UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14C

Information Statement Pursuant to Section 14(c) of the

Securities Exchange Act of 1934

 

 

Check the appropriate box:

 

RUMBLEON, INC.

(Name of Registrant As Specified In Its Charter)

 

Payment of Filing Fee (Check the appropriate box):

 

 

	(1)	Title of each class of securities to which transaction applies:
	(2)	Aggregate number of securities to which transaction applies:
	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)	Proposed maximum aggregate value of transaction:
	(5)	Total fee paid:

 

 

 

	(1)	Amount Previously Paid:
	(2)	Form, Schedule or Registration Statement No.:
	(3)	Filing Party:
	(4)	Date Filed:

 

 

RumbleOn, Inc.

1350 Lakeshore Drive

 Suite 160

Coppell, Texas 75019

 

February 12, 2019

NOTICE OF ACTION TAKEN

PURSUANT TO WRITTEN CONSENT OF STOCKHOLDERS

To Our Stockholders:

RumbleOn, Inc. (the “Company”) hereby gives notice to the holders of its Class A common stock, par value $0.001 per share (the “Class A Common Stock”), and its Class B common stock, par value $0.001 per share (the “Class B Common Stock,” and together with the Class A Common Stock, the “Common Stock”), that certain stockholders of the Company holding a majority in voting power of its outstanding Common Stock have taken certain actions by written consent, which consent is set forth in Appendix A hereto, to approve the issuance of greater than 20 percent of the Company’s outstanding Class B Common Stock underlying the Company’s Series B Non-Voting Convertible Preferred Stock, par value $0.001 per share (“Series B Preferred”) issued in connection with the acquisitions by the Company (the “Acquisitions”) of Wholesale Holdings, Inc. (“Holdings”), Holdings’ wholly owned subsidiary, Wholesale, LLC, a Tennessee limited liability company (“Wholesale”), and Wholesale Express, LLC (“Wholesale Express,” and together with Wholesale and Holdings, the “Wholesale Entities”) and in connection with certain financing transactions relating to the Acquisitions. Following the Acquisitions, Wholesale was converted from a limited liability company to a corporation under the name Wholesale, Inc.

The Company’s Class B Common Stock is listed and traded on the Nasdaq Capital Market under the symbol “RMBL.” Under the Nasdaq Capital Market rules, the holders representing a majority in voting power of the outstanding shares of the Common Stock must approve the issuance of the Class B Common Stock underlying the Series B Preferred because such issuance, when aggregated with the shares of Class B Common Stock issued or to be issued in the related financing transactions securities, exceeds of 20% of the number of shares of Class B Common Stock outstanding before such issuances. Section 78.320 of the Nevada Revised Statutes (“NRS”) and our organizational documents permit any action that may be taken at a meeting of the stockholders to be taken by written consent by the holders of the number of shares of voting stock required to approve the action at a meeting. Accordingly, the holders of a majority in voting power of the outstanding shares of the Common Stock have approved the issuance of the Class B Common Stock underlying the Series B Preferred issued in connection with the Acquisitions, subject to the terms and conditions set forth in the documents governing the transactions.

All necessary corporate approvals in connection with the matters referred to in this Information Statement have been obtained, and the Company may issue the shares of Class B Common Stock underlying the Series B Preferred upon providing necessary notice to its non-consenting stockholders in accordance with NRS and the U.S. Federal Securities laws. This Information Statement is being furnished to all stockholders of the Company pursuant to Section 14(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, solely for the purpose of informing the non-consenting stockholders of these corporate actions before the Company takes the actions set forth in the written consent. In accordance with Rule 14c-2 under the Exchange Act, the Company may issue the shares of Class B Common Stock underlying the Series B Preferred on the date that is the twenty first (21st) day following the mailing of this Information Statement to the Company’s non-consenting stockholders.

We are mailing this Information Statement to our holders of record as of the close of business on October 30, 2018, which is the date on which the respective consents received approval of a majority in voting power of our Common Stock. This Information Statement is being provided to you for your information to comply with the Exchange Act requirements. You are urged to read this Information Statement carefully in its entirety. No action is required on your part in connection with this document. No shareholder meeting will be held in connection with this Information Statement. We are not asking you for a proxy and you are requested not to send us a proxy.  

We thank you for your continued support.

		By order of the Board of Directors
		/s/ Marshall Chesrown
		Marshall Chesrown
		Chairman and Chief Executive Officer

 

 

RumbleOn, Inc.

1350 Lakeshore Drive

 Suite 160

Coppell, Texas 75019

 

INFORMATION STATEMENT

We are required to deliver this Information Statement to holders of our Common Stock in order to inform them that stockholders of the Company holding a majority in voting power of its outstanding Common Stock, have taken certain actions by written consent, which would normally require a meeting of stockholders. October 30, 2018, which is the date on which the consent received approval of a majority in voting power of our Common Stock, has been fixed as the record date for the determination of stockholders entitled to receive this Information Statement.

THIS INFORMATION STATEMENT IS FIRST BEING SENT ON OR ABOUT FEBRUARY 12, 2019

TO THE RECORD HOLDERS AS OF OCTOBER 30, 2018.

WE ARE NOT ASKING YOU FOR A PROXY

AND YOU ARE NOT REQUESTED TO SEND US A PROXY.

 

TABLE OF CONTENTS

Page

Summary Term Sheet	1
Questions and Answers About the Acquisitions	3
Risk Factors	6
The Acquisitions	8
Background of the Acquisitions	15
Reasons for the Acquisitions	18
Description of the Acquired Businesses	18
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Wholesale, Inc.	19
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Wholesale Express, LLC	34
No Dissenter’s Rights	42
No Regulatory Approvals	42
Material U.S. Federal Income Tax Consequences	42
Accounting Treatment	42
Interest of Certain Persons in Matters to be Acted Upon	42
Security Ownership of Certain Beneficial Owners and Management	43
Where You Can Find More Information	44
Index to Financial Statements.	F-1
Unaudited Pro Forma Condensed Combined Financial Statement of RumbleOn, Inc.	PF-1
Appendix A	A-1

 

 

Summary Term Sheet

This Summary Term Sheet and the section titled “Questions and Answers About the Acquisitions” summarize certain information contained in this Information Statement, but do not contain all of the information that is important to you. The description and summaries of the documents and agreements below do not purport to be complete and are qualified in their entirety by reference to the actual documents and agreements. You should carefully read this entire Information Statement, including the attached Appendices.

ISSUANCE OF UP TO 1,317,329 SHARES OF CLASS B COMMON STOCK UNDERLYING 1,317,329 SHARES OF SERIES B NON-VOTING CONVERTIBLE PREFERRED STOCK

On October 26, 2018, RumbleOn, Inc., a Nevada corporation ("RumbleOn" or the “Company”), entered into (i) an Agreement and Plan of Merger, as amended (the “Merger Agreement”) by and among the Company, RMBL Tennessee, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Merger Sub”), Wholesale Holdings, Inc., a Tennessee corporation (“Holdings”), Wholesale, LLC, a Tennessee limited liability company (“Wholesale”), the shareholders of the Holdings set forth in Schedule 1 to the Merger Agreement (each, a “Wholesale Seller,” and collectively, the “Wholesale Sellers”), Steven Brewster, a Tennessee resident, as the representative of each Wholesale Seller as more fully described in the Merger Agreement (the “Wholesale Representative”), and (ii) a Membership Interest Purchase Agreement (the “Purchase Agreement”), by and among the Company, the members of Wholesale Express, LLC, a Tennessee limited liability company (“Wholesale Express”) set forth in Schedule 1 to the Purchase Agreement (each, an “Express Seller,” and collectively, the “Express Sellers”), and Steven R. Brewster, a Tennessee resident, as the representative of each Seller as more fully described herein (the “Express Representative”). The Company, Wholesale Sellers, Express Sellers, Wholesale Representative and Express Representative are sometimes referred to herein collectively as the “Parties” and each individually as a “Party.” On October 29, 2018, the parties amended the Merger Agreement to provide for certain tax matters relating to the Merger (as defined below). The Merger Agreement and the amendment to the Merger Agreement, are included as Exhibits 2.1 and 2.2 to the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 31, 2018 (the "Form 8-K"), and are incorporated by reference in this Information Statement. The Purchase Agreement is included as Exhibit 2.3 to the Form 8-K and is incorporated in this Information Statement by reference.

The Parties completed the Acquisitions (as defined below) (the “Closing”) on October 30, 2018 (the “Closing Date”). On the Closing Date, Holdings merged with and into Merger Sub, with Merger Sub as the surviving entity (the “Merger”). Also on the Closing Date, the Company purchased all the membership interest in Wholesale Express (the “Express Purchase,” and together with the Merger, the “Acquisitions”). Following the Acquisitions, Wholesale was converted from a limited liability company to a corporation under the name Wholesale, Inc.

As consideration for the Merger, at Closing, Wholesale Sellers received from the Company:

As consideration for the Express Purchase, at Closing, Express Sellers received from the Company approximately $4,000,000 in cash, inclusive of working capital adjustments, certain change of control payments due to certain Wholesale Express officers, employees and consultants.

In connection with financing the cash portion of consideration in the Acquisitions, the Company entered into the following transactions (collectively, the “Financing Transactions”):

 

Under the terms of the Amendment, $5,000,000 (less certain fees and expenses) were funded by Lender to the Borrowers in connection with the Closing Date (the “Tranche II Advance”). The Tranche II Advance has a maturity date of October 1, 2021 and an initial interest rate of 11.00%.

Advances under the Amended Loan Agreement (“Advances”) will bear interest at a per annum rate equal to the greater of either (i) the prime rate as reported in The Wall Street Journal plus 5.75% or (ii) 10.25%, based on a year consisting of 360 days, with interest computed daily based on the actual number of days elapsed. The Tranche II Advance, and any future amounts that may be advanced under the Amended Loan Agreement, will be due and payable on October 1, 2021.

Upon any event of default, the Agent may, at its option, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to Lender by Borrowers. Conditions for an event of default remain unchanged by the Amendment.

 

In connection with the Amendment, on the Cosing Date, the Company issued to Lender a warrant to purchase 20,950 shares of the Company's Class B Common Stock at an exercise price of $7.16 per share (the “Warrant”), which pursuant to the terms and the Warrant, the exercise price of the Warrant was adjusted to $5.55 and the number of shares of Class B Common Stock underlying the Warrant was adjusted to 27,026.

 

Advances under the NextGear Credit Line will bear interest at an initial per annum rate of 5.25%, based upon a 360-day year, and compounded daily, and the per annum interest rate will vary based on a base rate, plus the contract rate, which is currently negative 2.0%, until the outstanding liabilities to NextGear are paid in full. Advances under the NextGear Credit Line require Wholesale to maintain at least $5,500,000 cash collateral in a reserve account in favor of NextGear, which amount is subject to change in NextGear's sole discretion.

Advances under NextGear Credit Line, if not demanded earlier, are due and payable, without notice, on or before the maturity date, which is (a) for all liabilities relating to inventory or receivables financed, the date set forth on the applicable advance schedule or the date of a maturity event that causes NextGear to declare an event of default, or October 31, 2019; (b) for all liabilities not relating to inventory or receivables financed, 10 days after the date such liability is posted to Wholesale’s account; and (c) for loans in excess of the market value of a unit financed, the date on which such loan is posted to Wholesale’s account. Notwithstanding the foregoing, upon the declaration of an event of default by NextGear, the maturity date for all liabilities will be the earlier of (i) the date on which such event of default is declared by NextGear, or (ii) the date on which such event of default first occurred.

Upon any event of default (including, without limitation, Wholesale’s obligation to pay upon demand any outstanding liabilities of the NextGear Credit Line), NextGear may, at its option and without notice to Wholesale, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to NextGear and its affiliates by Wholesale and its affiliates.

The NextGear Credit Line is secured by a grant of a first lien security interest in all of Wholesale’s assets. Payment to NextGear is guaranteed by unsecured guaranties of each of the Company and Merger Sub (collectively, the “Parent Guaranties”). In connection with the Amendment and the NextGear Credit Line, NextGear and Agent will enter into an intercreditor agreement (the “Wholesale Inventory Financing Intercreditor Agreement”) within 30 days of the Closing Date, by and among NextGear and Agent, in form and substance satisfactory to NextGear and Agent in Agent’s reasonable discretion. The terms of the Wholesale Inventory Financing Intercreditor Agreement and any additional intercreditor arrangements will control the priority of Agent’s security interest in the Collateral of Wholesale relative to NextGear’s security interest in the Collateral of Wholesale.

