UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2019

OR

Commission file number: 001-38248

RumbleOn, Inc. (Exact name of registrant as specified in its charter)
Nevada		46-3951329
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1350 Lakeshore Drive Suite 160 Coppell, Texas		75019
(Address of principal executive offices)		(Zip Code)

 

		(469) 250-1185
		(Registrant's telephone number, including area code)
	(Former name, former address and former fiscal year, if changed since last report)

 

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

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

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

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

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

Large accelerated filer ☐ Non-accelerated filer ☒

Accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☒

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

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

The number of shares of Class B Common Stock, $0.001 par value, outstanding on November 8, 2019 was 22,233,620 shares. In addition, 1,000,000 shares of Class A Common Stock, $0.001 par value, were outstanding on November 8, 2019.

RUMBLEON, INC.

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

Table of Contents to Report on Form 10-Q

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	54
Item 4.	Controls and Procedures	54
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
SIGNATURES		55

 

 

 

 

 

 

    

PART I - FINANCIAL INFORMATION

RumbleOn, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

	As of September 30, 2019	As of December 31, 2018
ASSETS
Current assets:
Cash	$6,723,038	$9,134,902
Restricted Cash	6,671,118	6,650,000
Accounts receivable, net	13,186,144	8,465,810
Inventory	49,522,995	52,191,523
Prepaid expense and other current assets	1,358,152	1,096,945
Total current assets	77,461,447	77,539,180
Property and equipment, net	6,473,477	5,177,877
Right-of-use asset	2,131,846	-
Goodwill	28,736,563	26,107,146
Other assets	120,581	102,178
Total assets	$114,923,914	$108,926,381
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$10,746,627	$10,554,913
Accrued interest payable	1,094,858	206,037
Current portion of convertible debt	1,234,936	-
Current portion of long-term debt	53,566,398	58,555,006
Total current liabilities	66,642,819	69,315,956
Long-term liabilities:
Note payable	-	8,792,919
Convertible Debt	19,720,113	-
Derivative liabilities	510,000	-
Other long-term liabilities	1,655,202	-
Total long-term liabilities	21,885,315	8,792,919
Total liabilities	88,528,134	78,108,875
Commitments and contingencies (Notes 4, 6, 7, 8, 9, 13, 16)
Stockholders' equity:
Class B Preferred stock, $0.001 par value, 10,000,000 shares authorized, none and 1,317,329 shares issued and outstanding as of September 30, 2019 and December 31, 2018	-	1,317
Common A stock, $0.001 par value, 1,000,000 shares authorized, 1,000,000 shares issued and outstanding as of September 30, 2019 and December 31, 2018	1,000	1,000
Common B stock, $0.001 par value, 99,000,000 shares authorized, 22,219,420 and 17,486,291 shares issued and outstanding as of September 30, 2019 and December 31, 2018	22,219	17,486
Additional paid in capital	90,727,000	64,998,817
Accumulated deficit	(64,354,439)	(34,201,114)
Total stockholders' equity	26,395,780	30,817,506
Total liabilities and stockholders' equity	$114,923,914	$108,926,381

 

See Notes to the Condensed Consolidated Financial Statements.

 

 

RumbleOn, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Revenue:
Pre-owned vehicle sales:
Powersports	$27,153,474	$18,975,968	$84,388,321	$40,858,916
Automotive	187,108,303	-	611,871,819	-
Transportation	6,058,546	-	17,417,846	-
Other	-	279,054	-	390,845
Total Revenue	220,320,323	19,255,022	713,677,986	41,249,761
Cost of revenue
Powersports	24,280,599	17,248,588	74,367,614	37,419,594
Automotive	179,672,614	-	585,163,984	-
Transportation	4,352,585	-	12,523,281	-
Total Cost of Revenue	208,305,798	17,248,588	672,054,879	37,419,594
Gross Profit	12,014,525	2,006,434	41,623,107	3,830,167
Selling, general and administrative	19,010,939	8,431,561	64,458,520	17,857,561
Depreciation and amortization	473,670	247,669	1,283,333	671,264
Operating loss	(7,470,084)	(6,672,796)	(24,118,746)	(14,698,658)
Interest expense	2,031,697	333,448	5,351,689	657,788
Change in derivative liability	(630,000)	-	(820,000)	-
Loss on early extinguishment of debt	-	-	1,499,250	-
Net loss before provision for income taxes	(8,871,781)	(7,006,244)	(30,149,685)	(15,356,446)
Benefit for income taxes	-	-	-	-
Net loss	$(8,871,781)	$(7,006,244)	$(30,149,685)	$(15,356,446)
Weighted average number of common shares outstanding - basic and fully diluted	23,178,291	14,920,693	21,976,163	13,626,006
Net loss per share - basic and fully diluted	$(0.38)	$(0.47)	$(1.37)	$(1.13)

