance under the NextGen
Note shall become immediately due and payable upon election of the
holder. The Company’s obligations under the NextGen Note are
secured by substantially all the assets of NextGen Pro, pursuant to
an Unconditional Guaranty Agreement (the “Guaranty
Agreement”), by and among NextGen and NextGen Pro, and a
related Security Agreement between the parties, each dated as of
February 8, 2017. Under the terms of the Guaranty Agreement,
NextGen Pro has agreed to guarantee the performance of all the
Company’s obligations under the NextGen Note. Interest
expense on the NextGen Notes for the three and nine-month periods
ended September 30, 2017 was $21,370 and $54,849,
respectively.
Notes Payable-Private Placement
On
March 31, 2017, the Company completed funding of the second tranche
of the 2016 Private Placement (as defined below). The investors
were issued 1,161,920 shares of Class B Common Stock of the Company
and promissory notes (the “Private Placement Notes”) in
the amount of $667,000, in consideration of cancellation of loan
agreements having an aggregate principal amount committed by the
purchasers of $1,350,000. Under the terms of the Private Placement
Notes, interest shall accrue on the outstanding and unpaid
principal amounts until paid in full. The Private Placement Notes
mature on March 31, 2020. Interest accrues at a rate of 6.5%
annually from the closing date through the second anniversary of
such date and at a rate of 8.5% annually from the second
anniversary of the closing date through the maturity date. Upon the
occurrence of any event of default, the outstanding balance under
the Private Placement Notes shall become immediately due and
payable upon election of the holders. Based on the relative fair
values attributed to the Class B Common Stock and promissory notes
issued in the 2016 Private Placement, the Company recorded a debt
discount on the promissory notes of $667,000 with the corresponding
amounts as addition to paid in capital. The debt discount is
amortized to interest expense until the scheduled maturity of the
Private Placement Notes in March 2020 using the effective interest
method. The effective interest rate at September 30, 2017 was
26.0%. Interest expense on the Private Placement Notes for the
three and nine-month periods ended September 30, 2017 was $94,885
and $184,943, respectively, which included debt discount
amortization of $41,979 and $81,603, respectively for the three and
nine-month periods ended September 30, 2017.
Notes Payable-Senior Secured Promissory Notes
On September 5, 2017, the Company executed Senior
Secured Promissory Notes (the “Notes”) in favor of
several investors, including certain executive officers and
directors of the Company, in the aggregate principal amount of
$1,650,000 (“Principal Amount”), which includes an
aggregate original issue discount of $150,000. The proceeds to the
Company from the Notes, net of original issuance discount, was
$1,500,000. The Notes are secured by an interest in all the
Company’s Collateral, as such term is defined in the
Notes.
The Notes mature on
September 5, 2018 and bear interest at a rate equal to 5% per annum
through December 31, 2017, and a rate of 10% per annum
thereafter. Interest is payable monthly in arrears.
Upon the
occurrence of any event of default, the outstanding balance under
the Notes shall become immediately due and payable upon election of
the holders
.
The Principal Amount
and any unpaid interest accrued thereon may be prepaid by the
Company at any time prior to the maturity date without premium or
penalty upon five days prior written notice to the noteholder. If
the Company consummates in one or more transactions financing of
any nature resulting in net proceeds available to the Company of
$5,000,000 or more, then the noteholders may require the Company to
prepay the Notes on thirty (30) days prior written notice to the
Company.
The original issue discount is amortized to
interest expense until the scheduled maturity of the Notes in
September 2018 using the effective interest method. The effective
interest rate at September 30, 2017 was 10.0%. Interest
expense on the Notes for the three and nine-month periods ended
September 30, 2017 was $15,925 which included $10,274 of
original issue discount amortization.
On October 23, 2017, the Company completed a
public offering
and used
approximately
$1,661,075
of the
net proceeds of the offering for the repayment of the Notes in the
aggregate principal amount of $1,650,000, plus accrued interest,
which resulted in the termination of the Notes.
For
additional information, see Note 15 “Subsequent
Events.”
NOTE 8 – STOCKHOLDERS’ EQUITY
On
November 28, 2016, the Company completed a private placement with
certain purchasers, with respect to the sale of an aggregate of
900,000 shares of common stock of the Company at a purchase price
of $1.50 per share for total consideration of $1,350,000 (the
“2016 Private Placement”). In connection with the 2016
Private Placement, the Company also entered into loan agreements,
pursuant to which the purchasers would loan to the Company their
pro rata share of up to $1,350,000 in the aggregate upon the
request of the Company at any time on or after January 31, 2017 and
before November 1, 2020. On March 31, 2017, the Company completed
the second tranche of the 2016 Private Placement. For additional
information, see Note 7 - “Notes Payable.”
On
January 9, 2017, the Company’s Board of Directors approved,
subject to stockholder approval, the adoption of the Plan. On June
30, 2017, the Plan was approved by the Company’s stockholders
at the 2017 Annual Meeting of Stockholders. The purposes of the
Plan are to attract, retain, reward and motivate talented,
motivated and loyal employees and other service providers
(“Eligible Individuals”) by providing them with an
opportunity to acquire or increase a proprietary interest in the
Company and to incentivize them to expend maximum effort for the
growth and success of the Company, so as to strengthen the
mutuality of the interests between such persons and the
stockholders of the Company. The Plan will allow the Company to
grant a variety of stock-based and cash-based awards to Eligible
Individuals. Twelve percent (12%) of the Company’s issued and
outstanding shares of Class B Common Stock from time to time are
reserved for issuance under the Plan. As of September 30,
2017, 9,018,541 shares are issued and outstanding, resulting in up
to 1,082,225 shares available for issuance under the Plan. As of
September 30, 2017, the Company has granted 560,000 RSUs under the
Plan to certain officers and employees of the Company. The
aggregate fair value of the RSUs was $2,103,500. The RSUs vest over
a three-year period as follows: (i) 20% on the first
anniversary of the grant date; (ii) 30% on the second
anniversary of the grant date; and (iii) 50% on the third
anniversary of the grant date. The fair value of the grant is
amortized over the period from the grant date through the vesting
dates. Compensation expense recognized for these grants for the
three and nine-month periods ended September 30, 2017 was
$157,763 and $287,550, respectively. The Company has approximately
$1,605,600 in unrecognized stock-based compensation, with an
average remaining vesting period of three years.
On
January 9, 2017, the Company’s Board of Directors and
stockholders holding 6,375,000 of the Company’s issued and
outstanding shares of common stock approved an amendment to the
Company’s Articles of Incorporation (the “Certificate
of Amendment”), to change the name of the Company to
RumbleOn, Inc. and to create an additional class of common stock of
the Company, which was effective on February 13, 2017 (the
“Effective Date”).
Immediately before
approving the Certificate of Amendment, the Company had authorized
100,000,000 shares of common stock, $0.001 par value (the
“Authorized Common Stock”), including 6,400,000 issued
and outstanding shares of common stock (the “Outstanding
Common Stock, and together with the Authorized Common Stock, the
“Common Stock”). Pursuant to the Certificate of
Amendment, the Company designated 1,000,000 shares of Authorized
Common Stock as Class A Common Stock (the “Class A Common
Stock”), which Class A Common Stock ranks pari passu with all
of the rights and privileges of the Common Stock, except that
holders of the Class A Common Stock are entitled to ten votes per
share of Class A Common Stock issued and outstanding, and all other
shares of Common Stock, including all shares of Outstanding Common
Stock shall be deemed Class B Common Stock (the “Class B
Common Stock”), which Class B Common Stock is identical to
the Class A Common Stock in all material respects, except that
holders of the Class B Common Stock are entitled to one vote per
share of Class B Common Stock issued and outstanding.
Also on
January 9, 2017, the Company’s Board of Directors and
stockholders holding 6,375,000 of the Company’s issued and
outstanding shares of common stock approved the issuance to
(i) Marshall Chesrown of 875,000 shares of Class A Common
Stock in exchange for an equal number of shares of Class B Common
Stock held by Mr. Chesrown, and (ii) Steven R. Berrard of
125,000 shares of Class A Common Stock in exchange for an equal
number of shares of Class B Common Stock held by Mr. Berrard,
effective at the time the Certificate of Amendment was filed with
the Secretary of State of Nevada.
On the
Effective Date, the Company filed the Certificate of Amendment with
the Secretary of State of the State of Nevada changing the
Company’s name to RumbleOn, Inc. and creating the Class A and
Class B Common Stock. Also on the Effective Date, the Company
issued an aggregate of 1,000,000 shares of Class A Common Stock to
Messrs. Chesrown and Berrard in exchange for an aggregate of
1,000,000 shares of Class B Common Stock held by them. Also on the
Effective Date, the Company amended its bylaws to reflect the name
change to RumbleOn, Inc. and to reflect the Company’s primary
place of business as Charlotte, North Carolina.
On
March 31, 2017, the Company completed the sale of 620,000
shares of Class B Common Stock, par value $0.001, at a price of
$4.00 per share for aggregate proceeds of $2,480,000 in the private
placement (the “2017 Private Placement”). Officers and
directors of the Company acquired 175,000 shares of Class B Common
Stock in the 2017 Private Placement. In May 2017, the Company
completed the sale of an additional 37,500 shares of Class B Common
Stock in the 2017 Private Placement. Proceeds from the 2017 Private
Placement were used to complete the launch of the Company’s
website,
www.rumbleon.com
,
acquire vehicle inventory, continue development of the
Company’s platform, and for working capital
purposes.
On June
30, 2017, the Company filed a Registration Statement on Form S-1
(the “Registration Statement”) with the SEC covering
the resale of 8,993,541 shares of Class B Common Stock issued in
the NextGen acquisition and the 2017 Private Placement and other
shares previously held by our stockholders, including our officers
and directors. The SEC declared the Registration Statement
effective on July 7, 2017. In connection with the filing of the
Registration Statement, our officers and directors and certain
stockholders entered into a lock-up agreement restricting, through
December 31, 2017, the resale of an aggregate of 6,848,800 shares
of our common stock held by them and subject to the Registration
Statement.