 

 

Other Information

The Company’s Class B Common Stock is listed and traded on the Nasdaq Capital Market under the symbol “RMBL.” Under the Nasdaq Capital Market rules, the holders of a majority of the outstanding shares of the Class B Common Stock and the Class A common stock, par value $0.001 per share (the “Class A Common Stock,” and together with the Class B Common Stock, the “Common Stock”) must approve the issuance of the Class B Common Stock underlying the Series B Preferred because we will have issued in connection with the Merger and the related Financing Transactions in excess of 20 percent of the number of shares of Class B Common Stock outstanding before such issuance. Section 78.320 of the Nevada Revised Statutes (“NRS”) and our organizational documents permit any action that may be taken at a meeting of the stockholders to be taken by written consent by the holders of the number of shares of voting stock required to approve the action at a meeting. Accordingly, the holders of a majority in voting power of the outstanding shares of the Common Stock have approved the issuance of the Class B Common Stock underlying the Series B Preferred issued in connection with the Merger, subject to the terms and conditions set forth in the documents governing the transaction, by written consent as set forth in Appendix A.

All necessary corporate approvals in connection with the matters referred to in this Information Statement have been obtained, and the Company may issue the shares underlying the Series B Preferred upon providing necessary notice to its non-consenting stockholders in accordance with NRS and the U.S. Federal Securities laws. This Information Statement is being furnished to all stockholders of the Company pursuant to Section 14(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder, solely for the purpose of informing stockholders of these corporate actions before the Company takes such actions set forth in the written consent. In accordance with Rule 14c-2 under the Exchange Act, the Company may issue the shares of Class B Common Stock underlying the Series B Preferred on the date that is the twenty first (21st) day following the mailing of this Information Statement to the Company’s non-consenting stockholders, subject to notice and approval of the Nasdaq Capital Market.

Questions and Answers About the Acquisitions

Q: Why am I receiving this Information Statement?

A: The Company has acquired Wholesale Express, Wholesale, and Holdings (collectively, the “Wholesale Entities”) in accordance with the terms of the Merger Agreement and the Purchase Agreement as described in this Information Statement. We are mailing this Information Statement to our holders of record as of the close of business on October 30, 2018, which is the date on which the respective consent received approval of a majority in voting power of our Common Stock. This Information Statement is being provided to you for your information to comply with the Exchange Act requirements. You are urged to read this Information Statement carefully in its entirety. However, no action is required on your part in connection with this document. We are not asking you for a proxy and you are requested not to send us a proxy.  

Q: When and where is the stockholder meeting?

A: No stockholder meeting will be held in connection with this Information Statement.

Q: What is the record date for Stockholders entitled to receive this Information Statement?

A: The record date is October 30, 2018, which is the date on which the respective consents received approval of a majority in voting power of our Common Stock.

Q: Why is the Company acquiring the Wholesale Entities?

A: We are building a supply chain solution that will span all pre-owned vehicle segments. We built RumbleOn around inventory acquisitions and optimize our business through a completely agnostic distribution model. We believe that controlling the inventory at the source will prove to be a winning proposition in the supply of vehicles for consumers and dealers. Wholesale accelerates our plan to enter the huge automobile marketplace and allows us to do it with meaningful size and scale, and without the significant start-up costs typically associated with new market entries. Multiple sales channels allow us to maximize revenue by selling wherever the opportunity exists, based on customer demand, market conditions or inventory availability, at any given time. RumbleOn will be the dominant marketplace in online acquisition of vehicles direct from consumers and dealers while continuing its agnostic distribution approach of rapid turns of vehicle supply.

We will integrate our powerful technology with Wholesale, enabling us to acquire cars and trucks direct from consumers and creating liquidity, while maintaining our capital-light and agnostic distribution model that underpins RumbleOn today. This new source of inventory will provide incremental volume and improved gross margins to the current Wholesale distribution platform. Further, RumbleOn will market the current Wholesale inventory on RumbleOn.com, to provide the same friction-free transaction RumbleOn currently offers to motorcycle and powersports consumers and dealers.

 

The Wholesale model has scaled over several years with an acquisition strategy that focuses primarily on acquiring inventory direct from dealers and auctions with a small portion from consumers direct or on trade. Overlaying the RumbleOn proprietary software to Wholesale’s current manual operations will provide new growth opportunities and enhance operating metrics. We believe that our cash offer tool, combined with our inventory management software, processes and guidelines will improve inventory turns, reduce mistakes and increase margins. By capturing data on all opportunities on the RumbleOn database, our ability to have the right vehicle, at the right time, at the right price, is greatly enhanced.

Additionally, Wholesale Express has become a well-known brand for the movement of thousands of cars and trucks for dealers across the country. We intend to realize cost benefits by moving our logistics across powersports onto the Wholesale Express platform. RumbleOn will market under the Wholesale Inc. brand, independently as a separate channel and in parallel, taking advantage of two brands and capitalizing on the associated marketing leverage. RumbleOn has the potential to make a meaningful improvement to the overall retail channel by leveraging our 100% online model, and we believe this will produce pure incremental purchases and sales of highly desirable and profitable inventory for Wholesale.

Q: What was the consideration paid by the Company to acquire 100% of the outstanding stock of Holdings and the interests in Wholesale Express?

A: In the Acquisitions, the Company acquired (A) 100% of the outstanding stock of Holdings from the Wholesale Sellers for (i) 1,317,329 shares of Series B Preferred, convertible into 1,317,329 shares of Class B Common Stock and (ii) approximately $12,000,000 in cash, inclusive of working capital adjustments, certain change of control payments due to certain Wholesale directors, employees and consultants, of which 681,481 shares of Series B Preferred were held back in connection with Wholesale Sellers’ indemnification obligations under the Merger Agreement and the Express Sellers’ indemnification obligations under the Purchase Agreement and (B) 100% of the membership interests of Wholesale Express from the Express Sellers for $4,000,000 in cash, inclusive of working capital adjustments, certain change of control payments due to certain Wholesale Express officers, employees and consultants.

Q: Into how many shares of Class B Common Stock can the Series B Preferred be converted?

A: Each share of Series B Preferred can be converted into one share of Class B Common Stock. As a result, upon conversion of the Series B Preferred received by the Wholesale Sellers, the Company will issue to the Wholesale Sellers an aggregate of 1,317,329 shares of Class B Common Stock.

Type of Stock	Shares	As Converted
Preferred Shares, Issued at Closing	1,317,329	1,317,329

 

Q: Who Can Help Answer Your Questions

A: If you have more questions about the Acquisitions the related financing, and the other transactions provided for in the Merger Agreement and described in this Information Statement, you should contact:

RumbleOn, Inc.

1350 Lakeshore Drive

 Suite 160

Coppell, Texas 75019

Attention: Corporate Secretary

Phone: (469) 250-1185

 

Cautionary Statement Concerning Forward-Looking Statements

This Information Statement contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Section 27A of the Securities Act, and Section 21E of the Exchange Act. Such forward-looking statements contain information about our expectations, beliefs or intentions regarding our product development and commercialization efforts, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

 

 

Risk Factors

You should carefully consider the risk factors described below, together with the other information contained in this Information Statement. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the market or trading price of our securities could decline and you could lose all or part of your investment. This information statement also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below.

Risks Related to the Acquisitions

We may be unable to realize the anticipated synergies related to the Acquisitions, which could have a material adverse effect on our business, financial condition and results of operations.

 

We expect to realize significant synergies related to the Acquisitions. We also expect to incur costs to achieve these synergies. While we believe these synergies are achievable, our ability to achieve such estimated synergies in the amounts and timeframe expected is subject to various assumptions by our management based on expectations that are subject to a number of risks, which may or may not be realized, as well as the incurrence of other costs in our operations that may offset all or a portion of such synergies and other factors outside our control. As a consequence, we may not be able to realize all of these synergies within the time frame expected or at all, or the amounts of such synergies could be significantly reduced. In addition, we may incur additional and unexpected costs to realize these synergies. Failure to achieve the expected synergies could significantly reduce the expected benefits associated with the Acquisitions and adversely affect our business. We have incurred and will continue to incur substantial expenses in connection with the negotiation and consummation of the transactions contemplated by the Merger or the Express Purchase. These costs, as well as other unanticipated costs and expenses, could have a material adverse effect on our financial condition and operating results.

We may be unable to successfully integrate the Wholesale Entities’ business and realize the anticipated benefits of the Acquisitions.

We are now be required to devote significant management attention and resources to integrating the business and operations of the Wholesale Entities. Potential difficulties we may encounter in the integration process include the following:

 

An inability to realize the anticipated benefits and cost synergies of the Acquisitions, as well as any delays encountered in the integration process, could have a material adverse effect on the operating results of the combined company, which may materially adversely affect the value of our Class B Common Stock.

In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefit of our plan for integration may not be realized. Actual synergies, if achieved at all, may be lower than what we expect and may take longer to achieve than anticipated. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Acquisitions may be offset by costs incurred or delays in integrating the companies. If we are not able to adequately address these challenges, we may be unable to successfully integrate the Wholesale Entities’ operations into our own or, even if we are able to combine the business operations successfully, to realize the anticipated benefits of the integration of the companies.

 

 

Our business relationships, those of the Wholesale Entities or the combined company may be subject to disruption due to uncertainty associated with the Acquisitions.

Parties with which we or the Wholesale Entities do business may experience uncertainty associated with the Acquisitions, including with respect to current or future business relationships with us, the Wholesale Entities or the combined company. Our and the Wholesale Entities’ business relationships may be subject to disruption, as customers, distributors, suppliers, vendors, and others may seek to receive confirmation that their existing business relations with us or the Wholesale Entities, as the case may be, will not be adversely impacted as a result of the Acquisitions or attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us, the Wholesale Entities, or the combined company as a result of the Acquisitions. Any of these other disruptions could have a material adverse effect on our or the Wholesale Entities’ businesses, financial condition, or results of operations or on the business, financial condition or results of operations of the combined company, and could also have an adverse effect on our ability to realize the anticipated benefits of the Acquisitions.

If we are unable to maintain effective internal control over financial reporting for the combined companies, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial statements.

We and the Wholesale Entities currently maintain separate internal control over financial reporting with different financial reporting processes and different process control software. We plan to integrate our internal control over financial reporting with those of the Wholesale Entities. We may encounter difficulties and unanticipated issues in combining our respective accounting systems due to the complexity of the financial reporting processes. We may also identify errors or misstatements that could require audit adjustments. If we are unable to implement and maintain effective internal control over financial reporting following completion of the Acquisitions, we may fail to prevent or detect material misstatements in our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our securities may decline.

The Wholesale Entities may have liabilities that are not known, probable or estimable at this time.

As a result of the Acquisitions, the Wholesale Entities became subsidiaries of the Company and remain subject to their past, current and future liabilities. There could be unasserted claims or assessments against or affecting the Wholesale Entities, including the failure to comply with applicable laws, regulations, orders and consent decrees or infringement or misappropriation of third party intellectual property or other proprietary rights that we failed or were unable to discover or identify in the course of performing our due diligence investigation of the Wholesale Entities. In addition, there are liabilities of the Wholesale Entities that are neither probable nor estimable at this time that may become probable or estimable in the future, including indemnification requests received from customers of the Wholesale Entities relating to claims of infringement or misappropriation of third party intellectual property or other proprietary rights, tax liabilities arising in connection with ongoing or future tax audits and liabilities in connection with other past, current and future legal claims and litigation. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial results. We may learn additional information about the Wholesale Entities that adversely affects us, such as unknown, unasserted, or contingent liabilities and issues relating to compliance with applicable laws or infringement or misappropriation of third party intellectual property or other proprietary rights.

As a result of the Acquisitions, we and the Wholesale Entities may be unable to retain key employees.

Our success after the Acquisitions depends in part upon our ability to retain key employees of ours and the Wholesale Entities. Key employees may depart because of a variety of reasons relating to the Acquisitions. If we and the Wholesale Entities are unable to retain key personnel who are critical to the successful integration and future operations of the combined company, we could face disruptions in our operations, loss of existing customers, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs. In addition, the loss of key personnel could diminish the anticipated benefits of the Acquisitions.