 

See Notes to the Condensed Consolidated Financial Statements.

 

RumbleOn, Inc.

Condensed Consolidated Statement of Stockholders' Equity

(unaudited)

 

			Class A		Class B		Additional		Total
	Preferred Shares		Common Shares		Common Shares		Paid In	Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance, as of June 30, 2019	-	$-	1,000,000	$1,000	22,125,120	$22,125	$90,037,964	$(55,482,658)	$34,578,431
Issuance of common stock for restricted stock units	-	-	-	-	94,300	94	(94)	-	-
Stock-based compensation	-	-	-	-	-	-	689,130	-	689,130
Net loss	-	-	-	-	-	-	-	(8,871,781)	(8,871,781)
Balance as of September 30, 2019	-	$-	1,000,000	$1,000	22,219,420	$22,219	$90,727,000	$(64,354,439)	$26,395,780

 

			Class A		Class B		Additional		Total
	Preferred Shares		Common Shares		Common Shares		Paid In	Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance, as of December 31, 2018	1,317,329	$1,317	1,000,000	$1,000	17,486,291	$17,486	$64,998,817	$(34,201,114)	$30,817,506
Cumulative effect of accounting change (see Note 1)	-	-	-	-	-	-	-	(3,640)	(3,640)
Equity component of convertible senior notes, net of issuance costs	-	-	-	-	-	-	7,745,625	-	7,745,625
Issuance of common stock for restricted stock units	-	-	-	-	239,300	239	(239)	-
Beneficial conversion feature on convertible notes	-	-	-	-	-	-	495,185	-	495,185
Conversion of preferred shares to common stock	(1,317,329)	(1,317)	-	-	1,317,329	1,317	-	-	-
Issuance of common stock	-	-	-	-	3,176,500	3,177	15,152,370	-	15,155,547
Stock-based compensation	-	-	-	-	-	-	2,335,242	-	2,335,242
Net loss	-	-	-	-	-	-	-	(30,149,685)	(30,149,685)
Balance as of September 30, 2019	-	$-	1,000,000	$1,000	22,219,420	$22,219	$90,727,000	$(64,354,439)	$26,395,780

 

 

RumbleOn, Inc.

Condensed Consolidated Statement of Stockholders' Equity cont'd

(unaudited)

 

			Class A		Class B		Additional		Total
	Preferred Shares		Common Shares		Common Shares		Paid In	Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance, as of June 30, 2018	-	$-	1,000,000	$1,000	12,077,541	$12,078	$24,225,192	$(17,369,500)	$6,868,770
Issuance of common stock	-	-	-	-	2,328,750	2,328	13,013,497	-	13,015,825
Stock-based compensation	-	-	-	-	-	-	417,689	-	417,689
Net loss	-	-	-	-	-	-	-	(7,006,244)	(7,006,244)
Balance as of September 30, 2018	-	$-	1,000,000	$1,000	14,406,291	$14,406	$37,656,378	$(24,375,744)	$13,296,040

 