NOTE 9 – SELLING, GENERAL AND ADMINISTRATIVE
The
following table summarizes the detail of selling, general and
administrative expense for the three and nine-month periods ended
September 30, 2017 and 2016:
|
|
Three-months
ended
September
30,
|
Nine-months
ended
September
30,
|
|
|
|
|
|
|
|
Selling, general
and administrative:
|
|
|
|
|
|
Compensation and
related costs
|
$
1,028,819
|
$
-
|
$
1,951,911
|
$
-
|
|
Advertising and
marketing
|
752,017
|
-
|
1,060,195
|
-
|
|
Professional
fees
|
192,041
|
34,044
|
724,486
|
49,017
|
|
Technology
development
|
91,967
|
-
|
278,668
|
-
|
|
General and
administrative
|
261,199
|
2,662
|
674,956
|
9,118
|
|
|
$
2,326,043
|
$
36,706
|
$
4,690,216
|
$
58,135
|
NOTE 10 – SUPPLEMENTAL CASH FLOW INFORMATION
The
following table includes supplemental cash flow information,
including noncash investing and financing activity for the
nine-month periods ended September 30, 2017 and 2016.
|
|
Nine-Months Ended
September 30,
|
|
|
|
|
|
Cash
paid for interest
|
$
42,502
|
$
-
|
|
|
|
|
|
Note
payable issued on acquisition
|
$
1,333,334
|
$
-
|
|
|
|
|
|
Conversion
of notes payable-related party
|
$
206,484
|
$
-
|
|
|
|
|
|
Issuance
of shares for acquisition
|
$
2,666,666
|
$
-
|
NOTE 11 – INCOME TAXES
In
projecting the Company’s income tax expense for the year
ended December 31, 2017, management has concluded it is not likely
to recognize the benefit of its deferred tax asset, net of deferred
tax liabilities, and as a result a full valuation allowance will be
required. As such, no income tax benefit has been recorded for the
three and nine-month periods ended September 30, 2017 or
2016.
NOTE 12 — LOSS PER SHARE
Net
loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. The
computation of diluted net loss per share for the three-month and
nine-month periods ended September 30, 2017 did not include
560,000 of restricted stock units to purchase shares of Class B
Common Stock as their inclusion would be antidilutive. There were
no restricted stock units outstanding for the three and nine-month
periods ended September 30, 2016.
NOTE 13 – RELATED PARTY TRANSACTIONS
As of
December 31, 2015, the Company had loans of $141,000 and accrued
interest of $13,002 due to an entity that is owned and controlled
by a family member of an officer and director of the Company.
Interest expense on these loans for the three and nine-month period
ended September 30, 2016 was $2,878 and $7,431, respectively. All
convertible notes and related party notes outstanding as of July
13, 2016 were paid in full in July 2016.
As of
December 31, 2016, the Company had the BHLP Note payable of
$197,358 and accrued interest of $5,508 due to an entity that is
owned and controlled by a current officer and director of the
Company. On March 31, 2017, the Company issued 275,312 shares of
Class B Common Stock upon full conversion of the BHLP Note. The
accrued interest is included in accrued interest under Long-term
liabilities in the Condensed Consolidated Balance Sheets. For
additional information, see Note 7 - “Notes
Payable.”
On
March 31, 2017, the Company completed the sale of 620,000 shares of
Class B Common Stock in the 2017 Private Placement. Officers and
directors of the Company acquired 175,000 shares of Class B Common
Stock in the 2017 Private Placement. In May 2017, the Company
completed the sale of an additional 37,500 shares of Class B Common
Stock in the 2017 Private Placement. For additional information,
see Note 8 - “Stockholders’
Equity.”
A key
component of the Company’s business model is to use dealer
partners in the acquisition of motorcycles as well as utilize these
dealer partners to provide inspection, reconditioning and
distribution services. Correspondingly, the Company will earn fees
and transaction income, and the dealer partner may earn incremental
revenue and enhance profitability through increased sales, leads,
and fees from inspection, reconditioning and distribution programs.
In connection with the development of the dealer program, the
Company tested various aspects of the program by utilizing a
dealership (the “Test Dealer”) to which Mr. Chesrown,
the Company’s Chief Executive Officer has provided financing
in the form of a $400,000 convertible promissory note. The note
matures on May 1, 2019, interest is payable monthly at 5% per annum
and can be converted into a 25% ownership interest in the Test
Dealer at any time. The Test Dealer is expected to be named a
Select Dealer by an agreement with the same material terms as the
Company’s other Select Dealer agreements. Revenue generated
by the Company from the Test Dealer for the three and nine-month
periods ended September 30, 2017 was $924,069 and $946,824,
respectively. Included in accounts receivable at September 30, 2017
is $264,464 owed to the Company by the Test Dealer.
In
connection with the NextGen acquisition, the Company entered into a
Consulting Agreement (the “Consulting Agreement”) with
Kartik Kakarala, who formerly served as the Chief Executive Officer
of NextGen and now serves as a director of the Company. Pursuant to
the Consulting Agreement, Mr. Kakarala serves as a consultant to
the Company. The Consulting Agreement may be cancelled by either
party, effective upon delivery of a written notice to the other
party. Mr. Kakarala’s compensation pursuant to the Consulting
Agreement is $5,000 per month. For the three and nine-month periods
ended September 30, 2017, the Company paid $15,000 and $35,000,
respectively under the Consulting Agreement. These amounts are
included in selling, general and administrative expenses in the
Condensed Consolidated Statements of Operations. For additional
information, see Note 3 -
“Acquisitions.”
In
connection with the NextGen acquisition, the Company entered into a
Services Agreement (the “Services Agreement”) with
Halcyon Consulting, LLC (“Halcyon”), to provide
development and support services to the Company. Mr. Kakarala
currently serves as the Chief Executive Officer of Halcyon.
Pursuant to the Services Agreement, the Company will pay Halcyon
hourly fees for specific services, set forth in the Services
Agreement, and such fees may increase on an annual basis, provided
that the rates may not be higher than 110% of the immediately
preceding year’s rates. The Company will reimburse Halcyon
for any reasonable travel and pre-approved out-of-pocket expenses
in connection with its services to the Company. For the three and
nine-month periods ended September 30, 2017 the Company paid
$221,400 and $678,766, respectively under the Services
Agreement.
As of
September 30, 2017, the Company had promissory notes of $370,556
and accrued interest of $12,076 due to an entity controlled by a
director and to the director of the Company. The promissory notes
were issued in connection with the completion of the 2016 Private
Placement on March 31, 2017. Interest expense on the promissory
notes for the three and nine-month periods ended September 30, 2017
was $29,392 and $63,416, respectively, which included debt discount
amortization of $23,321 and $45,335, respectively for the three and
nine-month periods ended September 30, 2017. The interest was
charged to interest expense in the Condensed Consolidated
Statements of Operations and included in accrued interest under
long-term liabilities in the Condensed Consolidated Balance
Sheets.
On
September 5, 2017, the Company executed Senior Secured Promissory
Notes (the “Notes”) in favor of several investors,
including certain executive officers and directors of the Company,
in the aggregate principal amount of $1,650,000 (“Principal
Amount”), which includes an aggregate original issue discount
of $150,000. As of September 30, 2017, the Company had Notes of
$1,214,144 and accrued interest of $4,144 due to certain executive
officers and directors of the Company. Interest expense on the
Notes due to certain executive officers and directors for the three
and nine-month periods ended September 30, 2017 was $11,678, which
included $7,534 of original issue discount amortization. On October
23, 2017, the Company completed a public offering and used
$1,661,075 of the net proceeds of the offering for the repayment of
the Notes in the aggregate principal amount of $1,650,000, plus
accrued interest, which resulted in the termination of the Notes.
For additional information, see Note 7 - “Notes
Payable” and Note 15 “Subsequent
Events.”
NOTE 14 – COMMITMENTS AND
CONTINGENCIES
The
Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. Although occasional adverse
decisions (or settlements) may occur, the Company believes that the
final disposition of such matters will not have a material adverse
effect on the Company’s financial position, results of
operations or cash flows.
NOTE 15 – SUBSEQUENT EVENTS
On October 23, 2017, the
Company completed an underwritten public offering of 2,910,000
shares of Class B common stock at a public offering price
of $5.50 per share
for net proceeds to the Company
of approximately $
14,500,000
after deducting the
underwriting discount and offering fees and expenses payable by the
Company (the “Offering”). The Company also granted the
underwriters a 30-day option, which expires on November 19, 2017,
to purchase up to an additional 436,500 shares of Class B common
stock to cover over-allotments.
The Company
used $1,661,075 of
the net proceeds of the Offering for the repayment of the Senior
Secured Promissory Notes in the aggregate principal amount of
$1,650,000, plus accrued interest, which resulted in the
termination of the Senior Secured Promissory Notes. The
Company
intends to use the
remaining net proceeds of the Offering for working capital and
general corporate purposes, which may include purchases of
additional inventory held for sale, increased spending on marketing
and advertising and capital expenditures necessary to grow the
business.
In
connection with the Offering, on October 23, 2017, the Company
issued to the representatives of the underwriters warrants to
purchase 218,250 shares of Class B common stock, which is equal to
7.5% of the aggregate number of shares of Class B common stock sold
in the Offering (the “Representatives’
Warrants”). The Representatives’ Warrants are
exercisable at a per share price of $6.325, which is equal to 115%
of the Offering price per share of the shares sold in the Offering.
The Representatives’ Warrants are exercisable at any time and
from time to time, in whole or in part, during the four-year period
commencing one year from the effective date of the registration
statement related to the Offering.
Also,
in connection with the Offering, on October 19, 2017, the Class B
Common Stock uplisted from the OTCQB and began trading on The
NASDAQ Capital Market under the symbol
“RMBL.”
On November 2, 2017, the Company
through its wholly-owned subsidiary RMBL Missouri, LLC (the
“Borrower”), entered into a floor plan line of credit
(the "Credit Line") with NextGear Capital, Inc. (the
“Lender”) in the amount of $2,000,000, or such lesser
sum which may be advanced to or on behalf of the Borrower from time
to time, pursuant to that certain Demand Promissory Note and Loan
and Security Agreement. Any advance under the Credit Line bears
interest on a per annum basis from the date of the request of such
advance (or date of the financed receivable, as applicable), based
upon a 360-day year, and such interest shall be compounded daily
until such outstanding advances are paid in full at a rate of
interest set forth in schedules published by the Lender. As of
November 2, 2017, the effective rate of interest is
6.5%.