Stockholders will experience dilution as a consequence of, among other transactions, the issuance of the Class B Common Stock underlying the Series B Preferred in connection with the Acquisitions.

Current stockholders will experience dilution upon the issuance of additional shares of Class B Common Stock upon conversion of the Series B Preferred issued pursuant to the Merger Agreement and the issuance of additional shares of Class B Common Stock upon exercise of the Warrant issued in connection with the Amendment. Such dilution could, among other things, limit the ability of the current stockholders to influence management of RumbleOn, including through the election of directors following the Acquisitions.

 

 

The Acquisitions

On October 26, 2018, the Company entered into (i) the Merger Agreement by and among the Company, the Merger Sub, Holdings, Wholesale, the Wholesale Sellers, and the Wholesale Representative, and (ii) the Purchase Agreement, by and among the Company, the Express Sellers and the Express Representative.

As consideration for the Merger, the Company paid in the aggregate:

As consideration for the Express Purchase, at Closing, Express Sellers received from the Company approximately $4,000,000 in cash, inclusive of working capital adjustments, certain change of control payments due to certain Wholesale Express officers, employees and consultants.

The Merger Agreement

The discussion in this Information Statement of the Merger and the principal terms of the Merger Agreement described below is qualified in its entirety by reference to the copy of the Merger Agreement and the amendment to the Merger Agreement, which are attached as Exhibits 2.1 and 2.2, respectively, to the Company’s Current Report on Form 8-K filed October 31, 2018, and are incorporated herein by reference. The following description summarizes the material provisions of the Merger Agreement, which we urge you to read carefully because it is the principal legal document that governed the Merger.

The representations and warranties described below and included in the Merger Agreement were made by the Company and the Wholesale Sellers as of specific dates. The assertions embodied in these representations and warranties may be subject to important qualifications and limitations mutually agreed to by the Company, Merger Sub, Holdings, Wholesale, the Wholesale Sellers, and the Wholesale Representative, in connection with negotiating the Merger Agreement. The representations and warranties may also be subject to a contractual standard of materiality that may be different from what may be viewed as material to stockholders, or may have been used for the purpose of allocating risk among the Company, Merger Sub, Holdings, Wholesale, the Wholesale Sellers, and the Wholesale Representative, rather than establishing matters as facts. The Merger Agreement is described in this Information Statement only to provide you with information regarding its terms and conditions at the time it was entered into by the Parties.

Basic Deal Terms

 

 

 

 

 

 

 

 

The Series B Preferred will automatically convert into shares of Class B Common Stock, on a 1 to 1 basis, on the Conversion Date.

Upon conversion of the Series B Preferred to Class B Common Stock, 1,317,329 shares of Class B Common Stock will be issued pursuant to the Merger Agreement, which will represent approximately 7% of the Company’s Class B Common Stock (on an as converted basis).

Representations and Warranties

In the Merger Agreement, Holdings, Wholesale, and the Wholesale Sellers made, as of the signing of the Merger Agreement and as of the Closing, certain representations and warranties (subject to certain exceptions and qualifications) about Wholesale relating to, among other things:

 

In the Merger Agreement, the Company and Merger Sub made certain representations and warranties (subject to certain exceptions and qualifications) relating to, among other things:

 

Covenants

The Merger Agreement contains covenants of the parties, including, among other things the following:

 

 

Conditions to Closing

General Conditions

Consummation of the Merger was subject to conditions, including, among others:

 

Indemnification

Survival of Representations and Warranties

The representations and warranties of the Company, Merger Sub and Wholesale Sellers contained in the Merger Agreement will survive for a period of 1 year following the Merger; provided, however, nothing in the Merger Agreement shall operate to limit the common law liability of the Company, Merger Sub and Wholesale Sellers for fraud, which shall extended to the statute of limitations in such events. Any claim for indemnification based upon a misrepresentation or breach of warranty pursuant to the Merger Agreement must be asserted in writing before the expiration of such survival period for indemnification to be available therefor and must exceed specified monetary thresholds in certain circumstances.

Indemnification Rights

From and after the Closing of the Merger, the Company agreed to indemnify each Wholesale Seller from any damages arising from: (a) any misrepresentation or breach of warranty by the Company or Merger Sub contained in the Merger Agreement or any other transaction document; or (b) any failure to perform any covenant or agreement made or contained in the Merger Agreement or other transaction documents.

From and after the Closing of the Merger, the Company, Merger Sub and their respective stockholders, officers and directors shall be indemnified from and against any and all damages arising from:

 

Limitations on Indemnity

Wholesale Sellers’ indemnification obligations with respect to all non-fundamental and tax-related representations and warranties of the Wholesale Sellers are subject to a cap of the value of the 681,481 shares of Series B Preferred held in escrow.

Regulatory and Other Approvals

The business combination and the transactions contemplated by the Merger Agreement and the Purchase Agreement were not subject to any additional foreign, federal or state regulatory requirements or approvals, except for (i) filings with the States of Nevada, Delaware and Tennessee necessary to effectuate the transactions contemplated by the Merger and the Express Purchase, (ii) compliance with applicable securities laws and rules and regulations of the SEC and Nasdaq Capital Market, including approval of the matters set forth herein, and (iii) approval by a the Company’s stockholders holding a majority of the Common Stock regarding issuance of the Class B Common Stock to be issued upon conversion of the Series B Preferred (the “Share Issuance”).

The Purchase Agreement

The discussion in this Information Statement of the Express Purchase and the principal terms of the Purchase Agreement described below is qualified in its entirety by reference to the copy of the Purchase Agreement, which is attached as Exhibit 2.3 to the Company’s Current Report on Form 8-K filed October 31, 2018, and is incorporated herein by reference. The following description summarizes the material provisions of the Purchase Agreement, which we urge you to read carefully because it is the principal legal document that governed the Express Purchase.

 

The representations and warranties described below and included in the Purchase Agreement were made by the Company and the Express Sellers as of specific dates. The assertions embodied in these representations and warranties may be subject to important qualifications and limitations mutually agreed to by the Company, the Express Sellers, and the Express Representative, in connection with negotiating the Purchase Agreement. The representations and warranties may also be subject to a contractual standard of materiality that may be different from what may be viewed as material to stockholders, or may have been used for the purpose of allocating risk among the Company, the Express Sellers, and the Express Representative, rather than establishing matters as facts. The Purchase Agreement is described in this Information Statement only to provide you with information regarding its terms and conditions at the time it was entered into by the Parties.

Basic Deal Terms

The Express Purchase was structured as a one-step transaction. All of the membership interests of Wholesale Express were purchased by the Company and Wholesale Express became a wholly-owned subsidiary of the Company; and

The Company paid, in the aggregate, in exchange for all of the shares in Wholesale Express:

 

Representations and Warranties

In the Purchase Agreement, Express Sellers made, as of the signing of the Purchase Agreement and as of the Closing, certain representations and warranties (subject to certain exceptions and qualifications) about Wholesale Express relating to, among other things:

 

In the Purchase Agreement, the Company made certain representations and warranties (subject to certain exceptions and qualifications) relating to, among other things:

 

 

Covenants

The Purchase Agreement contains covenants of the parties, including, among other things the following:

 

Conditions to Closing

General Conditions

Consummation of the Express Purchase was subject to conditions, including, among others:

 

Indemnification

Survival of Representations and Warranties

The representations and warranties of the Company and Express Sellers contained in the Purchase Agreement will survive for a period of 1 year following the Express Purchase; provided, however, that nothing in the Purchase Agreement shall operate to limit the common law liability of the Company, and Express Sellers for fraud, which shall extended to the statute of limitations in such events. Any claim for indemnification based upon a misrepresentation or breach of warranty pursuant to the Purchase Agreement must be asserted in writing before the expiration of such survival period for indemnification to be available therefor and must exceed specified monetary

Indemnification Rights

From and after the Closing of the Express Purchase, the Company agreed to indemnify each Express Seller from any damages arising from: (a) any misrepresentation or breach of warranty by the Company contained in the Purchase Agreement or any other transaction document; or (b) any failure to perform any covenant or agreement made or contained in the Purchase Agreement or other transaction documents.

From and after the Closing of the Express Purchase, the Company, and their respective stockholders, officers and directors shall be indemnified from and against any and all damages arising from:

 

Limitations on Indemnity

Express Sellers’ indemnification obligations with respect to all non-fundamental and tax-related representations and warranties of the Express Sellers are subject to a cap of the value of the 681,481 shares of Series B Preferred held in escrow.

 

The Financing Transactions

Amendment to Loan and Security Agreement

 

On the Closing Date, the Borrowers, Lender and Agent, entered into the Amendment, amending the Loan Agreement, by and among the Existing Borrowers, Lender and Agent.

 

Under the terms of the Amendment, the Tranche II Advance was funded by Lender to the Borrowers in connection with the Closing Date. The Tranche II Advance has a maturity date of October 1, 2021 and an initial interest rate of 11.00%.

 

Advances under the Amended Loan Agreement will bear interest at a per annum rate equal to the greater of either (i) the prime rate as reported in The Wall Street Journal plus 5.75% or (ii) 10.25%, based on a year consisting of 360 days, with interest computed daily based on the actual number of days elapsed. The Tranche II Advance, and any future amounts that may be advanced under the Amended Loan Agreement, will be due and payable on October 1, 2021.

 

Upon any event of default, the Agent may, at its option, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to Lender by Borrowers. Conditions for an event of default remain unchanged by the Amendment.

 

Agent is secured by a grant of (i) a first lien security interest in all assets of the Borrowers (other than Wholesale) and (ii) a second lien security interest in all assets of Wholesale (clauses (i) and (ii), collectively, the “Collateral”), except that the Collateral should not include (a) more than 65% of the presently existing and later arising issued and outstanding shares of capital stock owned by any Borrower of any foreign subsidiary which shares entitle the holder thereof to vote for directors or any other matter and (b) nonassignable licenses or contracts.

 

On the Closing Date, the Company issued the Warrant to purchase 20,950 shares of the Company’s Class B Common Stock at an exercise price of $7.16 per share to the Lender, which pursuant to the terms and the Warrant, the exercise price of the Warrant was adjusted to $5.55 and the number of Shares of Class B Common Stock underlying the Warrant was adjusted to 27,026. The Warrant is immediately exercisable and expires on October 30, 2023. The Company agreed to file a registration statement registering the resale of the shares underlying the Warrant no later than 90 days after issuance. The information set forth under Item 3.02 of this Current Report on Form 8-K with respect to the Warrant is incorporated herein by reference. 

 

The Private Placement

 

On the Placement Date, the Company also entered into the Securities Purchase Agreement with the Investors pursuant to which the Company agreed to sell in the Private Placement an aggregate of 3,030,000 Private Placement Shares, at a purchase price of $7.10 per share for non-affiliates of the Company, and, with respect to directors participating in the Private Placement, at a price of $8.10 per share. The gross proceeds for the Private Placement were approximately $21.6 million. National Securities Corporation, a wholly owned subsidiary of National Holdings Corporation, and Craig-Hallum Capital Group served as the Placement Agents for the Private Placement. The Company paid the Placement Agents a fee of 6.5% of the gross proceeds in the Private Placement. Net proceeds from the Private Placement and $5,000,000 funded under the Tranche II Advance were used to partially fund the cash consideration of the Merger and the Express Purchase and the balance will be used for working capital purposes. In connection with the Private Placement, the Company and the Placement Agents entered into an Escrow Agreement to facilitate the Private Placement, which is included as Exhibit A to the Securities Purchase Agreement, attached hereto as Exhibit 10.6.

 

Denmar Dixon, a member of the Company’s Board of Directors, invested through Blue Flame Capital, LLC (an entity controlled by Mr. Dixon) $243,000 in the Private Placement for 30,000 shares of Class B Common Stock. Also, Joseph Reece, a member of the Company’s Board of Directors, individually invested $81,000 in the Private Placement for 10,000 shares of Class B Common Stock. These purchases were approved by the Company’s Board of Directors in accordance with Rule 16b-3(d)(1) of the Exchange Act. Messrs. Dixon and Reece abstained from the Company’s Board of Directors’ vote in favor of the Private Placement.