			Class A		Class B		Additional		Total
	Preferred Shares		Common Shares		Common Shares		Paid In	Accumulated	Stockholders'
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Equity
Balance, as of December 31, 2017	-	$-	1,000,000	$1,000	11,928,541	$11,929	$23,372,360	$(9,019,297)	$14,365,992
Issuance of common stock	-	-	-	-	2,328,750	2,328	13,013,497	-	13,015,825
Issuance of common stock for restricted stock units	-	-	-	-	149,000	149	(149)	-	-
Issuance of warrants in connection with loan agreement	-	-	-	-	-	-	176,885	-	176,885
Stock-based compensation	-	-	-	-	-	-	1,093,784	-	1,093,784
Net loss	-	-	-	-	-	-	-	(15,356,446)	(15,356,446)
Balance as of September 30, 2018	-	$-	1,000,000	$1,000	14,406,291	$14,406	$37,656,378	$(24,375,744)	$13,296,040

 

See Notes to the Condensed Consolidated Financial Statements.

 

RumbleOn, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

	Nine Months Ended September 30,
	2019	2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$(30,149,685)	$(15,356,446)
Depreciation and amortization	1,283,333	671,264
Amortization of debt discounts	1,308,061	296,513
Share based compensation	2,335,242	1,093,784
Loss from extinguishment of debt	1,499,250	-
Income from change in value of derivatives	(820,000)	-
Changes in operating assets and liabilities:
Decrease (increase) in inventory	5,530,532	(2,791,520)
(Increase) decrease in accounts receivable	(1,564,145)	383,972
(Increase) decrease in prepaid expenses and other current assets	(261,207)	176,447
(Increase) decrease in other assets	(18,403)	(52,542)
(Decrease) increase in accounts payable and accrued liabilities	(5,824,733)	659,993
Increase (decrease) in accrued interest payable	888,821	26,704
Net cash used in operating activities	(25,792,934)	(14,891,831)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used for acquisitions; net of cash received	(835,000)	-
Proceeds from sales of property and equipment	40,620	-
Technology development	(2,619,551)	(1,396,662)
Purchase of property and equipment	-	(59,206)
Net cash used in investing activities	(3,413,931)	(1,455,868)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and convertible debt	27,455,537	7,424,417
Payments on notes payable	(11,134,695)	-
Proceeds from sale of common stock	15,155,547	13,015,825
Net proceeds (repayments) on lines of credit	(4,660,270)	(1,081,593)
Net cash provided by financing activities	26,816,119	19,358,649
NET CHANGE IN CASH	(2,390,746)	3,010,950
CASH AT BEGINNING OF PERIOD	15,784,902	9,170,652
CASH AT END OF PERIOD	$13,394,156	$12,181,602

 

See Notes to the Condensed Consolidated Financial Statements.

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Organization

RumbleOn, Inc. (the "Company") was incorporated in October 2013 under the laws of the State of Nevada, as Smart Server, Inc. ("Smart Server"). On February 13, 2017, the Company changed its name from Smart Server, Inc. to RumbleOn, Inc.

Description of Business

In July 2016, Berrard Holdings Limited Partnership ("Berrard Holdings") acquired 99.5% of the common stock of the Company from the principal stockholder. Shortly after the Berrard Holdings common stock purchase, the Company began exploring the development of a capital light e-commerce platform facilitating the ability of both consumers and dealers to Buy-Sell-Trade-Finance pre-owned vehicles in one online location and in April 2017, the Company launched its platform. The Company's goal is to transform the way pre-owned vehicles are bought and sold by providing users with the most efficient, timely and transparent transaction experience. While the Company's initial customer facing emphasis through most of 2018 was on motorcycles and other powersports, the Company continues to enhance its platform to accommodate nearly any VIN-specific vehicle including motorcycles, ATVs, boats, RVs, cars and trucks, and via its acquisition of Wholesale, Inc. in October 2018, the Company is making a concerted effort to grow its cars and light truck categories.