Advances and interest under the Credit Line are due and payable
upon demand, but, in general, in no event later than 150 days from
the date of request for the advance (or the date of purchase in the
case of a universal funding agreement), or of the receivable, as
applicable. Upon any event of default (including, without
limitation, the Borrower’s obligation to pay upon demand any
outstanding liabilities of the Credit Line), Lender may, at its
option and without notice to the Borrower, exercise its right to
demand immediate payment of all liabilities and other indebtedness
and amounts owed to Lender and its affiliates by the Borrower and
its affiliates. The Credit Line is secured by a grant of a security
interest in the vehicle inventory and other assets of the Borrower
and payment is guaranteed by the Company pursuant to a guaranty in
favor of the Lender and its affiliates.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
This Quarterly Report on Form 10-Q contains forward-looking
statements. Any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
The words “believes,” “anticipates,”
“plans,” “expects,” “intends”
and similar expressions identify some of the forward-looking
statements. Forward-looking statements are not guarantees of
performance or future results and involve risks, uncertainties and
assumptions. The factors discussed elsewhere in this Form 10-Q and
in subsequent Quarterly Reports on Form 10-Q, Annual Reports on
Form 10-K, and Current Reports on Form 8-K could also cause actual
results to differ materially from those indicated by the
Company’s forward-looking statements. The Company undertakes
no obligation to publicly update or revise any forward-looking
statements, except as required by law.
OVERVIEW
We
operate a capital light disruptive e-commerce platform facilitating
the ability of both consumers and dealers to Buy-Sell-Trade-Finance
pre-owned motorcycle and other power sport and recreation vehicles
(“power/recreation vehicles”) in one online location.
Our goal is to transform the way motorcycles and other
power/recreation vehicles are bought and sold by providing users
with the most efficient, timely and transparent transaction
experience. Our initial focus is the market for 601cc and larger
on-road motorcycles. We will look to extend to additional
power/recreation vehicle types and products as the platform
matures, including ATVs, personal watercraft, snowmobiles,
side-by-sides, boats, and both towable and motor coach
RVs.
Serving
both consumers and dealers, through our online platform, we make
cash offers for the purchase of their vehicles and intend to
provide them the flexibility to trade, list, or auction their
vehicle through our website and mobile applications. In addition,
we offer a large inventory of used vehicles for sale along with
third-party financing and associated products. Our operations are
designed to be scalable by working through an infrastructure and
capital light model that is achievable by virtue of a synergistic
relationship with dealer partners. We utilize dealer partners in
the acquisition of motorcycles as well as to provide inspection,
reconditioning and distribution services. Correspondingly, we earn
fees and transaction income, and dealer partners will earn
incremental revenue and enhance profitability through increased
sales, leads, and fees from inspection, reconditioning and
distribution programs.
Our
business model is driven by a technology platform we acquired in
February 2017, through our acquisition of substantially all of the
assets of NextGen. The acquired system provides integrated vehicle
appraisal, inventory management, customer relationship and lead
management, equity mining, and other key services necessary to
drive the online marketplace. Over the past 16 years, the
developers of the software have designed and built, for large
multi-national clients, a number of dealer and, what we believe to
be, high quality applications solutions.
Our
business combines a comprehensive online buying and selling
experience with a vertically-integrated supply chain that allows us
to buy and sell vehicles to consumers and dealer partners
transparently and efficiently at a value-oriented price. Using our
website or mobile application, consumers and dealers can complete
most phases of a used vehicle transaction. Our online buying and
selling experience allows consumers to:
●
Sell us a
vehicle.
We address the lack
of liquidity available in the market for a cash sale of a vehicle
by dealers and consumers through our
Sell Us Your Vehicle Program. Dealers and
consumers can sell us a vehicle independent of a purchase. Using
our free online or mobile appraisal tool, consumers and dealers can
complete a short appraisal form and receive a haggle-free,
guaranteed 3-day firm cash offer for their vehicle within minutes
and, if accepted, receive payment in a few days or less. Our cash
offer to buy is based on the use of extensive used retail and
wholesale vehicle market data. When a consumer accepts our offer,
we ship their vehicles to our closest dealer partner where the
vehicle is inspected, reconditioned and stored pending sale.
We believe buying used vehicles
directly from consumers will be the primary driver of our source of
supply for sale and a key to our ability to offer competitive
pricing to buyers. By being one of the few sources for consumers to
receive cash for their vehicle, we have a significant opportunity
to buy product at a lower cost since dealer and auction markup is
eliminated from these consumer purchases. In addition, we believe
our willingness to appraise and purchase a customer’s
vehicle, whether or not the customer is buying a vehicle from us,
provides a competitive sourcing advantage for
vehicles.
●
List a
vehicle.
The current market
for listing motorcycles and other power sport vehicles is
inefficient and ineffective in that a majority of the transactions
are conducted through peer-to-peer transactions, which do not
facilitate making cash offers, accepting trades or providing
financing to the buyer. Our listing options and comprehensive
transaction support addresses the shortcomings that currently exist
in the market for listing a vehicle for sale while allowing dealers
and consumers an opportunity to utilize a simple, efficient and
effective process. Consumers who do no not accept our cash offer
can pay a fee to list their vehicle on
RumbleOn.com
and
other available listing sites. During the listing period, our cash
offer is extended, and we manage all sales leads, handle all the
documentation necessary to complete a sale and accept a buyer trade
and provide a range of third-party finance options and vehicle
service contracts to the buyer, if necessary. Upon the sale of a
listed vehicle, we earn a fee separate and apart from the listing
fee. Dealer partners do not pay a fee to list their
vehicles.
●
Purchase a
used vehicle.
Our 100% online
approach to retail and wholesale distribution addresses the many
issues currently facing the retail and wholesale distribution
marketplace for power/recreation vehicles, a marketplace we believe
is primed for a disruptive change. We believe the issues facing the
marketplace include: (i) heavy use of inefficient listing sites,
(ii) a highly fragmented dealer network; (iii) a limited selection
of used vehicles for sale; (iv) negative consumer perception of the
current buying experience; and (v) a massive consumer shift to
online retail. We offer dealers and consumers a large selection of
vehicles at a value-oriented price that can be purchased in a
seamless transaction in minutes. In addition to a transparent
buying experience, our no haggle pricing, coupled with an
inspected, reconditioned and certified vehicle, backed by a
fender-to-fender warranty and a 3-day money back guarantee,
addresses consumer dissatisfaction with the current buying
processes in the marketplace. As of October 31, 2017,
including vehicles of our dealer partners, we have
approximately
550
vehicles
listed for sale on our website, where consumers can select and
purchase a vehicle, including arranging financing, directly from
their desktop or mobile device. Selling used vehicles to dealers
and consumers is the key driver of our
business.
●
Finance a
purchase.
Customers can pay
for their vehicle using cash or we will provide a range of finance
options from unrelated third parties such as banks or credit
unions. Customers fill out a short online application form, and, if
approved, apply the financing to their purchase in our online
checkout process.
●
Protect a
purchase.
Customers have the
option to protect their vehicle with unrelated third-party branded
EPPs and vehicle appearance protection products as part of our
online checkout process. EPPs include extended service plans which
are designed to cover unexpected expenses associated with
mechanical breakdowns and guaranteed asset protection,
which is intended to cover the unpaid balance on a vehicle
loan in the event of a total loss of the vehicle or unrecovered
theft. Vehicle appearance protection includes products aimed at
maintaining vehicle appearance.
To
enable a seamless dealer and consumer experience, we are building a
vertically-integrated used vehicle supply chain, supported by
proprietary software systems and data which include the following
attributes:
●
Vehicle
sourcing and acquisition.
We
acquire a significant percentage of our used vehicle inventory
directly from consumers and dealers through our Sell Us Your
Vehicle Program. We also, to a lesser extent, acquire vehicles from
auctions and directly from used vehicle suppliers, including
franchise and independent dealers and finance and leasing
companies. Using used retail and wholesale vehicle market data
obtained from a variety of internal and external sources, we
evaluate a significant number of vehicles daily to determine their
fit with consumer demand, internal profitability targets and our
existing inventory mix. The supply of used vehicles is influenced
by a variety of factors, including: the total number of vehicles in
operation; the rate of new vehicle sales, which in turn generate
used vehicle trade-ins; and the number of used vehicles sold or
remarketed through retail channels, wholesale transactions and at
auctions. Based on the large number of vehicles remarketed each
year, consumer acceptance of our online vehicle appraisal process,
our experience and success in acquiring vehicles from auctions and
other sources and the large size of the United States market
relative to our needs, we believe that sources of used vehicles
will continue to be sufficient to meet our current and future
needs.
●
Inspection,
reconditioning and logistics.
After acquiring a
vehicle, we transport it to one of our dealer partners who is paid
to perform an inspection and to recondition the vehicle to meet
“RumbleOn Certified” standards. High quality
photographs are then taken, the vehicle is listed for sale on
Rumbleon.com and the dealer partner stores the vehicle pending
delivery to the buyer. This process is supported by a custom used
vehicle inventory management system, which tracks vehicles through
each stage of the inspection, reconditioning and logistic process.
The ability to leverage and provide a high margin source of
incremental revenue to the existing network of dealer partners in
return for providing inspection, reconditioning, logistics and
distribution support reduces our need for any significant
investment in retail or reconditioning facilities.
Our Strategy
Our
strategy is to provide a complete online, direct, pre-owned
motorcycle and power/recreation vehicle marketplace solution for
both consumers and dealers, while providing dealers access to
additional software solutions and services allowing them to earn
incremental revenue and enhance profitability through increased
sales leads, and fees earned from inspection, reconditioning and
distribution programs. The recognition of the need for our
solutions is the result of our management team gaining a clear
understanding of the key drivers of complete supply chain solutions
necessary to create a different and disruptive way to both acquire
and distribute cars and trucks online from their deep experience in
the automotive sector with disruptive businesses such as:
AutoNation, Auto America, and Vroom. We believe that there is a
significant opportunity to disrupt the pre-owned marketplace in
recreational vehicles as it suffers from many of the same negative
consumer sentiments and dealer practices that existed in the
automotive sector prior to the advent of and the significant influx
of new entrants with improved business models. In addition, the
power/recreation vehicle segment lacks the significant competition
that exists in the automotive sector due to its fragmented dealer
network, relative size and the niche nature of its products.