 

Pursuant to the Securities Purchase Agreement, the Company has agreed to file with the SEC a registration statement with respect to the resale of the Private Placement Shares purchased by the Investors under the Securities Purchase Agreement no later than 30 days after the Placement Date, and to have such registration statement declared effective by the SEC no later than (i) 90 days after the Placement Date in the event the SEC does not review such registration statement, or, if earlier, five business days after a determination by the SEC that it will not review such registration statement, or (ii) 180 days after the Placement Date in the event the SEC does review such registration statement, or, if earlier, five business days after the completion of any review by the SEC. In the event the Company does not file such registration statement or does not cause such registration statement to become effective by the applicable deadline or after such registration statement becomes effective it is suspended or ceases to be effective, then the Company will be required to make certain payments as liquidated damages to the Investors under the Securities Purchase Agreement.

 

 

The shares of Series B Preferred (including the underlying Class B Common Stock) issued in the Merger and the Class B Common Stock issued in the Private Placement and the Warrant (including the underlying Class B Common Stock) were and will be issued in reliance on the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, and Regulation D thereunder, as a sale not involving any public offering.

 

Approval of Issuance of Class B Common Stock Underlying the Series B Preferred

In the Merger, the Company issued an aggregate 1,317,329 shares of Series B Preferred as follows:

Type of Stock	Shares	As Converted
Preferred Shares, Issued at Closing	1,317,329	1,317,329

 

Each share of Series B Preferred is convertible on a one-for-one basis into shares of Class B Common Stock. The Series B Preferred will automatically convert into Class B Common Stock 21 days after the mailing of this definitive information statement to the Company’s stockholders, without any further action on the part of the Company or any holder.

On October 30, 2018, immediately prior to the Acquisitions, there were 1,000,000 shares of Class A Common Stock and 14,438,291 shares of Class B Common Stock, issued and outstanding. Stockholders of the Company holding a total of 1,000,000 shares of Class A Common Stock and 4,669,835 shares of Class B Common Stock, representing a majority in voting power of the Company’s outstanding common stock approved by written consent the issuance of the shares of Class B Common Stock underlying the Series B Preferred. The consent is set forth in Appendix A to this Information Statement. This Information Statement describing the Acquisitions and the Conversion is being mailed to non-consenting stockholders of the Company in accordance with Regulation 14C of the Exchange Act.

 

 

Background of the Acquisitions

Highlighted below is a detailed chronology of events leading up to and subsequent to the execution of the Merger Agreement, the Purchase Agreement and the Closing of the Acquisitions and the related financing transactions.

On June 15, 2018, Peter Levy, Vice President of RumbleOn, contacted Chad Cunningham, Vice President of Wholesale and Wholesale Express, suggesting the parties discuss a possible business combination among RumbleOn and the Wholesale Entities.  Mr. Levy had heard through industry contacts that the Wholesale Entities were considering a sale of the businesses and a third-party dealer group had been in conversations with the Wholesale Entities, though no agreement had been reached. After a brief conversation as to the current state of the Wholesale Entities' business the parties agreed to engage in further talks.

 

During the next week, the parties engaged in basic business due diligence and a review of historical financial information and updates as to the Wholesale Entities' current operations and financial condition.

 

On June 25, RumbleOn presented the Wholesale Entities an initial Letter of Intent ("LOI") providing for a $23.0 million purchase price payable in stock of the company. The LOI also provided for the issuance, after closing, to key Wholesale Entities employees up to $2.0 million worth of restricted stock units ("RSUs") from the RumbleOn Equity Incentive Plan. The LOI provided for a one year employment agreement with Steven Brewster, the Chief Executive Officer of the Wholesale Entities, and a seat on the RumbleOn Board for as long as Mr. Brewster owned at least 1.0 million shares of RumbleOn common stock. The LOI also provided for a 90 exclusivity from the signing of the LOI for the parties to complete due diligence, sign definitive agreements, and close the transaction.

 

On July 3, 2018, the Wholesale Entities sent RumbleOn a revised LOI providing that the purchase price be paid half in cash and half in stock and that the stock be issued in a registered transaction. The revised LOI requested an employment period of two to three years for Mr. Brewster. The revised LOI also provided that the exclusivity begin after signing the definitive agreements.

 

On July 9, 2018, the parties and their respective counsels met at the offices of Bass, Berry & Sims PLC ("BBS") in Nashville, Tennessee. In attendance were Messrs. Chesrown, Berrard, and Levy of RumbleOn, Messrs. Brewster and Cunningham and Stephen Watson of the Wholesale Entities, Michael Francis of Akerman, counsel to RumbleOn, and Allen Overby and Taylor Ashley of BBS, counsel to the Wholesale Entities. The parties primarily discussed their differences in how the proposed $23.0 million purchase price for the Wholesale Entities should be paid between cash and stock as well as liability caps and baskets. The parties ended the meeting without coming to definitive agreement on the terms discussed, however to address Mr. Brewster's liquidity concerns, RumbleOn offered an all cash deal. The parties agreed to continue discussions, recognizing the mutual benefits of completing a transaction.

Between July 10 and August 2, 2018, the parties traded correspondence primarily focused on the allocation of purchase price between cash and stock and on August 3, 2018, representatives of the Wholesale Entities provided RumbleOn a further for the Acquisitions. The letter of intent contemplated the $23.0 million purchase price being paid $12.0 million in cash and the balance in shares of RumbleOn non-voting preferred stock, which would be converted to Class B Common Stock after closing upon approval of RumbleOn stockholders in accordance with applicable state corporate and federal securities laws. The revised LOI also provided that after closing, RumbleOn would issue up to $3.0 million in restricted stock units to key employees of the Wholesale Entities as determined by Mr. Brewster. The parties agreed to negotiate representations, warranties, covenants and other terms in connection with preparing the definitive documents and agreed to a 60 day exclusivity from the date of signing. RumbleOn executed the LOI on August 3rd; the Wholesale Entities executed the LOI on August 6th.

On August 6, 2018, Akerman began preparing the definitive agreement and sent to BBS a list of requested materials and information about the Wholesale Entities to be uploaded to a virtual data room that would be set up for the Acquisitions (the "Data Room"). Representatives of the Company and the Wholesale Entities received access to the Data Room on August 7, 2018.

In the course of preparing the definitive agreement, the parties determined to provide for two separate agreements, one for Wholesale and the other for Wholesale Express, allowing for a clear delineation of representations, warranties, and indemnities between the entities. The Wholesale transaction would take the form of a merger with the consideration consisting of a mix of cash and equity in order to provide for optimal tax treatment and the Wholesale Express transaction taking the form of a membership interest purchase all for cash. The parties agreed to allocate the purchase price as between the two entities in the course of their continued due diligence.

On September 4, 2018, Akerman sent BBS a draft Merger Agreement relating to the proposed merger of Wholesale and the Purchase Agreement relating to the acquisition of Wholesale Express. The documents were intended as a framework for the ongoing discussions between the parties, but did not set forth additional specifics as to the financial terms beyond the August 3rd LOI.

 

On September 14, 2018, BBS provided Akerman with its initial comments to the Merger Agreement and advised it would be easier to make conforming changes to the Purchase Agreement once the Merger Agreement was near final form due to the similarity between the two agreements. The revised draft remained silent as to allocation of purchase price between the Wholesale Entities, provided for an all stock escrow rather than cash in an amount equal to 1/11th of the stock consideration, or $1.0 million worth of stock. The draft also significantly revised a number of the representations and warranties, reduced the survival period of the "non-fundamental" representation from three years to one year, and revised the materiality standard.

On September 17, 2018, a term sheet to amend the Company's credit facility with Hercules was received by the Company. Discussions by Akerman and the Company ensued with Hercules and with Cooley LLP (“Cooley”), Hercules’ counsel.

On September 18, 2018, Akerman sent a revised draft of the Merger Agreement to BBS. In this draft, RumbleOn proposed a 20% escrow funded all cash and split the difference of non-fundamental representations to 24 months. The draft also proposed a compromise on materiality by allowing for a materiality standard in connection with an indemnity claim but removing the materiality standard, where appropriate, in the representations and warranties. In response to the draft, on September 19, 2018, Mr. Brewster called Mr. Chesrown and advised Mr. Chesrown that he had decided not to sell the Wholesale Entities.

Continuing to recognize the benefits to the Company of acquiring the Wholesale Entities, and because of the significant differences remaining in terms of the draft Merger Agreement, Messrs. Chesrown and Berrard believed a second trip to Nashville for an in person meeting would be more productive than continuing to exchange draft documents.

On September 20, 2018, the parties and their respective counsels met at the offices of BBS in Nashville, Tennessee. In attendance were Messrs. Chesrown and Berrard of RumbleOn, Messrs. Brewster, Watson, and Cunningham of the Wholesale Entities, Mr. Francis and Sean Coyle of Akerman, counsel to RumbleOn, and Messrs. Overby and Ashley of BBS. The parties primarily discussed allocation of purchase price, agreeing that $4.0 million cash should be allocated to Wholesale Express and the balance of cash and all equity allocated to Wholesale. The parties agreed to expand the scope of the representations and warranties, recognizing the deductible threshold and agreed to a 20% liability cap and agreed to a single escrow covering both the Merger Agreement and the Purchase Agreement.

On September 24, 2018, BBS sent a revised Merger Agreement to Akerman, which reflected the parties' meeting in Nashville. The Akerman and RumbleOn teams' review of the document suggested the reps had not been expanded to the extent anticipated and some open matters remained with regarding which items would be paid out of the escrow and the proper accounting for the escrow.

On September 26, 2018, the parties executed an amendment to the August 3rd LOI extending the exclusivity period out to October 31, 2018.

On September 27, 2018, Akerman sent BBS a supplemental diligence request highlighting remaining open diligence matters.

On September 28, 2018, the Private Placement roadshow begins.

On October 1, 2018, Akerman sent BBS a revised Merger Agreement addressing its view of the parties' ongoing discussion regarding the representations and warranties, escrow, and indemnity.

On October 2, 2018, Akerman presented the Company with its initial issues list summarizing its diligence review of the materials uploaded to the Data Room.

On October 2, 2018, BBS sent Akerman a draft Registration Rights Agreement, providing for demand, piggy-back, and resale registration rights. RumbleOn had understood that only resale registration rights would be provided, in keeping with its prior practice.

On October 3, 2018, BBS sent Akerman and RumbleOn an outstanding issues list, which continued reciting the parties' disagreements as to the coverage of the representations and warranties and open questions regarding escrow and indemnities. The parties did however come to an agreement regarding an aggregate 20% cap on Seller indemnity obligations and a $400,000 basket, each covering both acquisition agreements. The parties further agreed the escrow would be all stock.

On October 5, 2018, the parties discussed a structural change to the Wholesale merger to provide for the requirements of Tennessee dealer license laws, which would not allow the transfer of a dealer license to a new entity, even where that new entity is the surviving entity of a merger solely with the licensed entity. The structure was changed by way of an "F-reorganization" in which the Wholesale Sellers contributed their Wholesale stock to a new entity, Holdings and that entity merged into MergerSub, with MergerSub surviving and Wholesale continuing as a wholly-owned subsidiary of MergerSub. Also on October 5, Akerman updated its diligence memo and diligence request list.

 

On October 9, 2018, BBS sent Akerman a revised Merger Agreement reflecting the revisions agreed to in connection with the October 3 issues list. BBS also provided a revised Registration Rights Agreement, providing for resale registration rights and limited "piggy-back" registration rights. BBS also provided a Stockholders Agreement providing for one independent Board seat for the Wholesale Sellers and Board observation rights.

On October 9, 2018, after review of the revised Merger Agreement and brief conversation between the parties, both parties determined to terminate further negotiations.

On October 15, 2018, the parties determined to meet one final time in Nashville to attempt to work through the points of disagreement.

On October 17, 2018, the parties and their respective counsels met at the offices of BBS in Nashville. In attendance were Messrs. Chesrown of RumbleOn, Messrs. Brewster and Watson of the Wholesale Entities, Mr. Francis of Akerman, counsel to RumbleOn, Messrs. Overby and Ashley of BBS, and Lee Terry, special counsel to RumbleOn. The parties agreed to aggregate cash consideration between the two acquisitions of $16.0 million, with $4 million allocated to Wholesale Express and $12.0 million allocated to Wholesale along with shares allocated only to Wholesale sufficient to provide for optimal tax treatment of the Wholesale transaction, which number of shares would be determined at the time of sign and close. The parties also came to a final agreement on the open representation and warranty matters.