On October 26, 2018, the Company entered into an Agreement and Plan of Merger (as amended, the "Merger Agreement") with the Company's newly-formed acquisition subsidiary RMBL Tennessee, LLC, a Delaware limited liability company ("Merger Sub"), Wholesale Holdings, Inc., a Tennessee corporation ("Holdings"), Wholesale, LLC, a Tennessee limited liability company ("Wholesale"), Steven Brewster and Janelle Brewster (each a "Stockholder," and together the "Stockholders"), Steven Brewster, a Tennessee resident, as the representative of each Stockholder (the "Representative"), and Marshall Chesrown and Steven R. Berrard, providing for the merger of Holdings with and into Merger Sub, with Merger Sub surviving the merger as a wholly-owned subsidiary of the Company (the "Wholesale Transaction").  On October 29, 2018, the Company entered into an Amendment to the Merger Agreement making a technical correction to the definition of "Parent Consideration Shares" contained in the Merger Agreement.

Also, on October 26, 2018, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement"), by and among the Company, Steven Brewster and Justin Becker (together the "Express Sellers"), and Steven Brewster as representative of the Express Sellers, pursuant to which the Company acquired all of the membership interests (the "Express Transaction," and together with the Wholesale Transaction, the "Transactions") in Wholesale Express, LLC, a Tennessee limited liability company (“Wholesale Express”). The Transactions were both completed on October 30, 2018 (the "Acquisition Date"). As consideration for the Wholesale Transaction, the Company (i) paid cash consideration of $12,353,941, subject to certain customary post-closing adjustments, and (ii) issued to the Stockholders 1,317,329 shares (the "Stock Consideration") of the Company's Series B Non-Voting Convertible Preferred Stock, par value $0.001 (the "Series B Preferred"). As consideration for the Express Transaction, the Company paid cash consideration of $4,000,000, subject to certain customary post-closing adjustments. Wholesale Inc. is one of the largest independent distributors of pre-owned vehicles in the United States and Wholesale Express, LLC is a related logistics company.

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

Serving both consumers and dealers, through its online marketplace platform, the Company makes cash offers for the purchase of pre-owned vehicles. In addition, the Company offers a large inventory of pre-owned vehicles for sale along with third-party financing and associated products. The Company's operations are designed to be scalable by working through an infrastructure and capital light model that is achievable by virtue of a synergistic relationship with its regional partners, which are primarily auctions. The Company utilizes regional partners in the acquisition of pre-owned vehicles to provide inspection, reconditioning and distribution services. These regional partners earn incremental revenue and enhance profitability through fees from inspection, reconditioning and distribution programs.

Our business model is driven by our proprietary technology platform. Our initial platform was acquired in February 2017, through our acquisition of substantially all of the assets of NextGen Dealer Solutions, LLC ("NextGen"). Since that time, we have expanded the functionality of that platform through a significant number of high-quality technology development projects and initiatives. Included in these new technology development projects and initiatives were modules or significant upgrades to the existing platforms for: (i) Retail online auction; (ii) native IOS and Android apps; (iii) new architecture on website design and functionality; (iv) RumbleOn Marketplace; (v) redesigned cash offer tool; (vi) deal-jacket tracking tool; (vii) inventory tracking tool; (viii) CRM and multiple third-party integrations; (ix) new analytics and machine learning initiatives; and (x) IT monitoring infrastructure.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC") and therefore do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements. The Company's Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair presentation of their financial condition, results of operations, and cash flows for the periods presented. The information at December 31, 2018 in the Company's Condensed Consolidated Balance Sheets included in this quarterly report was derived from the audited Consolidated Balance Sheets included in the Company's 2018 Annual Report on Form 10-K filed with the SEC on April 1, 2019. The Company's 2018 Annual Report on Form 10-K, together with the information incorporated by reference into such report, is referred to in this quarterly report as the "2018 Annual Report." This quarterly report should be read in conjunction with the 2018 Annual Report.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Certain accounting estimates involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period, which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management's experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates, which could have a material impact on the carrying values of the Company's assets and liabilities and the results of operations. 

Earnings (Loss) Per Share

The Company follows the FASB Accounting Standards Codification ("ASC") Topic 260-Earnings per share. Basic earnings per common share ("EPS") calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. Common share and dilutive common share equivalents include: (i) Class A common; (ii) Class B common; (iii) Class B participating preferred shares; (iv) restrictive stock units; (v) warrants to acquire Class B common stock; and (vi) shares issued in connection with convertible debt.