Management believes consumers prefer to purchase and sell through a
well-designed online/mobile solution, with a broad selection of
vehicles at highly competitive prices. We believe that our
applications will provide appraisal, cash-offer, vehicle listing,
financing options, and logistics/delivery solutions designed to
provide an exceptional consumer experience. We intend to replicate
and improve upon the positive attributes of the various “sell
us your car” and other related programs that have proven
successful in automotive retail for entities such as AutoNation,
CarMax, Carvana, Vroom and others.
Our
dealer strategy is focused on creating a synergistic relationship
wherein dealers will have the ability to leverage the RumbleOn
marketplace and dealer services offerings to drive increased
revenue through the purchase or sale of vehicles via the online
platform and the ability to earn fees from inspection,
reconditioning and distribution programs. Dealer partners will have
the ability to show the complete RumbleOn vehicle inventory on
their website and will have access to preferred pricing on the
acquisition of vehicles. Management believes that partners
utilizing the platform will significantly enhance their existing
online retail strategies. We have agreed to add dealers to our
network and are in discussions with other dealers regarding joining
the network. We believe that our operations, designed to be both
capital and infrastructure light, will leverage the dealer network
to provide inspection, reconditioning and distribution, thus
minimizing the number of warehouse locations, reconditioning
centers and logistics facilities we operate. We plan to primarily
operate a centralized headquarter, call center, and limited number
of strategically located warehouses as needed.
Our
initial focus on pre-owned Harley-Davidson motorcycles provides a
targeted, identifiable segment to establish the functionality of
the platform and the RumbleOn brand. Harley-Davidson is a highly
regarded and dominant brand (representing approximately 50% market
share of new 601cc+ on-road motorcycles according to both
Harley-Davidson public filings and the Motorcycle Industry Council)
in the motorcycle market, with a base of over three million
pre-owned motorcycles registered for use in the United States.
According to Harley-Davidson, as disclosed in their 2017 investor
meeting presentation, and management estimates, each year
approximately 400,000 pre-owned Harley-Davidsons are sold, with
Harley-Davidson dealers selling approximately 125,000 units,
250,000 units sold in private consumer and independent dealer
transactions, and 25,000 sold via other means. Further, as
Harley-Davidson discussed in its 2017 investor meeting
presentation, their objective is to build two million new
Harley-Davidson riders in the United States in the next 10 years,
principally, we believe, via brand marketing and product
development, estimated at $70 million in 2016, dealer hosted
experiences and the Harley-Davidson Riding Academy. We believe such
efforts will benefit us as, per Harley-Davidson’s 2017
investor meeting presentation, there are 2.4 million owners of
non-Harley-Davidson motorcycles, and 15.0 million people who
don’t currently own a motorcycle, who have an interest in
Harley-Davidson and are planning to purchase a motorcycle within
three years. Further, Harley-Davidson’s estimates that there
are 7.8. million motorcycle license holders who do not currently
own a motorcycle and that the sale of used Harley-Davidson
motorcycles to young adults (ages 18-34) was three times the sale
of new Harley-Davidson motorcycles to the same age group. These
statistics support our contention that there is expected to be a
growing market for used Harley-Davison transactions and a more
informed buyer.
We
believe that we may potentially enjoy a halo effect from
Harley-Davidson’s advertising as not all young new buyers
will purchase new motorcycles. Our extension into the
“metric” brands (Honda, Yamaha, Kawasaki, Suzuki, etc.)
essentially doubles the available market and is a natural extension
as these vehicles are often sold or traded for Harley-Davidson
vehicles. The metric market and dealer profile closely mirror that
of the Harley-Davidson market although it is more highly
fragmented. In addition, many of the metric dealers also retail
ATVs, UTVs, snowmobiles and personal watercraft providing the next
organic product extension leveraging existing dealer
relationships.
Our Growth Strategy
We
intend to transform the way recreational vehicles are bought and
sold and thereby significantly grow our business and gain market
share by targeting the large number of private consumer peer to
peer transactions driven by listing only sites such as Craigslist.
Management estimates the market for annual used motorcycle sales
today at approximately 800,000 units sold, or approximately $7.5
billion of sales. Management believes approximately 50% or more of
these transactions are completed on a peer to peer basis. We
believe these transactions are highly inefficient and consumers
view the process as cumbersome. Our online consumer direct sourcing
strategy, wherein we make a cash offer to a consumer or dealer
utilizing our website or mobile application allows us to deliver
value pricing on our vehicles for sale. We believe our large-scale
inventory of vehicles for sale, coupled with our online platform,
transparent selling process, certified and reconditioned vehicles
and ability to offer financing and ancillary products provides a
unique customer experience as compared to current alternatives when
purchasing a vehicle. We believe we can aggressively drive RumbleOn
brand recognition and awareness at a relatively low expense by
utilizing digital, social media and guerrilla marketing techniques,
as there are few national competitors and consumers are very brand
focused and loyal. For example, approximately 15 key motorcycle
events, such as Daytona Bike Week and the Sturgis Bike Rally
attract millions of attendees annually, many of whom are both
motorcycle enthusiasts and Harley-Davidson consumers. We intend to
have a significant presence at these events, with onsite
advertising and sales facilities to build brand awareness. In
addition, we anticipate engaging with or sponsoring motorcycle
groups, providing us a targeted audience to which to market
RumbleOn and showcase the ease with which they can buy, sell, or
trade motorcycles. Once motorcycle enthusiasts have sampled our
website, we believe the unique experience will be compelling and
drive organic growth. Over time, management believes we will build
a proprietary database of customers and their interests, which will
facilitate customer retention and cross sell
activities.
Our Market
We
operate in a market with significant scale and breadth of products.
The Motorcycle Industry Council estimates that in 2014, 9.2 million
people owned 10.1 million motorcycles in the United States. 87% of
these were on-highway models, our initial targeted segment.
According to the Powersports Business 2016 Market Data Book, or the
2016 Market Datebook
,
used motorcycle
registrations were 1.1 million units in 2015 with new unit sales of
approximately 573,000 or approximately $7 billion in new vehicle
sales. The owner demographic is favorable to the market outlook as
millennials and baby boomers are maturing into the median ranges.
The owner group is characterized by brand loyal riding enthusiasts.
According to the Motorcycle Industry Council, in 2014 the median
owner age was 47 years with a median income of $62,200 which is
approximately 10% above the United States’ average. The
dealer market is fragmented with an estimated 4,600 retail outlets
authorized to sell new motorcycles, scooter, and all-terrain
vehicles.
The
ATV, UTV/side-by-side, snowmobile and personal watercraft vehicle,
or PWC, markets, are a logical next extension for our platform, as
there is significant overlap in the motorcycle dealer base with
dealers of these products. According to data from Power Product
Marketing and the 2016 Market Data Book, there were approximately
630,000 sales of ATV/UTV/Side-by-sides in 2015. There are
approximately 1.2 million snowmobiles registered in the United
States (another 600,000 in Canada) and in 2016, approximately
95,000 snowmobiles were sold in the United States and Canada.
Lastly, according the National Marine Manufacturers Association and
the Personal Watercraft Industry Association, in 2015 there were
more than 54,000 new PWCs sold in the United States and there are
currently approximately 1.2 million PWCs registered in the United
States.
As we
look to further extend the platform, the two largest adjacent
segments are represented by the recreational boating and
recreational vehicle (
motor vehicle or trailer equipped
with living space and amenities found in a home)
industries.
According to the National Marine Manufacturers Association, there
were approximately 15.7 million recreational boats in the United
States in 2014, and there were approximately 940,000 sales of
pre-owned boats in 2014. Correspondingly, the Recreational Vehicle
Industry Association estimates that currently more than 8.9 million
households own an RV and in 2017 there will be over 470,000
shipments of RVs from manufacturers to dealers.
Competition
We face
competition in all our business segments. The United States used
recreational vehicle marketplace is highly fragmented, and we face
competition from franchised dealers, who sell both new and used
vehicles; independent dealers; online and mobile sales platforms;
and private parties. We believe that the principal competitive
factors in our industry are delivering an outstanding consumer
experience, competitive sourcing of vehicles, breadth and depth of
product selection, and value pricing. Our competitors vary in size
and breadth of their product offerings. We believe that our
principal competitive advantages in used vehicle retailing will
include our ability to provide a high degree of customer
satisfaction with the buying experience by virtue of our low,
no-haggle prices and our online platform including our website and
mobile application and our ability to make a cash offer to purchase
a vehicle or offer listing alternatives coupled with our
customer-friendly sales process and our breadth of selection of the
most popular makes and models available on our website. In
addition, we believe our willingness to appraise and purchase a
customer’s vehicle, whether or not the customer is buying a
vehicle from us, provides a competitive sourcing advantage for
retail vehicles allowing us to offer value-oriented
pricing. We believe the principal competitive factors
for our ancillary products and services include an ability to offer
a full suite of products at competitive prices delivered in an
efficient manner to the customer. We will compete with a variety of
entities in offering these products including banks, finance
companies, insurance and warranty providers and extended vehicle
service contract providers. We believe our competitive strengths in
this category will include our ability to deliver products in an
efficient manner to customers utilizing our technology and our
ability to partner with key participants in each category to offer
a full suite of products at competitive prices. Lastly, additional
competitors may enter the businesses in which we will
operate.
Seasonality
Historically, the
industry has been seasonal with traffic and sales strongest in the
spring and summer quarters which tracks closely with the timing of
regional riding seasons. Sales and traffic are typically
slowest in the fall quarter but increase in February and March,
coinciding with tax refund season.
Key Operation Metrics
As our
business expands we will regularly review a number of metrics, to
evaluate our business, measure our progress, and make strategic
decisions. Our key operating metrics reflect what we believe will
be the key drivers of our growth, including increasing brand
awareness, maximizing the opportunity to source the purchase of low
cost used vehicles from consumers and dealers while enhancing the
selection of vehicles we make available to our customers.