On October 19, 2018, BBS sent Akerman a revised draft Merger Agreement based on the parties discussions in Nashville and Akerman sent BBS a revised draft of the Purchase Agreement conforming changes made to the Merger Agreement that were applicable to the Purchase Agreement.

From October 19, 2018 to October 30, 2018, Akerman and BBS exchanged additional revised drafts of the Merger Agreement and Purchase Agreement, including exhibits attached thereto and corresponding disclosure schedules. The revisions primarily included (i) general updates throughout the Merger Agreement relating to the proposed internal reorganization of Wholesale that was to occur prior to the closing of the transaction, (ii) providing to document the parties agreements on the representation and warranties, and (iii) providing for a simultaneous sign and close of the Acquisitions.

On October 22, 2018, the Wholesale Sellers effected the F-reorganization, with the stockholders of Wholesale, Inc. (the “Former Wholesale”) incorporated Holdings and on October 23, 2018 contributed all of the shares of capital stock owned by each of the stockholders of the Former Wholesale to Holdings, such that, immediately after such contribution, the Former Wholesale became a wholly-owned subsidiary of Holdings (the “Wholesale Contribution”). Effective upon the Wholesale Contribution, Holdings elected to treat the Former Wholesale as a qualified subchapter S subsidiary for federal income tax purposes (the “Q-Sub Election”), such that the Wholesale Contribution together with the Q-Sub Election would be treated as a tax free reorganization of the Company.

On October 23, 2018, BBS sent Akerman the initial draft of Wholesale’s disclosure schedules to the Merger Agreement.

On October 23, 2018, Akerman and the Company received a draft of the Warrant in favor of Hercules and the First Amendment to the Loan and Security Agreement with Hercules (the “First Amendment,” and together with the Warrant, and all related documentation, the “Hercules Financing Documentation”) from Cooley. The First Amendment included the joining of Wholesale and Wholesale Express to the Hercules Financing Documentation.

Between October 23 and October 29, 2018, the Company, Hercules, Akerman and Cooley prepared, revised and exchanged drafts of, and participated in phone negotiations concerning, the Hercules Financing Documentation. Negotiations concerned primarily matters related to (i) the relationship between Hercules and NextGear and the establishment of payment and lien priorities and (ii) financial and other negative and affirmative covenants. By October 30, 2018, Company, Hercules, Akerman and Cooley exchanged executed copies of the Hercules Financing Documentation.

On October 24, 2018, following the Wholesale Contribution and Q-Sub Election, Holdings caused the Former Wholesale to convert from a Tennessee corporation to a Tennessee limited liability company, Wholesale, LLC.

On October 24, 2018, BBS sent Akerman the initial draft of Wholesale Express’ Disclosure Schedules to the Purchase Agreement.

On October 25, 2018, the Board of Directors of the Company approved the Merger Agreement, Purchase Agreement, the Private Placement and the other transactions contemplated thereby, subject to final approval by a Committee established by the Board.

Also, on October 25, 2018, Akerman and the Company received a draft of the Demand Promissory Note and Loan and Security Agreement and related documentation (the “NextGear Financing Documentation”) from NextGear.

 

Between October 25 and October 30, 2018, the Company, Akerman and NextGear exchanged revised drafts of, and participated in phone negotiations concerning the NextGear Financing Documentation. Negotiations concerned primarily matters related to the relationship between Hercules and NextGear and the establishment of payment and lien priorities. On October 30, 2018, Akerman and the Company received an executed copy of the NextGear Financing Documentation.

On October 26, 2018, the Company entered into the Merger Agreement and the Purchase Agreement. The Company also entered into the Securities Purchase Agreement in connection with the Private Placement transaction. The parties agreed to close the Private Placement and the Acquisitions "T+2" and revised the Merger Agreement and the Purchase Agreement to provide for the two day delayed close. RumbleOn issued a press release announcing the execution of the Merger Agreement and the Purchase Agreement and the pricing of the Private Placement.

On October 29, 2018, the parties executed an amendment to the Merger Agreement making a correction to the definition of “Parent Consideration Shares” contained in the Merger Agreement to provide for the agreed upon tax treatment of the Wholesale Merger.

On October 30, 2018, the Company’s shareholders holding a majority of the voting power of the Company executed a written consent approving the issuance of shares of Class B Common Stock upon conversion of the Series B Preferred to be issued pursuant to the Merger Agreement. The Certificate of Merger with respect to the Merger contemplated by the Merger Agreement was filed on October 30, 2018 following the confirmation by BBS of the receipt of the merger consideration.

Also on October 30, 2018, the Acquisitions, the Financing Transactions and the Private Placement closed.

On October 31, 2018, the Company filed a Current Report on Form 8-K, announcing the execution of the amendment, and the closing of the Acquisitions, the Financing Transactions, and the Private Placement.

On February 1, 2019, RumbleOn filed a Preliminary Information Statement relating to the conversion of the Series B Preferred into Class B Common Stock.

 

On February 5, 2019, the Company filed a Definitive Information Statement and commenced mailing the Definitive Information Statement to the Company's stockholders on February 12, 2019. Based on this mailing date, the Series B Preferred will automatically convert to Class B Common Stock on March 4, 2019.

Reasons for the Acquisitions

New Growth Opportunities

The Company’s stated acquisition strategy has been to extend cash offers that provide a low-cost vehicle acquisition source while providing liquidity to its customers, and the Company’s distribution strategy has been to establish a network of regional partner locations that enable the Company to, among other things, improve the cost efficiency of vehicle logistics. The Acquisitions accelerate the Company’s entrance into the automotive industry and will the Company to move its logistics onto the Wholesale Express platform.

Potential Synergies

The Acquisitions create many synergies by providing the Company with greater diversity of customers, markets, products, and revenues generated therefrom. Further, the Acquisitions present significant revenue growth opportunities within the U.S. through the entrance into the pre-owned automotive market, making the Company the sole nationwide online provider allowing for buying, selling, trading, financing and listing of any vehicle. Additionally, there are cost benefits associated with moving the Company’s logistics onto the Wholesale Express platform.

Description of the Acquired Businesses

Wholesale

Wholesale, Inc. was incorporated in Tennessee on April 24, 2003, and was later converted to a Tennessee limited liability company. Following the Acquisitions, Wholesale was converted from a limited liability company to a corporation. Wholesale operates a retail location in Madison, Tennessee, and a combined retail and wholesale location in Mt. Juliet, Tennessee.

 

Services Provided

Wholesale has been in business for over 27 years and is one of the largest independent distributors of pre-owned vehicles in the United States and Wholesale Express is its related logistics company. Wholesale buys and sells approximately 2,000 cars per month to dealers and consumers nationwide, with a historical five-year compounded growth in unit sales is in excess of 15%. Wholesale offers these cars and trucks to consumers for a limited time at the same time as making them available to dealers. Wholesale has grown into a well-respected brand and has an outstanding regional distribution platform that can be replicated to a national footprint. In 2018, Wholesale is expected to sell more than 21,000 vehicles. The Wholesale model has scaled over several years with an acquisition strategy that focuses primarily on acquiring inventory direct from dealers and auctions with a small portion from consumers direct or on trade.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Wholesale, Inc.

The management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes of Wholesale, Inc. included in this information statement.

All references to “we”, “us”, “our”, the “Company” or “Wholesale” in this section refer to Wholesale, Inc. and SRB Remarketing LLC.

Overview

Wholesale, Inc. and SRB Remarketing LLC, a generic branding company, operate two retail outlets selling cars, trucks and SUVs serving Middle Tennessee and the surrounding areas conveniently located near Nashville, Tennessee. Wholesale sells directly to dealers or dealer-only auctions. The volume of inventory, we move, and our connections nationwide gives us a unique market position providing customers with a 5-Star customer service at wholesale prices.

Serving both consumers and dealers, we purchase pre-owned vehicles from auctions, dealers, and consumers. In addition, we offer a large inventory of pre-owned vehicles for sale along with third-party financing. We utilize regional partners in the acquisition of pre-owned vehicles as well as to provide inspection, reconditioning and distribution services.

Key Operations Metrics

Annually we review our company’s operating metrics to help us continue cost effective sourcing of low cost pre-owned vehicles from consumers and dealers while enhancing the selection of vehicles we make available to our customers. Our key operating metrics also demonstrate our ability to translate these drivers into sales and to monetize these retail sales through a variety of product offerings.

Vehicles Sold

We define vehicles sold as the number of pre-owned vehicles sold to either i) directly to consumers through our retail locations or website (“Retail Vehicles”), or ii) to dealers through direct sales or auctions (“Wholesale Vehicles”). We view the number of vehicles sold as a key measure of our growth for several reasons. First, it is the primary driver of our revenue and, indirectly, gross profit, since vehicle sales enable multiple complementary revenue streams, including financing, vehicle service contracts and trade-ins. Second, each vehicle sold increases the base of available customers for referrals and repeat sales. Third, growth in vehicles sold is an indicator of our ability to successfully scale our logistics, fulfillment, and customer service operations.

Gross Profit

We believe that our second key operating metric that should be considered in our operations is the gross wholesale and retail profit of our vehicles sold in both retail and wholesale. Gross profit is the difference between revenue and cost of sales.

Total Average Gross Margin per Vehicle

We define total average gross margin per vehicle as the aggregate gross margin in a given period divided by pre-owned vehicles sold in that period. Total average gross margin per vehicle is driven by sales of pre-owned vehicles to consumers and wholesale which, provides an opportunity to generate finance and vehicle service contract revenue from consumer sales. We believe average gross margin per vehicle is a key measure of our growth and long-term profitability.

 

The following tables provide the annual number of vehicles sold, gross profit and total average gross profit per vehicle for each of the years ended December 31, 2017, 2016 and 2015 and for the three and nine months ended September 30, 2018 and 2017.

	Year Ended December 31
	2017	2016	2015
Retail Vehicles Sold	3,563	3,875	3,494
Wholesale Vehicles Sold	19,151	15,049	11,833
Total Vehicles Sold	22,714	18,924	15,327
Retail Vehicles
Total Gross Profit	$10,998,117	$10,227,378	$11,894,936
Average Gross Profit per Vehicle	$3,087	$2,639	$3,404
Wholesale Vehicles
Total Gross Profit	$9,832,658	$7,682,795	$5,933,708
Average Gross Profit per Vehicle	$513	$511	$501

 

	Three Months Ending September 30		Nine Months Ending September 30
	2018	2017	2018	2017
Retail Vehicles Sold	979	845	2,751	2,747
Wholesale Vehicles Sold	6,317	4,903	17,530	14,981
Total Vehicles Sold	7,296	5,748	20,281	17,728
Retail Vehicles
Total Gross Profit	$2,681,772	$2,750,355	$7,917,511	$8,148,161
Average Gross Profit per Vehicle	$2,739	$3,255	$2,878	$2,966
Wholesale Vehicles
Total Gross Profit	$3,902,183	$2,880,463	$8,918,142	$7,640,291
Average Gross Profit per Vehicle	$618	$587	$509	$510

Components of Results of Operations

Revenue

Revenue is derived from two primary sources: (1) the Company’s physical locations, which include locations in Madison, Tennessee and Mt. Juliet, Tennessee and (2) sales at auction and to other dealerships that are looking for additional used vehicles for their own lots.

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 the Notes to Financial Statements—Note 2— “Summary of Significant Accounting Policies – Revenue Recognition” in the financial statements of Wholesale included in this information statement for a further description of the Company’s revenue recognition.

 

Pre-Owned Vehicle Sales

The number of pre-owned vehicles sold to dealers at auctions is determined based on a number of factors including: (i) filling auction sales channel market demand opportunities to maximize sales and gross margin; (ii) a need to balance the Company’s overall inventory mix and quantity levels against days to sales targets; and (iii) a need to liquidate those pre-owned vehicles that do not meet the Company’s quality standards to be sold at retail. Factors affecting vehicle sales include the number of retail vehicles sold and the average selling price of these vehicles. We generate gross profit on 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 number of vehicles we sell depends on our volume of traffic to our physical locations, visits to our website to view our inventory and pricing, our inventory levels and selection, the effectiveness of our branding and marketing efforts, the quality of our customer sales experience, our volume of referrals and repeat customers, the competitiveness of our pricing, competition and general economic conditions. On a quarterly basis, with demand for pre-owned vehicles reaching the high point in the first half of each year, commensurate with the timing of tax refunds, and diminishing through the rest of the year, with the lowest relative level of pre-owned vehicle sales expected to occur in the fourth calendar quarter.