Revenue Recognition

Revenue for our vehicle distribution segment is derived primarily from our online marketplace and auctions which primarily include: (i) the sale of pre-owned vehicles to consumer and dealers; (ii) vehicle financing; and (iii) vehicle service contracts.

Revenue from our vehicle logistics and transportation service segment is derived by providing automotive transportation services between dealerships and auctions throughout the United States.

We adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method. ASC 606 prescribes a five-step model that includes: (1) identify the contract; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) performance obligations are satisfied. Based on the manner in which we historically recognized revenue, the adoption of ASC 606 did not have a material impact on the amount or timing of our revenue recognition, and we recognized no cumulative effect adjustment upon adoption.

For vehicles sold at wholesale to dealers we satisfy our performance obligation for vehicles sales when the wholesale purchaser obtains control of the underlying vehicle, which is upon delivery when the transfer of title, risks and rewards of ownership and control pass to the dealer. We recognize revenue at the amount we expect to receive for the used vehicle, which is the fixed price determined at the auction. The purchase price of the wholesale vehicle is typically due and collected within 30 days of delivery of the wholesale vehicle.

For vehicles sold to consumers the purchase price is set forth in the customer contracts at a stand-alone selling price which is agreed upon prior to delivery. We satisfy our performance obligation for used vehicle sales upon delivery when the transfer of title, risks and rewards of ownership and control pass to the customer. We recognize revenue at the agreed upon purchase price stated in the contract, including any delivery charges, less an estimate for returns. Our return policy allows customers to initiate a return during the first three days after delivery. Estimates for returns are based on an analysis of historical experience, trends and sales data. Changes in these estimates are reflected as an adjustment to revenue in the period identified. The amount of consideration received for used vehicle sales to consumers includes noncash consideration representing the value of trade-in vehicles, if applicable, as stated in the contract. Prior to the delivery of the vehicle, the payment is received, or financing has been arranged. Payments from customers that finance their purchases with third parties are typically due and collected within 30 days of delivery of the used vehicle. In future periods additional provisions may be necessary due to a variety of factors, including changing customer return patterns due to the maturation of the online vehicle buying market, macro- and micro-economic factors that could influence customer return behavior and future pricing environments. If these factors result in adjustments to sales returns, they could significantly impact our future operating results. Revenue excludes any sales taxes, title and registration fees, and other government fees that are collected from customers.

Vehicle finance fee revenue is recognized upon delivery of the vehicle to the customer, when the sales contract is signed, and the financing has been arranged. We may be charged back for a fee in the event a contract is prepaid, defaulted upon, or terminated. Our risk related to contract cancellations is limited to the commissions that we receive. Cancellations will fluctuate depending on the customer financing default or prepayment rates and shifts in customer behavior. To the extent that actual experience differs from historical trends, there could be adjustments to our finance contract cancellation reserves.

Commission revenue on vehicle service contracts is recognized at the time of sale, net of a reserve for estimated contract cancellations. The reserve for cancellations is estimated based on historical experience and recent trends. Our risk related to contract cancellations is limited to the commissions that we receive. Cancellations will fluctuate depending on the customer financing default or prepayment rates, and shifts in customer behavior, including those related to changes in the coverage or term of the product. To the extent that actual experience differs from historical trends, there could be adjustments to our contract cancellation reserves.

Vehicle logistics and transportation services revenue is generated primarily by entering into freight brokerage agreements with dealers, distributors, or private party individuals to transport vehicles from a point of origin to a designated destination. The transaction price is based on the consideration specified in the customer's contract. A performance obligation is created when the customer under a transportation contract submits a bill of lading for the transport of goods from origin to destination. These performance obligations are satisfied as the shipments move from origin to destination. The freight brokerage agreements are fulfilled by independent third-party transporters who are obligated to meet our performance obligations and standards. Performance obligations are short-term, with transit days less than one week. Generally, customers are billed either upon shipment of the vehicle or on a monthly basis, and remit payment according to approved payment terms, generally not to exceed 30 days. Revenue is recognized when all risks and rewards of transportation of the vehicle is transferred to the owner upon delivery and the contracted carrier has been paid for their services.