Our key
operating metrics also demonstrate our ability to translate these
drivers into sales and to monetize these retail sales through a
variety of product offerings.
|
|
Three-Months
Ended
September
30,
|
Nine- Months
Ended
September
30,
|
|
|
|
|
|
|
|
Units
sold:
|
|
|
|
|
|
Consumer
|
106
|
-
|
106
|
-
|
|
Dealer
|
165
|
-
|
175
|
-
|
|
Auction
|
42
|
-
|
42
|
-
|
|
|
313
|
-
|
323
|
-
|
|
Number
of Dealers
|
3
|
-
|
3
|
-
|
|
Average
monthly unique users
|
71,180
|
-
|
42,670
|
-
|
|
Inventory
units available on website
|
588
|
-
|
588
|
-
|
|
Average
days to sale
|
39
|
-
|
38
|
-
|
|
Total
average gross margin per unit$
|
$
760
|
$
-
|
$
736
|
$
-
|
Units Sold
We
define units sold as the number of used vehicles sold to consumers,
dealers and at auctions in each period, net of returns under our
three-day return policy. We view units sold as a key measure of our
growth for several reasons. First, units sold is the primary driver
of our revenue and, indirectly, gross profit, since unit sales
enable multiple complementary revenue streams, including financing,
vehicle service contracts and trade-ins. Second, growth in units
sold increases the base of available customers for referrals and
repeat sales. Third, growth in units sold is an indicator of our
ability to successfully scale our logistics, fulfillment, and
customer service operations.
Number of Dealers
Our operations are designed to be
scalable by working through an infrastructure and capital light
model that is achievable by virtue of a synergistic relationship
with dealer partners who we refer to as either Select or Appraisal
Dealers. We utilize these dealer partners in the acquisition of
motorcycles as well as to provide inspection, reconditioning and
distribution services. Correspondingly, we earn fees and
transaction income, and dealer partners will earn incremental
revenue and enhance profitability through increased sales, leads,
and fees from inspection, reconditioning and distribution programs.
We choose
Select or Appraisal Dealers based on their
geographic location and abilities as a dealer. As Select and
Appraisal Dealers are added throughout the U.S. the cost and time
associated with distribution programs will be significantly reduced
as the pickup and delivery of motorcycles will become more
localized thus lower shipping costs and reduce the average days to
sale for vehicles.
Average Monthly Unique Users
We
define a monthly unique user as an individual who has visited our
website within a calendar month, based on data provided by Google
Analytics. We calculate average monthly unique users as the sum of
monthly unique users in a given period, divided by the number of
months in that period. We view average monthly unique users as a
key indicator of the strength of our brand, the effectiveness of
our advertising and merchandising campaigns and consumer
awareness.
Inventory Units Available on Website
We
define inventory units available on Website as the number of
vehicles listed for sale on our website
on the last day of a
given reporting period. Until we
reach an optimal pooled inventory level, we view inventory units
available as a key measure of our growth. Growth in inventory units
available increases the selection of vehicles available to
consumers and dealers on a nationwide basis, which we believe will
allow us to increase the number of vehicles we sell
Average Days to Sale
We
define average days to sale as the average number of days between
vehicle acquisition by us and delivery to a customer for all used
units sold in a period. However, this metric does not include any
used units that remain unsold at period end. We view average days
to sale as a useful metric due to its impact on used vehicle
average selling price. We anticipate that that average days to sale
will increase in future periods until we reach an optimal pooled
inventory level and fully scale our acquisition and sales channel
processes.
Total Average Gross Margin per Unit
We
define total average gross margin per unit as the aggregate gross
margin in a given period divided by units sold in that period.
Total gross margin per unit is driven by sales of used vehicles
which, in many cases generates finance and vehicle service
contracts revenue. We believe gross margin per unit is a key
measure of our growth and long-term profitability.
COMPONENTS OF RESULTS OF OPERATIONS
Revenue
Revenue
is derived from two primary sources: (1) our online marketplace,
which is our largest source of revenue and includes: (i) the sale
of used vehicles through consumer, dealers and auction sales
channels; (ii) online listing and sales fees;
(iii) retail merchandise sales; (iv) vehicle financing;
and (v) vehicle service contracts; and (2) subscription
and other fees.
The
Company recognizes revenue when all of the following conditions are
satisfied: (i) there is persuasive evidence of an arrangement;
(ii) the product or service has been provided to the customer;
(iii) the amount to be paid by the customer is fixed or
determinable; and (iv) the collection of the Company’s
payment is probable.
See
Note 2 – “Summary of Significant Accounting
Policies – Revenue Recognition” for a further
description of the Company’s revenue
recognition.
Used Vehicle Sales
We sell
used vehicles through consumer, dealers and auction sales channels.
These multiple sales channels provide us the opportunity to
maximize profitability through increased sales volume and lower
average days to sale by selling to the channel where the
opportunity based on customer demand, market conditions or
inventory availability is the greatest at any given time. The
number of used units sold to any given channel may vary from period
to period based on customer demand, market conditions and available
inventory.
Used vehicle sales represent the
aggregate sales of used vehicles to consumers and dealers through
our website and sales at auctions.
We generate gross profit
on used vehicle sales from the difference between the vehicle
selling price and our cost of sales associated with acquiring the
vehicle and preparing it for sale. We expect used vehicle sales to
increase as we begin to utilize a combination of brand building as
well as direct response channels to efficiently source and scale
our addressable markets while expanding our suite of product
offerings to consumers who may wish to trade-in or to sell us their
vehicle independent of a retail sale. Factors affecting used
vehicle sales include the number of retail units sold and the
average selling price of these vehicles. At this stage of our
development, changes in both retail units sold and in average
selling price will drive changes in revenue.
The
number of used vehicles we sell depends on our volume of website
traffic, our inventory selection, the effectiveness of our branding
and marketing efforts, the quality of our customer sales
experience, our volume of referrals and repeat customers, the
competitiveness of our pricing, competition and general economic
conditions. On a quarterly basis, the number of used vehicles we
sell is also affected by seasonality, with demand for used vehicles
reaching the high point in the first half of each year,
commensurate with the timing of tax refunds, and diminishing
through the rest of the year, with the lowest relative level of
used vehicle sales expected to occur in the fourth calendar
quarter.
Our
average retail selling price depends on the mix of vehicles we
acquire and hold in inventory, retail market prices in our markets,
our average days to sale, and our pricing strategy. We may
opportunistically choose to shift our inventory mix to higher or
lower cost vehicles, or to opportunistically raise or lower our
prices relative to market to take advantage of supply or demand
imbalances, which could temporarily lead to average selling prices
increasing or decreasing.
The
number of vehicles sold at auctions are determined based on a
number of factors including: (i) filling auction sales channel
market demand opportunities to maximize sales and gross margin;
(ii) a need to balance the Company’s overall inventory mix
and quantity levels against days to sales targets; and (iii) a need
to liquidate those units that do not meet the Company’s
quality standards to list or be sold through
Rumbleon.com.
Other Sales and Revenue
We
generate other sales and revenue primarily through: (i) online
listing and sales fees; (ii) retail merchandise sales;
(iii) vehicle financing; and (iv) vehicle service
contracts.
●
Online Listing and Sales
Fees
.
We charge a
non-refundable fee for sellers to list their vehicle on the
RumbleOn website. During the listing period, we manage all sales
leads, handles all the documentation necessary to complete a sale,
accepts a buyer’s trade and provides financing through
third-party providers to the potential buyer, if
necessary.
Upon a
successful sale, the seller pays a fee based on the difference
between the actual retail sales price of the vehicle sold and the
net proceeds agreed to be paid by RumbleOn to the seller when the
listing agreement was signed.
●
Retail Merchandise
Sales.
We sell branded and other merchandise and
accessories.
●
Vehicle Financing.
Customers can pay for their
vehicle using cash or we offer a range of finance options through
unrelated third-parties such as banks or credit unions. These
third-party providers generally pay us a
fee either in a
flat amount or in an amount equal to the difference between the
interest rates charged to customers over the predetermined interest
rates set by the financial institution.
We may be charged back for
commissions in the event a contract is prepaid, defaulted upon, or
terminated.
●
Vehicle
Service Contracts.
At the time of vehicle
sale, we provide customers, on behalf of unrelated third parties
who are the primary obligors, a range of other related products and
services, including extended protection plan (“EPP”)
products and vehicle appearance protection. EPP products include
extended service plans (“ESPs”), which are designed to
cover unexpected expenses associated with mechanical breakdowns and
guaranteed asset protection (“GAP”), which is
intended to cover the unpaid balance on a vehicle loan in the event
of a total loss of the vehicle or unrecovered theft. Vehicle
appearance protection includes products aimed at maintaining
vehicle appearance.
We
receive commissions from the
sale of these product and service contracts and
have no contractual liability to
customers for claims under these products.
The
EPPs and vehicle appearance protection currently offered to
consumers provides coverage up to 60 months (subject to mileage
limitations), while GAP covers the customer for the term of their
finance contract. At that time commission revenue will be
recognized at the time of sale,
net of a reserve for estimated contract
cancellations. The reserve for cancellations will be estimated
based upon historical industry experience and recent trends and
will be reflected as a reduction of other sales revenue in the
accompanying Condensed Consolidated Statements of Operations and a
component of accounts payable and accrued liabilities in the
accompanying Condensed Consolidated Balance Sheets. Our risk
related to contract cancellations is limited to the revenue that we
receive.
Subscription and other fees
We
generate subscription fees from dealer partners under a license
arrangement that provides access to our software solution and
ongoing support. Select or Appraisal Dealers pay a monthly
subscription fee for access to and ongoing support for portions of
the RumbleOn software solution, which includes: (i) a vehicle
appraisal process; (ii) inventory management system;
(iii) customer relationship and lead management program; and
(iv) equity mining. Dealers may also be charged an initial
software installation and training fee. Dealers do not have the
contractual right to take possession of the software and may cancel
the license for these products and services by providing a 30-day
notice. Installation and training do not have value to the user
without the license and ongoing support and
maintenance.
Cost of Revenue
Cost of
revenue is comprised of: (i) cost of vehicle sales and (ii) costs
of subscription and other fees.