Our average retail selling price depends on the mix of pre-owned vehicles we acquire and hold in inventory, retail market prices in our markets, our average days to sale, and our pricing strategy. We may choose to shift our inventory mix to higher or lower cost 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.

Other Sales Revenue - We generate other sales and revenue primarily through vehicle financing and vehicle service contracts as described below.

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 fees in the event a contract is prepaid, defaulted upon, or terminated.

Vehicle Service Contracts

At the time of a 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 limitation s), 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 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.

Cost of Sales

Cost of sales is comprised of cost of vehicle sales and cost of other sales and revenue products.

Cost of vehicle sales to consumers and dealers includes the cost to acquire vehicles and the reconditioning and transportation costs associated with preparing these vehicles for resale. Vehicle acquisition costs are driven by the mix of vehicles we acquire, the source of those vehicles and supply and demand dynamics in the vehicle market. Reconditioning costs are billed by third-party providers and include parts, labor, and other repair expenses directly attributable to specific pre-owned vehicles. Transportation costs consist of costs incurred to transport the vehicles from the point of acquisition. Cost of pre-owned vehicle sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.

 

Cost of other sales and revenue products includes primarily the costs of (i) vehicle financing and (ii) vehicle service contracts.

Vehicle Gross Margin

Gross margin is generated on pre-owned 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 and dealer sales channels are different. Pre-owned vehicles sold to consumers through our retail locations generally have the highest dollar gross margin since the vehicle is sold directly to the consumer. Pre-owned vehicles sold thru auction are sold at a price below the retail price offered to consumers, thus the auction and Wholesale are sharing the gross margin. Factors affecting gross margin from period to period include the mix of pre-owned vehicles we acquire and hold in inventory, retail market prices, our average days to sale, and our pricing strategy. We may opportunistically choose to shift our inventory mix to higher or lower cost vehicles, or to opportunistically raise or lower our prices relative to market to take advantage of supply or demand imbalances in our sales channels, which could temporarily lead to average selling prices and gross margins increasing or decreasing in any given channel.

Selling, General and Administrative Expense

Selling, general and administrative expenses include costs and expenses for compensation and benefits, advertising and marketing, and establishing our auction partner arrangements, and other corporate overhead expenses, including expenses associated with legal, accounting, finance, and business development. Selling, general and administrative expenses will continue to increase substantially in future periods as we execute and expand our business through increased management and support personnel to ensure we adequately develop and maintain operational, financial and management controls as well as our reporting systems and procedures.

Depreciation and Amortization

Depreciation and amortization are comprised of the: (i) amortization of capitalized and acquired technology development and (ii) depreciation of vehicle, furniture and equipment.

Interest Expense

Interest expense includes interest incurred on floor plan lending services.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“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 consolidated financial statements and accompanying notes. The Securities and Exchange Commission (the “SEC”) has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, See the Notes to Financial Statements—Note 2— “Summary of Significant Accounting Policies – Revenue Recognition” in the financial statements of Wholesale included in this information statement for a further description of the Company’s revenue recognition. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

Revenue Recognition

The Company records revenue when vehicles are delivered to customers. Conditions for completing a sale include having an agreement with the customer, including pricing, and the sales price must be reasonably expected to be collected.

The Company arranges financing for customers through various financial institutions and receives a commission from the financial institution either in a flat fee 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 also receives commissions from the sale of various insurance contracts to customers. The Company may be assessed a chargeback fee in the event of early cancellation of a loan or insurance contract by the customer.

 

Vehicle Inventory

Vehicle inventory consists of used vehicles, primarily acquired at auction. Direct and indirect vehicle reconditioning costs including parts and labor, inbound transportation costs and other incremental costs are capitalized as a component of inventory. 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 combined income statements.

Results of Operations

Comparison of Years ended December 31, 2017 and 2016

The following table provides our results of operations for each of the years ended December 31, 2017 and 2016, including key financial information pertaining to our business and operations for Wholesale.

	Year Ended December 31,
	2017	%	2016	%
Revenues
Total revenues	$601,075,642	100.0%	$460,163,681	100.0%
Expenses:
Cost of sales	580,244,867	96.5%	442,253,508	96.1%
Selling, general and administrative	17,357,156	2.9%	14,837,403	3.2%
Depreciation and amortization	250,458	0.0%	355,375	0.1%
Total expenses	597,852,481	99.5%	457,446,290	99.4%
Operating Income (loss)	3,223,161	0.5%	2,717,391	0.6%
Interest expense	1,941,106	0.3%	1,235,857	0.3%
Investment income (loss)	119,688	0.0%	661,777	0.1%
Income Before Taxes	1,401,743	0.2%	2,143,311	0.5%
Provision for income taxes	48,500	0.0%	188,600	0.0%
Net Income (loss)	$1,353,243	0.2%	$1,954,711	0.4%

Revenues

Total revenues increased $140,911,961 for the year ended December 31, 2017 as compared to 2016. This increase was driven by the sale of 22,714 pre-owned vehicles to consumers and dealers during the year ended December 31, 2017, representing a 20% increase as compared to 2016. The average selling price of the pre-owned vehicles sold for the year ended December 31, 2017 was $24,462, representing a 8.8% increase as compared to 2016. The average selling price of pre-owned vehicles sold will fluctuate from period to period as a result of changes in the sales mix to consumers and dealers in any given period.

Cost of Sales

Total cost of sales increased $137,991,359 for the year ended December 31, 2017 as compared to 2016. This increase was primarily driven by the 20% increase (3,790 vehicles) in the number of vehicles sold during the year ended December 31, 2017. The average cost of the pre-owned vehicles sold for the year ended December 31, 2017 was $25,546 versus $23,370 in 2016, which represents an increase of 9.3% compared to 2016.

 

Selling, General and Administrative Expense

	Year Ended December 31,
	2017	2016
Selling, General and Administrative
Compensation and Related costs	$8,709,592	$7,971,415
Advertising and Marketing	1,979,555	1,782,317
Professional Fees	292,458	204,690
Selling Expenses	1,400,389	816,461
General and Administrative	4,975,162	4,062,519
	$17,357,156	$14,837,403

 

Selling, general and administrative expenses increased $2,519,753 for the year ended December 31, 2017 as compared to 2016. The increase is in line with the increase in revenues for 2017.

Compensation and related costs increased $738,177 for the year ended December 31, 2017 as compared to 2016. The increase was driven by increased headcount to support all facets of the operations, offset by efficiency gains, as compensation per vehicle sold decreased from $421 per vehicle to $383 per vehicle.

Advertising and marketing increased $197,238 for the year ended December 31, 2017 as compared to 2016, but again was more efficient, decreasing from $94 per vehicle to $87 per vehicle.

Professional fees increased $87,768 for the year ended December 31, 2017 as compared to 2016.

Selling expenses increased $583,928 for the year ended December 31, 2017 as compared to 2016, reflecting a 5 basis point increase relative to revenue. These increases were driven by increased headcount.

General and administrative increased $912,643 for the year ended December 31, 2017 as compared to 2016. However as a percent of sales, it was actually 5 basis points lower (0.83% of revenue in 2017 vs 0.88% of revenue in 2016).

Depreciation and Amortization

Depreciation and amortization decreased $104,917 for the year ended December 31, 2017 as compared to 2016 and was comprised of land, buildings and improvements, transportation fleet equipment, software and furniture, fixtures and equipment.

Operating Income

Operating income increased $505,776 for the year ended December 31, 2017 as compared to 2016. The increase in operating income is primarily the result of the increase in revenues for the year ended December 31, 2017.

Interest Expense

Interest expense increased $705,249 for the year ended December 31, 2017 as compared to 2016. The increase in interest expense is the result of floor plan and volume increases.

Investment income (loss)

Investment income decreased $542,089 for the year ended December 31, 2017 as compared to 2016. The decrease is the result of stock and equity investment performance.

Provision for Income Taxes

Provisions for income taxes decreased $140,100 for the year ended December 31, 2017 as compared to 2016. The decrease in provisions for income taxes was the result of a decrease in income before taxes primarily due to an increase in interest expense for 2017 and a decrease in investment income in 2017.

Net Income

Net income decreased $601,468 for the year ended December 31, 2017 as compared to 2016 as a result of the foregoing.

 

Liquidity and Capital Resources

The sale of used cars and trucks is a capital intensive business that is typically supported by lenders that finance the vast majority of inventory, both in dollars and units. Additionally, in most instances, particularly when an inventory vehicle that has been financed is sold through an auction partner, the net proceeds are remitted quickly, thus receivables balances tend to be low relative to the revenue recognized.

The following table sets forth a summary of our cash flows for the years ended December 31, 2017 and 2016:

	Year Ended December 31,
	2017	2016
Net Cash provided by (used in) operating activities	$2,005,454	$676,460
Net Cash provided by (used in) investing activities	(1,614,470)	(987,185)
Net Cash provided by (used in) financing activities	98,484	836,053
Net increase (decrease) in cash	$489,198	$523,328

 

Wholesale finances vehicle purchases / inventory utilizing the Next Gear Capital floorplan. The delivery of the vehicle is a non-cash transaction prior to the funding of the Next Gear Capital floorplan. The vehicle purchase is reflected as a negative cash balance in order to take delivery of the vehicle.

Operating Activities

Net cash provided by operating activities increased $1,328,994 to $2,005,454 for the year ended December 31, 2017, as compared to 2016. The increase is attributable to an increase in current liabilities relative to current assets, particularly a net cash increase of $1,052,345 from floorplan financing. Additionally, there was an increase in other current liability accounts that offset a use of $1,265,917 from the growth in accounts receivables.

Investing Activities

Net cash provided by investing activities increased $627,555 to ($1,614,470) for the year ended December 31, 2017 as compared to 2016. A key driver in the increase in cash used in investing activities was the funding of improvements at the Mount Juliet location.

Financing Activities

Net cash provided by financing activities decreased $737,569 to $98,484 for the year ended December 31, 2017 as compared to 2016, primarily driven by a $855,055 increase in distributions to stockholders.

Off-Balance Sheet Arrangements

As of December 31, 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.

The Company leases its administrative offices and retail facilities on a month-to-month basis from its sole stockholder (before the Merger) for approximately $54,000 per month. Total rent paid to the stockholder was $648,000 and $602,000 for the years ended December 31, 2017 and 2016, respectively.

 

The amount due from the stockholder for advances or unreimbursed personal expenses totaled $3,621,422 and $438,204 as of December 31, 2017, and 2016, respectively.

In the normal course of operations, the Company utilizes transportation services of Wholesale Express, a related party. Freight purchases from Wholesale Express totaled $583,954 and $559,641 as of December 31, 2017 and 2016, respectively. In addition, in 2016, the Company made advances totaling $70,000 to Wholesale Express, primarily to accommodate expansion and other financing needs of the related entity. As of December 31, 2017 the Company had a balance due to Wholesale Express for $215,000, and at December 31, 2016, the Company was owned a balance of $70,000 from Wholesale Express at December 31, 2016.

 

Comparison of Years ended December 31, 2016 and 2015

The following table provides our results of operations for each of the years ended December 31, 2016 and 2015, including key financial information pertaining to our business and operations for Wholesale.