Purchase Accounting for Business Combinations

The Company accounts for acquisitions by allocating the fair value of the consideration transferred to the fair value of the assets acquired and liabilities assumed on the date of the acquisition and any remaining difference is recorded as goodwill. Adjustments may be made to the preliminary purchase price allocation when facts and circumstances that existed on the date of the acquisition surface during the allocation period subsequent to the preliminary purchase price allocation, not to exceed one year from the date of acquisition. Contingent consideration is recorded at fair value based on the facts and circumstances on the date of the acquisition and any subsequent changes in the fair value are recorded through earnings each reporting period. During the quarter ended September 30, 2019, the Company finalized the preliminary purchase price allocation recorded at the acquisition date for Wholesale Express and made a measurement period adjustment to the preliminary purchase price allocation which resulted in a decrease in goodwill of $318,453. The Company made this measurement period adjustment to reflect facts and circumstances related to accounts receivable and accounts payable that existed as of the acquisition date and did not result from intervening events subsequent to such date.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired which is not allocable to separately identifiable intangible assets. Other identifiable intangible assets, such as domain names, are separately recognized if the intangible asset is obtained through contractual or other legal right or if the intangible asset can be sold, transferred, licensed or exchanged.

Goodwill is not amortized but tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying amount of the reporting unit more likely than not exceeds fair value. We have the option to qualitatively or quantitatively assess goodwill for impairment and we evaluated our goodwill using a qualitative assessment process. Goodwill is tested for impairment at the reporting unit level.

We test our goodwill for impairment in December of each year. In 2018, we evaluated our goodwill using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. If the qualitative assessment determines it is more likely than not the fair value is less than the carrying amount, we would further evaluate for potential impairment. There was no impairment of goodwill as of September 30, 2019.

Leases

Effective January 1, 2019, the Company adopted ASC 842, Leases. In accordance with ASC 842, the Company first determines if an arrangement contains a lease and the classification of that lease, if applicable, at inception. This standard requires the recognition of right-of-use ("ROU") assets and lease liabilities for the Company's operating leases. For contracts with lease and non-lease components, the Company has elected not to allocate the contract consideration, and to account for the lease and non-lease components as a single lease component. The Company has also elected not to recognize a lease liability or ROU asset for leases with a term of 12 months or less and recognize lease payments for those short-term leases on a straight-line basis over the lease term in the Condensed Consolidated Statements of Operations. Operating leases are included in ROU assets, accounts payable and accrued liabilities and operating lease liabilities (net of current portion) in the Condensed Consolidated Balance Sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments under the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The implicit rate within the Company's leases is generally not determinable and therefore the incremental borrowing rate at the lease commencement date is utilized to determine the present value of lease payments. The determination of the incremental borrowing rate requires judgment. Management determines the incremental borrowing rate for each lease using the Company's estimated borrowing rate, adjusted for various factors including level of collateralization, term and currency to align with the terms of the lease. The ROU asset also includes any lease prepayments, offset by lease incentives. Certain of the Company's leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when the Company is reasonably certain that the option will be exercised. An option to terminate is considered unless the Company is reasonably certain the option will not be exercised.

Long-Lived Assets

Property and equipment is reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used are measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. If such assets or asset groups are considered to be impaired, the impairment to be recognized will be measured by the amount by which the carrying amount of the assets or asset groups exceeds the related fair values. The Company also performs a periodic assessment of the useful lives assigned to the long-lived assets.