Cost of
vehicle sales to consumers, dealers and auctions, includes the cost
to acquire vehicles and the reconditioning and transportation costs
associated with preparing the vehicles for resale. Vehicle
acquisition costs are driven by the mix of vehicles we acquire, the
source of those vehicles, and supply and demand dynamics in the
vehicle market. Reconditioning costs are billed by third-party
providers and include parts, labor, and other repair expenses
directly attributable to specific vehicles. Transportation costs
consisted of costs incurred to transport the vehicles from the
point of acquisition or delivery. Cost of vehicle sales also
includes any necessary adjustments to reflect vehicle inventory at
the lower of cost or net realizable value.
Cost of
subscription fee revenue includes the (i) various data feeds
from third parties; (ii) hosting of the customer-facing
website; (iii) commissions for new sales; and
(iv) implementation and training of new and existing
dealers.
Vehicle Gross Margin
Gross
margin is generated on used vehicle sales from the difference
between the vehicle selling price and our cost of sales associated
with acquiring the vehicle and preparing it for sale. The aggregate
dollar gross margins achieved from the consumer, dealer and auction
sales channels are different. Units sold to consumers through our
website generally have the highest dollar gross margin since the
unit is sold directly to the consumer. Vehicles sold to dealers are
sold at a price below the retail price offered to consumers, thus
the dealer and RumbleOn are sharing the gross margin. The dollar
gross margin on units sold at auction are usually the lowest due to
auction fees. Factors affecting gross margin from period to period
include the mix of vehicles we acquire and hold in inventory,
retail market prices, our average days to sale, and our pricing
strategy. We may opportunistically choose to shift our inventory
mix to higher or lower cost vehicles, or to opportunistically raise
or lower our prices relative to market to take advantage of supply
or demand imbalances in our sales channels, which could temporarily
lead to average selling prices and gross margins increasing or
decreasing in any given channel.
Selling, General and Administrative Expense
Selling, general
and administrative (“SG&A”) expenses include costs
and expenses for compensation and benefits, advertising to
consumers and dealers, development and operating our product
procurement and distribution system, managing our logistics system,
establishing our dealer partner arrangements, and other corporate
overhead expenses, including expenses associated with technology
development, legal, accounting, finance, and business development.
Selling, general and administrative expenses will increase
substantially as we continue to execute and aggressively expand our
business through increased marketing spending and the addition of
management and support personnel to ensure we adequately develop
and maintain operational, financial and management controls as well
as our reporting systems and procedures. SG&A expenses exclude
the costs of inspecting, reconditioning and transportation of
vehicles, which are included in cost of sales.
Depreciation and Amortization
Depreciation and
amortization is comprised of the: (i) amortization of
capitalized and acquired technology development;
(ii) amortization of identifiable intangible assets; and
(iii) depreciation of vehicle, furniture and equipment.
Depreciation and amortization will continue to increase as
continued investments are made in connection with the expansion and
growth of the business.
Interest Expense
Interest expense
includes interest incurred on notes payable and other long-term
debt, which was used to fund, startup costs and expenses,
technology development, inventory, our transportation fleet,
property and equipment and the acquisition of NexGen.
Results of Operations
The
following table provides our results of operations for the three
and nine-month periods ended September
30, 2017 and
September 30, 2016, respectively. This financial
information should be read in conjunction with our unaudited
Condensed Consolidated Financial Statements and notes included in
Part I, Item 1 of this Quarterly Report on Form 10-Q.
|
|
For the
three-months ended
September
30,
|
For the nine-months
ended
September
30,
|
|
|
|
|
|
|
|
Revenue:
Used
Vehicle Sales:
|
|
|
|
|
|
Consumer
|
$
1,626,864
|
$
-
|
$
1,626,864
|
$
-
|
|
Dealer
|
1,745,948
|
-
|
1,745,948
|
-
|
|
Auction
|
171,560
|
-
|
253,500
|
-
|
|
Other sales and
revenue
|
134,573
|
-
|
134,573
|
-
|
|
Subscription and
other fees
|
27,197
|
-
|
100,668
|
-
|
|
Total
Revenue
|
3,706,142
|
-
|
3,861,553
|
-
|
|
|
|
|
|
|
|
Cost of
revenue
|
3,478,124
|
-
|
3,627,455
|
-
|
|
Selling, General
and administrative
|
2,326,043
|
36,706
|
4,690,216
|
58,135
|
|
Depreciation and
amortization
|
129,277
|
475
|
302,697
|
1,425
|
|
Total
Expenses
|
5,933,444
|
37,181
|
8,620,368
|
59,560
|
|
|
|
|
|
|
|
Operating
loss
|
(2,227,302
)
|
(37,181
)
|
(4,758,815
)
|
(59,560
)
|
|
|
|
|
|
|
|
Interest
expense
|
90,201
|
2,878
|
373,808
|
7,431
|
|
|
|
|
|
|
|
Net
loss before provision for income taxes
|
$
(2,317,503
)
|
$
(40,059
)
|
$
(5,132,623
)
|
$
(66,991
)
|
|
|
|
|
|
|
|
Benefit
for income taxes
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Net
loss
|
$
(2,317,503
)
|
$
(40,059
)
|
$
(5,132,623
)
|
$
(66,991
)
|
Results of Operations for the Three and Nine-month periods ended
September 30, 2017 and September 30, 2016
Revenue
Online Marketplace
Total
revenue for the three and nine-month periods ended September 30,
2017 increased by $3,706,142 and $3,861,553, respectively as
compared to the same periods in 2016.
The increase in revenue was primarily due to an
increase in the number of used vehicles sold to consumers, dealers
and at auctions. The increase in unit sales was driven by the
launch of the RumbleOn website, expanded inventory selection,
enhanced social media, aggressive event marketing efforts,
increased brand awareness and customer referrals. We anticipate
that unit sales will continue to grow as we expand our units of
available inventory, while continuing to
efficiently source
and scale our addressable markets
of
consumers and dealers through brand
building and direct response marketing.
Sales of used vehicles to consumers, dealers and
auctions
for the three and nine-month periods ended
September 30, 2017 increased by $3,544,372 and $3,626,312,
respectively as compared to the same periods in 2016. This increase
was driven by the sale of 313 and 323 used units to consumers,
dealers and at auctions during the three and nine-month period
ending September 30, 2017, respectively.
The average selling price of the used units sold
for the three and nine-month periods ended September 30, 2017 was
$11,324 and $11,227, respectively. The average selling price of
used units sold will fluctuate from period to period as a result of
changes in the sales mix to consumers, dealers and at auctions in
any given period. There were no sales of used vehicles to
consumers, dealers or auctions for the three and nine-month periods
ended September 30, 2016.
Other sales and
revenue
for the
three and nine-month periods ended September 30, 2017 increased by
$134,573 as compared to the same periods in 2016.
This
increase was primarily driven by the increase in retail units sold
which led to an increase in loans originated and sold, and vehicle
service contracts and retail merchandise sales. There were no
online listing and sales fee revenue for the
three and nine-month periods ended
September 30, 2016.
Subscription and other fees
Subscription and
other fee revenue for the three and nine-month periods ended
September 30, 2017 increased by $27,197 and $100,668, respectively
as compared to the same periods in 2016. There were no subscription
or other fee revenue for the three and nine-month periods ended
September 30, 2016.
Expenses
Cost of Revenue
Total
cost of revenue for the three and nine-month periods ended
September 30, 2017 increased by $3,478,124 and $3,627,455,
respectively as compared to the same periods in 2016. This increase
was driven by the: (i) sale of used units to consumers, dealers and
at auctions; and (ii) sale of related products in connection with
unit sales to consumers during the three and nine-month period
ending September 30, 2017, respectively as compared to the same
periods in 2016.
Cost of
vehicle sales for the three and nine-month periods ended September
30, 2017 increased by $3,404,480 and 3,489,446, respectively as
compared to the same periods in 2016. This increase was driven by
the sale of 313 and 323 used units to consumers, dealers and at
auctions during the three and nine-month period ending September
30, 2017, respectively as compared to the same periods in 2016.
The average cost of the used units
sold for the three and nine-month periods ended September 30, 2017
was $10,769 and $10,696, respectively.
Cost of other sales and revenue for
the three and nine-month periods ended September 30, 2017 increased
by $53,754 as compared to the same periods in 2016.
This
increase was primarily driven by the increase in units sold to
consumers which led to an increase in loans originated and sold,
vehicle service contracts
.
Cost of
subscription and other fee revenue, included the (i) various
data feeds from third parties; (ii) hosting of the customer
facing website; (iii) commissions for new sales; and
(iv) implementation and training of new and existing dealers.
These costs and expenses are charged to cost of revenue as
incurred. Cost of subscription and other fee revenue for the three
and nine-month periods ended September 30, 2017 increased by
$19,890 and $84,255, respectively as compared to the same periods
in 2016.
Selling, General and Administrative
|
|
For the
three-months ended
September
30,
|
For the nine-months
ended
September
30,
|
|
|
|
|
|
|
|
Selling,
General and Administrative:
|
|
|
|
|
|
Compensation and
related costs
|
$
1,028,819
|
$
-
|
$
1,951,911
|
$
-
|
|
Advertising and
Marketing
|
752,017
|
-
|
1,060,195
|
-
|
|
Professional
Fees
|
192,041
|
34,044
|
724,486
|
49,017
|
|
Technology
Development
|
91,967
|
-
|
278,668
|
-
|
|
General and
Administrative
|
261,199
|
2,662
|
674,956
|
9,118
|
|
Total
Selling, General and Administrative
|
$
2,326,043
|
$
36,706
|
$
4,690,216
|
$
58,135
|
Selling, general
and administrative expenses for the three and nine-month periods
ended September 30, 2017 increased by $2,289,337 and $4,632,081,
respectively as compared to the same periods in 2016. The increase
is a result of the significant expansion of our businesses
associated with the launch of our website and mobile application
which resulted in: (i) an increase in expenses associated with
advertising and marketing; (ii) increase headcount associated with
the development and operating our product procurement and
distribution system, managing our logistics system; (iii) continued
investment in technology development; and (iv) other corporate
overhead costs and expenses, including legal, accounting, finance,
and business development.