	Year Ended December 31,
	2016	%	2015	%
Revenues
Total revenues	$460,163,681	100.0%	$353,839,506	100.0%
Expenses:
Cost of sales	442,253,508	96.1%	336,010,862	95.0%
Selling, general and administrative	14,837,403	3.2%	14,839,594	4.2%
Depreciation and amortization	355,375	0.1%	379,084	0.1%
Total expenses	457,446,295	99.4%	351,229,540	99.3%
Operating Income (loss)	2,717,391	0.6%	2,609,966	0.7%
Interest expense	1,235,857	0.3%	1,017,533	0.3%
Investment income (loss)	661,777	0.1%	(326,790)	-0.1%
Income Before Taxes	2,143,311	0.5%	1,265,643	0.4%
Provision for income taxes	188,600	0.0%	80,300	0.0%
Net Income (loss)	$1,954,711	0.4%	$1,185,343	0.3%

Revenues

Total revenues increased $106,324,175 for the year ended December 31, 2016 as compared to 2015. The increase in revenues was driven by our expanding auction presence and inventory selection. We anticipate that pre-owned vehicle sales will continue to grow as we increase auction presence. This increase was driven by the sale of 18,924 pre-owned vehicles to consumers and dealers during the year ended December 31, 2016, representing a 23.5% increase as compared to 2015. The average selling price of the pre-owned vehicles sold for the year ended December 31, 2016 was $24,316, representing a 5.3% increase as compared to 2015. The average selling price of pre-owned vehicles sold will fluctuate from period to period as a result of changes in the sales mix to consumers and dealers in any given period.

Cost of Sales

Total cost of sales increased $106,242,646 for the year ended December 31, 2016 as compared to 2015. This increase was primarily driven by 23.5% increase (3,597 vehicles) in the number of vehicles sold during the year ended December 31, 2016, representing a % increase as compared to 2015. The average cost of the pre-owned vehicles sold for the year ended December 31, 2016 was $23,370, as compared to $21,923 in 2015.

Selling, General and Administrative Expense

	Year Ended December 31,
	2016	2015
Selling, General and Administrative
Compensation and Related costs	$7,971,415	$8,516,958
Advertising and Marketing	1,782,317	1,690,917
Professional Fees	204,690	181,482
Selling Expenses	816,461	702,570
General and Administrative	4,062,519	3,747,667
	$14,837,403	$14,839,594

 

 

Selling, general and administrative expenses decrease $2,191 for the year ended December 31, 2016 as compared to 2015. The decrease is a result of consolidating certain retail functions resulting in lower compensation expense offset by increases in selling expenses and general and administrative costs.

Compensation and related costs decreased $545,543 for the year ended December 31, 2016 as compared to 2015. The decrease was as a result of consolidating certain retail functions and resulted in compensation costs per vehicle sold decreasing $134 per vehicle

Advertising and marketing increased $91,400 for the year ended December 31, 2016 as compared to 2015. The increase is a result of the costs associated with opening additional auction locations. Despite the dollar increase, the cost per advertising and marketing cost per vehicle sold decreased 14.6%.

Professional fees increased $23,208 for the year ended December 31, 2016 as compared to 2015. This increase was primarily a result of legal, accounting and other professional fees and expenses incurred in connection with consolidating certain retail functions and opening additional auction locations.

Selling expenses increased $113,891 for the year ended December 31, 2016 as compared to 2015, however the selling expenses per vehicle sold decreased from $46 to $43. The aggregate dollar increase is a result of the cost and expenses associated with the opening additional auction locations and the related increase in volume.

General and administrative increased $314,852 for the year ended December 31, 2016 as compared to 2015. The increase is a result of the cost and expenses associated with the opening of additional auction locations offset by efficiency gains, with the general and administrative costs per vehicle sold decreasing by $30.

Depreciation and Amortization

Depreciation and amortization decreased $23,705 for the year ended December 31, 2016 as compared to 2015 and was comprised of land, buildings and improvements, transportation fleet equipment, software and furniture, fixtures and equipment.

Operating Income

Operating income increased $107,425 for the year ended December 31, 2016 as compared to 2015. The increase in operating income is primarily the result of the increase in revenues for the year ended December 31, 2016.

Interest Expense

Interest expense increased $218,324 for the year ended December 31, 2016 as compared to 2015. The increase in interest expense is the result of floor plan and volume increases.

Investment income (loss)

Investment income increased $988,567 for the year ended December 31, 2016 as compared to 2015. The increase is the result of stock and equity investment performance.

Provision for Income Taxes

Provision for income taxes increased $108,300 for the year ended December 31, 2016 as compared to 2015. The increase in the provisions for income taxes is primarily the result of an increase in operating income and investment income in 2016.

Net Income

Net income increased $769,368 for the year ended December 31, 2016 as compared to 2015 as a result of the foregoing.

Liquidity and Capital Resources

The sale of used cars and trucks is a capital intensive business that is typically supported by lenders that finance the vast majority of inventory, both in dollars and units. Additionally, in most instances, particularly when an inventory vehicle that has been financed is sold through an auction partner, the net proceeds are remitted quickly, thus receivables balances tend to be low relative to the revenue recognized.

 

The following table sets forth a summary of our cash flows for the years ended December 31, 2016 and 2015:

	Year Ended December 31,
	2016	2015
Net Cash provided by (used in) operating activities	$676,460	$4,269,997
Net Cash provided by (used in) investing activities	(987,185)	(2,028,121)
Net Cash provided by (used in) financing activities	836,053	(2,468,130)
Net increase (decrease) in cash	$523,328	$(226,254)

 

Wholesale finances vehicle purchases utilizing the Next Gear Capital floorplan. The delivery of the vehicle is a non-cash transaction prior to the funding of the Next Gear Capital floorplan. The vehicle purchase is reflected as a negative cash balance in order to take delivery of the vehicle.

Operating Activities

Net cash provided by operating activities decreased $3,593,537 to $676,460 for the year ended December 31, 2016 as compared to 2015. Key contributors to this include an $859,819 decrease in accounts receivable and prepaid expenses offset by a $3,117,836 reduction in floorplan payable with only an $826,894 reduction in total inventory.

Investing Activities

Net cash provided by investing activities decreased $1,040,936 to $987,185 for the year ended December 31, 2016 as compared to 2015. The increase in cash used for investment activities was primarily the result of stock and equity positions.

Financing Activities

Net cash provided by financing activities increased $3,304,183 to $836,053 for the year ended December 31, 2016 as compared to 2015; a reduction of $1,065,000 in stockholder distributions contributed to this increase.

Off-Balance Sheet Arrangements

As of December 31, 2016, 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.

The Company leases its administrative offices and retail facilities on a month-to-month basis from the Company’s sole stockholder (before the Merger) for approximately $54,000 per month. Total rent paid to the stockholder was $602,000 and $372,000 for the years ended December 31, 2016, and 2015, respectively.

The amount due from the stockholder for advances or unreimbursed personal expenses totaled $438,204 and $421,627 as of December 31, 2016, and 2015, respectively.

In the normal course of operations, the Company utilizes transportation services of Wholesale Express, a related party. Freight purchases from Wholesale Express totaled $559,641 as of December 31, 2016. In addition, in 2016, the Company made advances totaling $70,000 to Wholesale Express, primarily to accommodate expansion and other financing needs of the related entity. At December 31, 2016, the Company had a balance from Wholesale Express of $70,000.

Comparison of Three Months ended September 30, 2018 and 2017

The following table provides our results of operations for each of the quarter ending September 30, 2018 and 2017, including key financial information pertaining to our business and operations for Wholesale.

	Three Months Ended September 30,
	2018	%	2017	%
Revenues
Total revenues	$181,825,317	100.0%	$163,185,677	100.0%
Expenses:
Cost of sales	175,241,361	96.4%	157,554,858	96.6%
Selling, general and administrative	5,331,990	2.9%	4,071,363	2.5%
Depreciation and amortization	77,475	0.0%	72,283	0.0%
Total expenses	180,650,826	99.4%	161,698,504	99.1%
Operating Income (loss)	1,174,491	0.6%	1,487,173	0.9%
Interest expense	682,961	0.4%	505,530	0.3%
Investment income (loss)	110,576	0.1%	11,899	0.0%
Income Before Taxes	602,106	0.3%	993,542	0.6%
Provision for income taxes	-	0.0%	-	0.0%
Net Income (loss)	$602,106	0.3%	$993,542	0.6%

 

Revenues

Total revenues increased $18,639,640 for the three months ended September 30, 2018 as compared to the same period in 2017. The increase in revenues was driven by our expanding auction presence and inventory selection. We anticipate that pre-owned vehicle sales will continue to grow as we increase auction presence. This increase was driven by the sale of 7,296 pre-owned vehicles to consumers and dealers during the three months ended September 30, 2018, representing a 26.9%% increase as compared to the same period in 2017. The average selling price of the pre-owned vehicles sold for the three months ended September 30, 2018 was $24,921, representing a 12.2% decrease as compared to the same period in 2017. The average selling price of pre-owned vehicles sold will fluctuate from period to period as a result of changes in the sales mix to consumers and dealers in any given period.

Cost of Sales

Total cost of sales increased $17,686,503 for the three months ended September 30, 2018 as compared to the same period in 2017, as a percentage of sales, total cost of sales was 96.4%, down 17 basis points from the same period in 2017. This total dollar increase was driven by an increase in the number of vehicles sold from 5,748 in the three months ended September 2017 to 7,296 in the three months ended September 30, 2018, an 26.9% increase. The average cost of the pre-owned vehicles sold for the three months ended September 30, 2018 was $24,019, down from $27,410 the prior year.

Selling, General and Administrative Expense

	Three Months Ended September 30,
	2018	2017
Selling, General and Administrative
Compensation and Related costs	$3,185,256	$2,594,065
Advertising and Marketing	135,753	146,592
Professional Fees	351,556	55,800
Selling Expenses	267,436	359,519
General and Administrative	1,391,989	915,387
	$5,331,990	$4,071,363

 

Selling, general and administrative expenses increased $1,260,627 to $5,331,900 for the three months ended September 30, 2018 as compared to the same period in 2017. The increase is in line with the increase in revenues in 2018 plus one-time charges related to the Merger.

Compensation and related costs increased $591,191 for the three months ended September 30, 2018 as compared to the same period in 2017. This is the result of more persons required to support the growth of the business offset by efficiencies, as compensation in per vehicle sold decreased by 3.3%

Advertising and marketing decreased $10,839 for the three months ended September 30, 2018 as compared to the same period in 2017.

Professional fees increased $295,756 for the three months ended September 30, 2018 as compared to the same period in 2017. The increase is primarily the result of expenses in connection with the Merger.

Selling expenses decreased $92,083 for the three months ended September 30, 2018 as compared to the same period in 2017.

General and administrative expenses increased $476,602 for the three months ended September 30, 2018 as compared to the same period in 2017. This increase is attributable to growth in the business plus extra support utilized during the Merger process.

Depreciation and Amortization

Depreciation and amortization increased $5,192 for the three months ended September 30, 2018 as compared to the same period in 2017 and was comprised of land, buildings and improvements, transportation fleet equipment, software and furniture, fixtures and equipment.

Operating Income

Operating income decreased $312,682 for the three months ended September 30, 2018 as compared to the same period in 2017. The decrease is primarily the result of increases in cost of sales and selling, general and administrative expenses, including expenses in connection with the Merger in 2018.

 

Interest Expense

Interest expense increased $177,431 for the three months ended September 30, 2018 as compared to the same period in 2017. The increase in interest expense is the result of floor plan and volume increases.

Investment income (loss)

Investment income (loss) increased $98,677 for the three months ended September 30, 2018 as compared to the same period in 2017. The increase is the result of stock and equity investment performance.

Provision for Income Taxes

Provision for income taxes was $0 for the three months ended September 30, 2018 as third quarter income was lower and the Company had an adequate accrual.

Net Income

Net income decreased $391,439 for the three months ended September 30, 2018 as compared to the same period in 2017 as a result of the foregoing.

Liquidity and Capital Resources

The sale of used cars and trucks is a capital intensive business that is typically supported by lenders that finance the vast majority of inventory, both in dollars and units. Additionally, in most instances, particularly when an inventory vehicle that has been financed is sold through an auction partner, the net proceeds are remitted quickly, thus receivables balances tend to be low relative to the revenue recognized.

The following table sets forth a summary of our cash flows for the three months ended September 30, 2018 and 2017:

	Three Months Ended September 30
	2018	2017
Net Cash provided by (used in) operating activities	$2,446,792	$(283,029)
Net Cash provided by (used in) investing activities	3,692,171	(237,919)
Net Cash provided by (used in) financing activities	(4,716,916)	601,046
Net increase (decrease) in cash	$1,422,046	$80,097

 

Wholesale finances vehicle purchases utilizing the Next Gear Capital floorplan. The delivery of the vehicle is a non-cash transaction prior to the funding of the Next Gear Capital floorplan. The vehicle purchase is reflected as a negative cash balance in order to take delivery of the vehicle.