Technology Development Costs

Technology development costs are accounted for pursuant to ASC 350, Intangibles — Goodwill and Other. Technology development costs include internally developed software and website applications that are used by the Company for its own internal use. Technology development costs consist principally of (i) development activities including payroll and related expenses billed by a third-party contractor involved in application, content, production, maintenance, operation, and platform development for new and existing products and services, (ii) technology infrastructure expenses, and (iii) costs of Company employees devoted to the development and maintenance of software products. Technology and content costs for design, maintenance and post-implementation stages of internal-use software and general website development are expensed as incurred. For costs incurred to develop new website functionality as well as new software products and significant upgrades to existing internally used platforms or modules, capitalization begins during the application development stage and ends when the software is available for general use. Capitalized technology development is amortized on a straight-line basis over periods ranging from 3 to 7 years. The Company will perform periodic assessment of the useful lives assigned to capitalized software applications. Additionally, the Company from time-to-time may abandon additional development activities relating to specific software projects or applications and charge accumulated costs to technology development expense in the period such determination is made.

Vehicle Inventory

Vehicle inventory is accounted for pursuant to ASC 330, Inventory, and consists of the cost to acquire and recondition a pre-owned vehicle. Reconditioning costs are billed by third-party providers and includes parts, labor, and other repair expenses directly attributable to a specific vehicle. Pre-owned inventory is stated at the lower of cost or net realizable value. Pre-owned vehicle inventory cost is determined by specific identification. Net realizable value is the estimated selling price less costs to complete, dispose and transport the vehicles. Selling prices are derived from historical data and trends, such as sales price and inventory turn times of similar vehicles, as well as independent market resources. Each reporting period, the Company recognizes any necessary adjustments to reflect pre-owned vehicle inventory at the lower of cost or net realizable value through cost of revenue in the accompanying Consolidated Statements of Operations. 

Cash and Cash Equivalents

The Company considers all cash accounts and all highly liquid short-term investments purchased with an original maturity of three months or less to be cash or cash equivalents. As of September 30, 2019, and December 31, 2018, the Company did not have any investments with maturities greater than three months.

Restricted Cash

In connection with the execution of the Inventory Financing and Security Agreement (the "Credit Facility") by and among the Company's subsidiary, RMBL Missouri, LLC ("RMBL MO"), Ally Bank ("Ally") and Ally Financial, Inc., dated February 16, 2018 the parties entered into a Credit Balance Agreement, and so long as the Company owes any debt to Ally or until the bank otherwise consents, the Company agrees to maintain a Credit Balance at Ally of 1) at least 10% of the amount of the Company's approved and available credit line under the Credit Facility and 2) no greater than 25% of the total principal amount owed to Ally for inventory financed under the Credit Facility.

In connection with the inventory financing contract (the "NextGear Facility"), entered into by the Company, its wholly owned subsidiary RMBL Tennessee, Inc., Wholesale, Inc. and NextGear Capital, Inc. ("NextGear"), dated October 30, 2018, Wholesale, Inc. and NextGear entered into a Reserve Agreement requiring Wholesale, Inc. to pay to NextGear $5.5 million (the "Reserve") to be collateral and security for Wholesale Inc.'s liability under the NextGear Facility as well as any amounts owed by Wholesale, Inc. to NextGear and its affiliates, and each of their respective directors, officers, principals, trustees, partners, shareholders or other holders of any ownership interest, as the case may be, employees, representatives, attorneys and agents.  NextGear is not required to pay Wholesale Inc. interest on the Reserve balance.  Upon the satisfaction of all obligations and the termination by NextGear of the NextGear Facility, NextGear will return the Reserve to Wholesale, Inc., upon its written request to NextGear no earlier than ten (10) business days from the date the obligations were indefeasibly paid and satisfied in full and the NextGear Facility and terminated by Lender.

Property and Equipment, Net

Property and equipment is stated at cost less accumulated depreciation and amortization and consists of capitalized technology development costs, furniture and equipment. Depreciation and amortization is recorded on a straight-line basis over the estimated useful life of the assets. Costs of significant additions, renewals and betterments, are capitalized and depreciated. Maintenance and repairs are charged to expense when incurred.

Embedded Conversion Features

The Company evaluates embedded conversion features within convertible debt under ASC 815, Derivatives and Hedging to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20; Debt with Conversion and Other Options. Under the ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for our convertible debt instruments is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on the consolidated balance sheets and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, we are required to record non-cash interest expense as a result of the amortization of the discounted carrying value of the convertible debt to their face amount over the term of the convertible debt.