Compensation and
related costs, which includes all payroll and related costs,
including benefits, payroll taxes, and stock-based compensation,
for the three and nine-month periods ended September 30, 2017
increased by $1,028,819 and $1,951,911 as compared to the same
periods in 2016. The increase was driven by the growth in headcount
and related compensation and benefits at our Dallas operations
center, and included new hires in our marketing, product and
inventory management, accounting, finance, information technology,
and administration departments. As our business continues to grow
these expenses will increase as we add headcount in all areas of
the business.
Advertising and
marketing for the three and nine-month periods ended September 30,
2017 increased by $752,017 and $1,060,195 as compared to the same
periods in 2016. The increase consists of cost associated with the
launch of our website and mobile application, aggressive event
marketing and further development of a multi-channel approach to
consumers and dealers. We have begun to utilize a combination of
brand building as well as direct response channels to efficiently
source and scale our addressable markets. Our paid advertising
efforts include advertisements through search engine marketing,
inventory site listing, retargeting, organic referral, display,
direct mail and branded pay-per-click channels. We believe our
strong consumer and dealer focus ensures loyalty which will drive
both high participation in the buy and selling process while
increasing referrals. In addition to our paid channels, we intend
to attract new customers through increased media spending and
public relations efforts and further investing in our proprietary
technology.
Professional fees
consist primarily of legal and accounting fees and costs associated
with: (i) financing activities; (ii) general corporate
matters; (iii) the NextGen acquisition; (iv) the
preparation of quarterly and annual financial statements; and
(v) the filing of regulatory reports required of the Company
for public reporting purposes. Professional fees for the three and
nine-month periods ended September 30, 2017 increased by $157,997
and $675,469, respectively as compared to the same periods in 2016.
This increase was primarily a result of legal, accounting and other
professional fees and expenses incurred in connection with the:
(i) NextGen acquisition; (ii) 2017 Private Placement;
(iii) second tranche of 2016 Private Placement; (iv) Senior
Secured Promissory Notes; (v) the Offering (as defined below); (vi)
our Nasdaq listing; and (vii) various corporate matters
resulting from the growth and expansion of the RumbleOn business
plan. For additional information, see Note 3 -
“Acquisitions,” Note 7 - “Notes Payable,”
Note 8 - “Stockholders’ Equity,” and Note 15 -
“Subsequent Events” in the accompanying Notes to the
Condensed Consolidated Financial Statements.
Technology
development costs consist principally of (i) development
activities including payroll and related expenses billed by a
third-party contractor involved in application, content,
production, maintenance, operation, and platform development for
new and existing products and services, (ii) technology
infrastructure expenses, and (iii) costs of Company employees
devoted to the development and maintenance of software
products. Technology development expenses for the three and
nine-month periods ended September 30, 2017 increased by $91,967
and $278,668, respectively as compared to the same period in 2016.
Total technology costs and expenses incurred for the three and
nine-month periods ended September 30, 2017 were $236,400 and
$713,766 of which $144,433 and $435,097, respectively were
capitalized. For the three and nine-month periods ended
September 30, 2017, a third-party contractor billed $221,400 and
$678,766 respectively, of the total technology development costs.
The amortization of capitalized technology development costs for
the three and nine-month periods ended September 30, 2017 was
$89,429 and $219,374, respectively. There were no technology
development costs incurred and no amortization of capitalized
development costs for the same periods in 2016. Technology
development costs are accounted for pursuant to ASC
350,
Intangibles
— Goodwill and Other.
Technology development costs include internally developed software
and website applications that are used by the Company for its own
internal use and to provide services to its customers, which
include consumers, dealer partners and ancillary service providers.
Under the terms of these customer arrangements the Company retains
the revenue generating technology and hosts the applications on its
servers
and mobile
applications. The customer does not have a contractual right to
take possession of the software during the term of the arrangement
and is not permitted to run the software itself or contract with
another party unrelated to the entity to host the software.
Technology development costs consist principally of
(i) development activities including payroll and related
expenses billed by a third-party contractor involved in
application, content, production, maintenance, operation, and
platform development for new and existing products and services,
(ii) technology infrastructure expenses, and (iii) costs
of Company employees devoted to the development and maintenance of
software products. Technology and content costs for design,
maintenance and post-implementation stages of
internal-use software and general website development are expensed
as incurred. For costs incurred to develop new website
functionality as well as new software products and significant
upgrades to existing internally used platforms or
modules, capitalization begins during the application
development stage and ends when the software is available for
general use. Capitalized technology development is amortized
on a straight-line basis over periods ranging from 3 to 7 years.
The Company will perform periodic assessment of the useful lives
assigned to capitalized software applications. Additionally,
the Company from time-to-time may abandon additional development
activities relating to specific software projects or applications
and charge accumulated costs to technology development expense in
the period such determination is made. We expect our technology
development expenses to increase as we continue to upgrade and
enhance our technology infrastructure, invest in our products,
expand the functionality of our platform and provide new product
offerings. We also expect technology development expenses to
continue to be affected by variations in the amount of capitalized
internally developed technology.
General
and administrative expenses
for the three and nine-month
periods ended September 30, 2017 increased by $258,537 and
$665,838 as compared to the same periods in 2016. The increase
is a
result of the cost and expenses associated with the continued
progress made in the development of our business,
the
establishment of our Dallas operations center and meeting the
requirements of being a public company. General and administrative
costs and expenses include: (i) insurance; (ii) advisor and various
filing fees for equity transactions; (iii) office supplies and
process application software; (iv) public and investor relations
and (v) travel.
Depreciation and Amortization
Depreciation and
amortization is comprised of the: (i) amortization of
capitalized technology development; (ii) amortization of
identifiable intangible assets; and (iii) depreciation of
vehicle, furniture and equipment. Depreciation and amortization for
the three and nine-month periods ended September 30, 2017 increased
by $131,128 and $303,598, respectively, as compared to the same
period in 2016. The increase in depreciation and amortization is a
result of the investments made in connection with the expansion and
growth of the business which for the three and nine-month periods
ended September 30, 2017 included: (i) capitalized technology
acquisition and development costs of $144,433 and $435,097,
respectively; and (ii) the purchase of vehicles, furniture and
equipment of $106,587 and $600,175, respectively. For the three and
nine-month periods ended September 30, 2017 amortization of:
(i) capitalized technology development was $89,429 and
$219,374, respectively; (ii) amortization of identifiable
intangible was $11,250 and $33,750, respectively; and
(iii) depreciation and amortization on vehicle, furniture and
equipment was $28,598 and $49,573, respectively. Depreciation and
amortization on furniture and equipment for the same periods in
2016 was $475 and $1,425, respectively.
Interest Expense
Interest expense
consists of interest on the: (i) BHLP Note; (ii) NextGen
Note; (iii) Private Placement Notes; and (iv)
Senior Secured Promissory Notes
. Interest
expense for the three and nine-month periods ended September 30,
2017 increased by $87,323 and $366,377, respectively, as compared
to the same periods in 2016. The increase resulted from: (i)
interest on a higher level of debt outstanding; (ii) the conversion
of the BHLP Note; (iii) the amortization of the beneficial
conversion feature on the Private Placement Notes; and (iv) the
amortization of the original issue discount on the
Senior Secured Promissory Notes.
The
conversion of the BHLP Note resulted in a $196,076 charge to
interest expense for the remaining balance of the beneficial
conversion feature, net of deferred taxes and is included in
interest expense for the nine-month period ended September 30,
2017. Interest expense on the Private Placement Notes for the three
and nine-month periods ended September 30, 2017 was $94,855 and
$183,943, respectively which included $41,979 and $81,603 of debt
discount amortization for the three and nine-month periods ended
September 30, 2017, respectively. Interest expense on the
NextGen Notes for the three and nine-month periods ended September
30, 2017 was $21,370 and $54,849 respectively. Interest expense on
the
Senior Secured Promissory
Notes for the three and nine-month periods ended September 30, 2017
was $15,925 which included $10,274 of original issue discount
amortization. For additional information, see Note 7 -
“Notes Payable” in the accompanying Notes to the
Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
The
following table sets forth a summary of our cash flows for the
nine-month period ended September 30, 2017 and 2016:
|
|
Nine-months
ended
September
30,
|
|
|
|
|
|
Net cash used in
operating activities
|
$
(4,389,128
)
|
$
(62,116
)
|
|
Net cash used in
investing activities
|
(1,785,272
)
|
-
|
|
Net cash provided
by financing activities
|
5,480,040
|
63,358
|
|
Net change in
cash
|
$
(694,360
)
|
$
1,242
|
Operating Activities
Net
cash used in operating activities increased $4,327,012 to
$4,389,128 for the nine-month period ended
September 30, 2017, as compared to the same period in
2016. The increase in net cash used is primarily due to a
$5,065,632 increase in our net loss offset by an increase in the
net change operating assets and liabilities of $138,153 and a
$876,775 increase in non-cash expense items. The increase in the
net loss for the nine-month period ended September 30, 2017 was a
result of the continued expansion and progress made on our business
plan, including a significant increase in marketing and advertising
spend in connection the launch of the Company’s website,
www.rumbleon.com
,
acquire vehicle inventory, continue development of the
Company’s business and for working capital
purposes.
Investing Activities
Net
cash used in investing activities increased $1,785,272 for the
nine-month period ended September 30, 2017, as compared to the same
period in 2016. The increase in cash used for investment activities
was primarily for the purchase of NextGen, $435,097 in costs
incurred for technology development and the purchase of $600,175 of
vehicles, furniture and equipment.
On
February 8, 2017, the Company acquired substantially all of the
assets of NextGen in exchange for $750,000 in cash, plus 1,523,809
unregistered shares of Class B Common Stock of the Company and a
subordinated secured promissory note issued by the Company in favor
of NextGen in the amount of $1,333,334. The NextGen Note matures on
the third anniversary of the closing date. Interest accrues and
will be paid semi-annually (i) at a rate of 6.5% annually from
the closing date through the second anniversary of such date and
(ii) at a rate of 8.5% annually from the second anniversary of
the closing date through the Maturity Date. In connection with the
closing of the acquisition, certain investors of the Company
accelerated the funding of the second tranche of their investment
totaling $1,350,000. The investors were issued 1,161,920 shares of
Class B Common Stock and promissory notes in the amount of
$667,000. For additional information, see “Financing
Activities” in Management’s Discussion and Analysis and
Note 7 - “Notes Payable” in the accompanying Notes
to the Condensed Consolidated Financial Statements.