Operating Activities

Net cash provided by operating activities increased $2,729,821 to $2,446,792 for the three months ended September 30, 2018 as compared to the same period in 2017. This change in cash generated is primarily the result of non-inventory working capital management; For example, accounts receivable improved accounted for $815,433 as the change, and accounts payable management yielded $1,766,606 of incremental cash. Portions of these changes are attributable to factors, including payoff for vehicles sold.

Investing Activities

Net cash provided by investing activities increased $3,930,090 to $3,692,171 for the three months ended September 30, 2018 as compared to the same period in 2017. The increase in cash used in investing activities is the result of a third quarter distribution. This change is primarily the result of a change in the amount due from a stockholder.

Financing Activities

Net cash provided by financing activities decreased $5,317,926 to ($4,718,916) the three months ended September 30, 2018 as compared to the same period in 2017. The decrease in cash provided by financing is the result of a third quarter distribution.

 

Off-Balance Sheet Arrangements

As of September 30, 2018, 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.

The Company leases its administrative offices and retail facilities on a month-to-month basis from the sole stockholder of the Company for approximately $54,000 per month. Total rent paid to the stockholder was $162,000 and $162,000, the three months ended September 30, 2018 and 2017, respectively.

 

The amount due from the stockholder for advances or unreimbursed personal expenses totaled $0 and 438,204 as of September 30, 2018, and 2017, respectively.

In the normal course of operations, the Company utilizes transportation services of Wholesale Express, a related party. Freight purchases from Wholesale Express totaled $1,478,810.03 and $72,410 for the three months ended September 30, 2018 and 2017, respectively. In addition, in 2016, the Company made advances totaling $70,000 to Wholesale Express, primarily to accommodate expansion and other financing needs of the related entity. As of September 30, 2018 and 2017, the Company had a balance due to Wholesale Express for $720,000 and $215,000, respectively.

Comparison of Nine Months ended September 30, 2018 and 2017

The following table provides our results of operations for each of the nine months ended September 30, 2018 and 2017, including key financial information pertaining to our business and operations for Wholesale and Wholesale Express.

	Nine Months Ended September 30,
	2018	%	2017	%
Revenues
Total revenues	$497,057,150	100.0%	$466,498,935	100.0%
Expenses:
Cost of sales	480,221,497	96.6%	450,810,483	96.6%
Selling, general and administrative	13,825,952	2.8%	12,759,977	2.7%
Depreciation and amortization	244,312	0.0%	178,175	0.0%
Total expenses	494,291,761	99.4%	463,748,635	99.4%
Operating Income (loss)	2,765,389	0.6%	2,750,300	0.6%
Interest expense	2,030,693	0.4%	1,398,468	0.3%
Investment income (loss)	125,312	0.0%	36,241	0.0%
Income Before Taxes	860,008	0.2%	1,388,073	0.3%
Provision for income taxes	86,000	0.0%	48,500	0.0%
Net Income (loss)	$774,008	0.2%	$1,339,573	0.3%

Revenues

Total revenues increased $30,558,215 for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase in revenues was driven by our expanding auction presence and inventory selection. We anticipate that pre-owned vehicle sales will continue to grow as we increase auction presence. This increase was driven by the sale of 20,281 pre-owned vehicles to consumers and dealers during the nine months ended September 30, 2018, representing a 14.4% increase as compared to the same period in 2017. The average selling price of the pre-owned vehicles sold for the nine months ended September 30, 2018 was $24,509, representing a 6.9% decrease as compared to the same period in 2017. The average selling price of pre-owned vehicles sold will fluctuate from period to period as a result of changes in the sales mix to consumers and dealers in any given period.

Cost of Sales

Total cost of sales increased $29,411,014 for the nine months ended September 30, 2018 as compared to the same period in 2017. This dollar increase was driven by the sale of an additional 2,553 vehicles during the nine months ended September 30, 2018 as compared to the same period in 2017, however the cost as a percentage of sales was the same.. The average cost of the pre-owned vehicles sold for the nine months ended September 30, 2018 was $23,678, excluding auction fees, transportation and reconditioning cost, a dollar decrease of 6.5% as compared to the same period in 2017, but consistent as a percentage of revenue.

 

Selling, General and Administrative Expense

	Nine Months Ended September 30,
	2018	2017
Selling, General and Administrative
Compensation and Related costs	$8,076,730	$7,590,259
Advertising and Marketing	528,785	445,889
Professional Fees	601,251	201,429
Selling Expenses	713,573	930,697
General and Administrative	3,905,613	3,591,703
	$13,825,952	$12,759,977

 

Selling, general and administrative expenses increased $1,065,975 for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase is in line with the increase in revenues for 2018.

Compensation and related costs increased $486,471 for the nine months ended September 30, 2018 as compared to the same period in 2017 as a result of the increase in vehicles sales, however the compensation per vehicle sold was 7% lower for the nine-months end September 30, 2018 vs the same period in 2017.

Advertising and marketing increased $82,896, yet was the same percentage of revenue, for the nine months ended September 30, 2018 as compared to the same period in 2017.

Professional fees for the nine months ending September 30, 2018 were 298% of the prior year, representing an increase of $399,822 as compared to the same period in 2017. The increase is primarily the result of expenses in connection with the Merger.

Selling expenses decreased $217,124, or 23.3%, for the nine months ended September 30, 2018 as compared to the same period in 2017. On a per vehicle basis, the selling expense was down 33.0% vs the prior year period, and reflects increased efficiency.

General and administrative expenses increased $313,910, or 8.7%, for the nine months ended September 30, 2018 as compared to the same period in 2017; that results in a 4.9% decrease on a per unit basis for the period. The costs were negatively impacted by management’s involvement in the Merger.

Depreciation and Amortization

Depreciation and amortization increase $66,137 for the nine months ended September 30, 2018 as compared to the same period in 2017 and was comprised of land, buildings and improvements, transportation fleet equipment, software and furniture, fixtures and equipment.

Operating Income

Operating income increased $15,089 for the nine months ended September 30, 2018 as compared to the same period in 2017. A $1,147,201 increase in gross margin was offset by incremental costs associated with the Merger and other items discussed above.

Interest Expense

Interest expense increased $632,225 for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase in interest expense is a result of floor plan and volume increases.

Investment income (loss)

Investment income increased $89,071 for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase is a result of stock and equity investment performance.

Provision for Income Taxes

Provision for income taxes increased $37,500 for the nine months ended September 30, 2018 as compared to the same period in 2017.

 

Net Income

Net income was $774,008, a decrease of $565,565 for the nine months ended September 30, 2018 as compared to the same period in 2017 as a result of the foregoing, with the incremental increase in interest expense of $632,255 being the larger factor.

Liquidity and Capital Resources

The sale of used cars and trucks is a capital intensive business that is typically supported by lenders that finance the vast majority of inventory, both in dollars and units. Additionally, in most instances, particularly when an inventory vehicle that has been financed is sold through an auction partner, the net proceeds are remitted quickly, thus receivables balances tend to be low relative to the revenue recognized.

The following table sets forth a summary of our cash flows for the nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30
	2018	2017
Net Cash provided by (used in) operating activities	$(842,173)	$2,878,469
Net Cash provided by (used in) investing activities	4,208,160	(1,480,861)
Net Cash provided by (used in) financing activities	(4,329,330)	(312,545)
Net increase (decrease) in cash	$(963,343)	$1,085,063

 

Wholesale finances vehicle purchases utilizing the Next Gear Capital floorplan. The delivery of the vehicle is a non-cash transaction prior to the funding of the Next Gear Capital floorplan. The vehicle purchase is reflected as a negative cash balance in order to take delivery of the vehicle.

Operating Activities

Net cash provided by operating activities was 842,173 for the nine months ended September 30, 2018 as compared to the same period in 2017. A significant portion of cash use was attributable to an approximately $3.1 million increase in the equity in the inventory.

Investing Activities

Net cash from investing activities increased $5,689,021 to $4,208,160 for the nine months ended September 30, 2018 as compared to the same period in 2017. The increase in cash is the liquidation of the Company’s brokerage account.

Financing Activities

The company used $4,329,330 cash in financing activities vs use of $312,545 the prior year period, an increased use of $4,016,785. Increased stockholder distribution accounted for $2,161,622 of the charge.

Off-Balance Sheet Arrangements

As of September 30, 2018, 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.

The Company leases its administrative offices and retail facilities on a month-to-month basis from the sole stockholder of the Company for approximately $54,000 per month. Total rent paid to the stockholder was $486,000 for each of the nine months ended September 30, 2018 and 2017.

 

The amount due from the stockholder for advances or unreimbursed personal expenses totaled $0 and $438,204 as of September 30, 2018, and 2017, respectively.

 

In the normal course of operations, the Company utilizes transportation services of Wholesale Express, a related party. Freight purchases from Wholesale Express totaled $2,213,432 and $643,992 for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018 and 2017, the Company had a due to Wholesale Express for $720,000 and $215,000, respectively.

In the normal course of operations, the Company utilizes transportation services of Wholesale Express, a related party. Freight purchases from Wholesale Express totaled $583,954 and $559,641 as of September 30, 2018 and 2017, respectively. In addition, in 2016, the Company made advances totaling $70,000 to Wholesale Express, primarily to accommodate expansion and other financing needs of the related entity. As of September 30, 2018 and 2017, the Company had a due to Wholesale Express for $720,000 and $215,000, respectively.

 

Wholesale Express, LLC

Wholesale Express, LLC is a Tennessee based limited liability company headquartered in Mt. Juliet, Tennessee. Wholesale Express is a nationwide high-volume automotive transport company and is engaged in domestic freight brokerage.

Services Provided

Wholesale Express was started to provide transportation services between dealerships and auctions. Wholesale Express is still focused on the one philosophy that started it all - customer satisfaction. Our valued employees help fuel that philosophy daily by keeping the customer’s interest its top priority, all while moving cars quickly and efficiently.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Wholesale Express, LLC

The management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes of Wholesale Express, LLC included in this information statement.

All references to “we”, “us”, “our”, or “Wholesale Express” in this section refer to Wholesale Express, LLC.

Overview

Wholesale Express, LLC is a Tennessee based limited liability company headquartered in Mt. Juliet, Tennessee. Wholesale Express is a nationwide high-volume automotive transport company and is engaged in domestic freight brokerage.

Wholesale Express was started to provide transportation services between dealerships and auctions. Wholesale Express is still focused on the one philosophy that started it all - customer satisfaction. Our valued employees help fuel that philosophy daily by keeping the customer’s interest its top priority, all while moving cars quickly and efficiently.

Key Operations Metrics

We review our company’s key operating metrics regularly to help us grow our business and maximize the opportunity to provide transportation services to dealerships across the country. While some growth is through our related party, Wholesale, Inc., our operations have grown to three locations in Tennessee, Arizona, and Michigan, which allows for more organic growth across the country.

Units Delivered

We define units delivered as the number of units transported from one location to another location on behalf of the customer. Units delivered is the main component of our operations and solely what our company performance relies on to succeed. Our results of operations are driven by units delivered, and with an increase in units delivered, an increase in net profit is expected.

The following tables provide the number of units delivered for each of the years ended December 31, 2017 and 2016 and three and nine months ended September 30, 2018 and 2017.

Gross Profit

We believe that our second key operating metric that should be considered in our operations is the gross profit on our transported vehicles. Gross profit is the difference between revenue and costs of revenue.

Total Average Gross Margin per Vehicle

Total average gross margin per vehicle is driven by sales of transported vehicles to consumers and dealers. We believe average gross margin per vehicle is a key measure of our growth and long-term profitability

A summary of our performance for the periods covered in this discussion is below.

	Year Ended December 31,
	2017	2016
Units Delivered	53,320	45,000*
Gross Profit	$3,750,563	$1,907,971
Gross Margin Per Vehicle	$70.34	$42.40

* The number provided is an estimate. Accounting software was changed after 2016, and the report to pull the exact number of units delivered is no longer available.

 

	Three Months Ended September 30		Nine Months Ended September 30
	2018	2017	2018	2017
Units Delivered	20,407	14,428	60,696	47,958
Gross Profit	$1,665,435	$1,034,859	$4,446,325	$2,674,287
Gross Margin Per Vehicle	$81.61	$71.73	$73.26	$55.76