Financing Activities
Net
cash provided by financing activities increased $5,416,681 to
$5,480,040 for the nine-month period ended
September 30, 2017, compared with net cash provided by
financing activities of $63,358 for the same period in 2016. This
increase is primarily a result of the: (i) 2017 Private
Placement of $2,630,000 in Class B Common Stock at a price of $4.00
per share; (ii) second tranche of the 2016 Private Placement
of $683,040 in Class B Common Stock and $667,000 in promissory
notes; and (iii) Senior Secured Promissory Notes proceeds of
$1,500,000. Proceeds from the 2017 Private Placement, the second
tranche of the 2016 Private Placement and the Senior Secured
Promissory Notes were used to complete the launch of the
Company’s website,
www.rumbleon.com
,
acquire vehicle inventory, continue development of the
Company’s business and for working capital
purposes.
On
March 31, 2017, the Company completed funding of the second tranche
of the 2016 Private Placement. The investors were issued 1,161,920
shares of Class B Common Stock of the Company and the Private
Placement Notes in the amount of $667,000, in consideration of
cancellation of loan agreements having an aggregate principal
amount committed by the purchasers of $1,350,000. Under the terms
of the Private Placement Notes, interest shall accrue on the
outstanding and unpaid principal amount until paid in full. The
Private Placement Notes mature on March 31, 2020. Interest accrues
at a rate of 6.5% annually from the closing date through the second
anniversary of such date and (ii) at a rate of 8.5% annually from
the second anniversary of the closing date through the maturity
date. Upon the occurrence of any event of default, the outstanding
balance under the Private Placement Notes shall become immediately
due and payable upon election of the holder. Based on the relative
fair values attributed to the Class B Common Stock and promissory
notes issued in the 2016 Private Placement the Company recorded a
debt discount on the promissory notes of $667,000 with the
corresponding amounts as addition to paid in capital. The debt
discount will be amortized to interest expense over the life of the
notes using the effective interest method. For additional
information, see Note 7 - “Notes Payable” in the
accompanying Notes to the Condensed Consolidated Financial
Statements.
On July
13, 2016, the Company entered into the BHLP Note with Berrard
Holdings, an entity owned and controlled by a current officer and
director, Mr. Berrard, pursuant to which the Company was required
to repay $191,858 on or before July 13, 2026 plus interest at 6%
per annum. The BHLP Note was also convertible into common stock, in
whole, at any time before maturity at the option of the holder at
the greater of $0.06 per share or 50% of the price per share of the
next qualified financing which is defined as $500,000 or greater.
Effective August 31, 2016, the principal amount of the BHLP Note
was amended to include an additional $5,000 loaned to the Company,
on the same terms. On November 28, 2016, the Company completed its
qualified financing at $1.50 per share which established the
conversion price per share for the BHLP Note of $0.75 per share,
resulting in the principal amount of the BHLP Note being
convertible into 263,144 shares of Class B Common Stock. As such,
November 28, 2016 became the “commitment date” for
determining the value of the BHLP Note conversion feature. Because
there had been one trade in January 2016 in the Company’s
common stock since July 2014, other than the purchase by Berrard
Holdings of 99.5% of the outstanding shares in a single
transaction, the Company used the Monte Carlo simulation to
determine the intrinsic value of the conversion feature of the BHLP
Note, which resulted in a value in excess of the principal amount
of the BHLP Note Thus, the Company recorded a note discount of
$197,358 with the corresponding amount as an addition to paid in
capital. This note discount is amortized to interest expense until
the scheduled maturity of the BHLP Note in July 2026 or until it is
converted using the effective interest method. The effective
interest rate at March 31, 2017 was 7.4%. Interest
expense on the BHLP Note for the three-month period ended March 31,
2017 was $2,920 and the amortization of the beneficial conversion
feature was $3,558. On March 31, 2017, the Company issued 275,312
shares of Class B Common Stock upon full conversion of the BHLP
Note, having an aggregate principal amount, including accrued
interest, of $206,484 and a conversion price of $0.75 per share. In
connection with the conversion of the BHLP Note, the remaining debt
discount of $196,076 was charged to interest expense in the
Condensed Consolidated Statements of Operations and the related
deferred tax liability was credited to additional paid in capital
in the Condensed Consolidated Balance Sheets. For additional
information, see Note 7 - “Notes Payable” in the
accompanying Notes to the Condensed Consolidated Financial
Statements.
On September 5, 2017 the Company executed Senior
Secured Promissory Notes (the “Notes”) in favor of
several investors, including certain executive officers and
directors of the Company, in the aggregate principal amount of
$1,650,000 (“Principal Amount”), which includes an
aggregate original issue discount of $150,000. The proceeds to the
Company from the Notes, net of original issuance discount, was
$1,500,000. The Notes are secured by an interest in all the
Company’s Collateral, as such term is defined in the
Notes.
The Notes mature on
September 15, 2018 and bear interest at a rate equal to 5% per
annum through December 31, 2017, and a rate of 10% per annum
thereafter. Interest is payable monthly in arrears.
Upon the
occurrence of any event of default, the outstanding balance under
the Notes shall become immediately due and payable upon election of
the holders
.
The Principal Amount
and any unpaid interest accrued thereon may be prepaid by the
Company at any time prior to the Maturity Date without premium or
penalty upon five days prior written notice to the Noteholder. If
the Company consummates in one or more transactions financing of
any nature resulting in net proceeds available to the Company of
$5,000,000 or more, then the Noteholders may require the Company to
prepay the Notes on thirty (30) days prior written notice to the
Company.
The original issue discount is amortized to
interest expense until the scheduled maturity of the Notes in
September 2018 using the effective interest method. The effective
interest rate at September 30, 2017 was 10.0%. Interest
expense on the Notes for the three and nine-month periods ended
September 30, 2017 was $15,925 which included $10,274 of
original issue discount amortization. On October 23, 2017, the
Company completed a public offering and used $1,661,075 of the net
proceeds of the Offering for the repayment of the Notes in the
aggregate principal amount of $1,650,000, plus accrued interest,
which resulted in the termination of the Notes
.
For additional information, see
Note 8 - “Stockholders Equity” and Note 15 –
“Subsequent Events” in the accompanying Notes to the
Condensed Consolidated Financial Statements.
Investment in Growth
As of September 30, 2017, the
Company had a total of $656,220 in available cash. Our cash
requirements for the next twelve months are significant as we have
begun to aggressively invest in the growth of our business and we
expect this investment to continue. We plan to invest heavily in
inventory, marketing, technology and infrastructure to support the
growth of the business. These investments are expected to increase
our negative cash flow from operations and operating losses at
least in the near term, and there is no guarantee that we will be
able to realize the return on our investments. Since inception, we
have financed our cash flow requirements through debt and equity
financing and o
n October
23, 2017, the Company completed a public offering of 2,910,000
shares of Class B common stock at a public offering price
of $5.50 per share (the "Offering") and
received approximately $14,500,000 in proceeds, net of
underwriting discounts and commissions and offering expenses. The
Company
used $1,661,075
of the net proceeds of the Offering for the repayment of the Senior
Secured Promissory Notes in the aggregate principal amount of
$1,650,000 plus accrued interest
and
intend to use the remaining net proceeds of the Offering for
working capital and general corporate purposes, which may include
purchases of additional inventory held for sale, increased spending
on marketing and advertising and capital expenditures necessary to
grow the business. Also, on November 2, 2017, we entered into
a floor plan line of credit through our subsidiary, RMBL Missouri,
LLC, in the amount of $2,000,000. For additional information on the
Offering and floor plan line of credit, see Note 15 –
“Subsequent Events” in the accompanying Notes to the
Condensed Consolidated Financial Statements.
However,
our
limited operating history makes predictions of future operating
results difficult to ascertain. Our prospects must be considered in
light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets. Such
risks for us include an evolving business model, advancement of
technology and the management of growth. To address these risks, we
must, among other things, continue our development of relevant
applications, stay abreast of changes in the marketplace, as well
as implement and successfully execute our business and marketing
strategy. There can be no assurance that we will be successful in
addressing such risks, and the failure to do so can have a material
adverse effect on our business prospects, financial condition and
results of operations.
Critical Accounting Policies
The
accompanying unaudited Condensed Consolidated Financial Statements
are prepared in conformity with accounting principles generally
accepted in the United States. As such, we are required to make
certain estimates, judgments and assumptions that we believe are
reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and
liabilities as of the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. We routinely evaluate our estimates based on historical
experience and on various other assumptions that management
believes are reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or
conditions. During the nine-month period ended September 30, 2017,
we did not experience any significant changes in estimates or
judgments inherent in the preparation of our financial statements.
A summary of our significant accounting policies is contained in
Note 1 to our financial statements included in our 2016 Annual
Report.
Off-Balance Sheet Arrangements
As of
September 30, 2017, we did not have any off-balance sheet
arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial
condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to
investors.
Emerging Growth Company
We are
an “emerging growth company” under the federal
securities laws and will be subject to reduced public company
reporting requirements. In addition, Section 107 of the JOBS Act
also provides that an “emerging growth company” can
take advantage of the extended transition period provided in
Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for
complying with new or revised accounting standards. In other words,
an “emerging growth company” can delay the adoption of
certain accounting standards until those standards would otherwise
apply to private companies. We are choosing not to take advantage
of the extended transition period for complying with new or revised
accounting standards.
Item
3.
Quantitative
and Qualitative Disclosure About Market Risk.
This
item is not applicable as we are currently considered a smaller
reporting company.
Item
4.
Controls
and Procedures.
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
September 30, 2017. We maintain disclosure controls and procedures
that are designed to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under
the 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 September 30, 2017.
Changes in Internal Control Over Financial Reporting
Since
the acquisition of NextGen, the Company is evaluating its internal
control over financial reporting; however, there were no changes in
our internal control over financial reporting that occurred during
our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
Limitations on Effectiveness of Controls and
Procedures
In
designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their
costs.