From time to time, the Company has issued convertible notes that have conversion prices that create an embedded beneficial conversion feature pursuant to the guidelines established by the ASC Topic 470-20. The Beneficial Conversion Feature ("BCF") of a convertible security is normally characterized as the convertible portion or feature of certain securities that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of a convertible security when issued and also records the estimated fair value of any conversion feature issued with those securities. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved. The debt discount is amortized to interest expense over the life of the note using the effective interest method. The Company calculates the fair value of the conversion feature embedded in any convertible security using either a) the Black Scholes valuation model or b) a discount cash flow analysis tested for sensitivity to key Level 3 inputs using Monte Carlo simulation.

Debt Issuance Costs

Debt issuance costs are accounted for pursuant to FASB Accounting Standards Update ("ASU") 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts.

Stock-Based Compensation

On June 30, 2017, the Company's shareholders approved the RumbleOn, Inc. 2017 Stock Incentive Plan (the "Plan") under which restricted stock units ("RSUs") and other equity awards may be granted to employees and non-employee members of the Board of Directors. As September 30, 2019, the number of shares of Class B Common Stock authorized for issuance under the Plan is 4,000,000 shares. The Company estimates the fair value of awards granted under the Plan on the date of grant. The fair value of an RSU is based on the average of the high and low market prices of the Company's Class B Common Stock on the date of grant and is recognized as an expense on a straight-line basis over its vesting period; to date, substantially all the RSUs issued vest over a three-year period utilizing the following vesting schedule: (i) 20% on the first anniversary of the grant date; (ii) 30% on the second anniversary of the grant date; and (iii) 50% on the third anniversary of the grant date.

Recent Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires that the rights and obligations created by leases with a duration greater than 12 months be recorded as assets and liabilities on the balance sheet of the lessee. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has adopted this standard as of January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date. The Company has also elected the option, as permitted in ASU 2018-11, Leases (Topic 842): Targeted Improvements, whereby initial application of the new lease standard would occur at the adoption date and a cumulative-effect adjustment, if any, would be recognized to the opening balance of retained earnings in the period of adoption. For comparability purposes, the Company will continue to comply with previous disclosure requirements in accordance with existing lease guidance for all periods presented in the year of adoption. The Company has elected the practical expedients permitted under the transition guidance which enabled the Company: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and (3) not to reassess the treatment of initial direct costs for existing leases. In addition, the Company has made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. Upon adoption of this standard on January 1, 2019, the Company recognized a total operating lease liability in the amount of $3,118,038, representing the present value of the minimum rental payments remaining as of the adoption date and a right-of-use asset in the amount of $3,114,398.

Accounting Standards Issued But Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU "2016-13"), which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and earlier adoption is permitted beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact on its condensed consolidated financial statements and plans to adopt this ASU for its fiscal year beginning January 1, 2020. Finance receivables originated in connection with the Company's vehicle sales are held for sale and are subsequently sold. The Company does not expect adoption of ASU 2016-13 to have a material impact on its condensed consolidated financial statements.

NOTE 2 –ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consists of the following as of:

	September 30, 2019	December 31, 2018
Trade	$13,211,074	$8,264,045
Finance	107,997	148,378
Other	8,390	229,577
	13,327,461	8,642,000
Less: allowance for doubtful accounts	141,317	176,190
	$13,186,144	$8,465,810

 

NOTE 3 – INVENTORY

Inventory consists of the following as of:

	September 30, 2019	December 31, 2018
Pre-owned vehicles:
Powersport vehicles	$9,304,790	$9,783,093
Automobiles and trucks	40,776,444	43,081,136
	50,081,234	52,864,229
Less: Valuation allowance	558,239	672,706
	$49,522,995	$52,191,523

NOTE 4 – ACQUISITION

On February 3, 2019, the Company completed the Autosport Acquisition pursuant to the Stock Purchase Agreement, by and among the Buyer, the Seller and Autosport. Aggregate consideration for the Autosport Acquisition consisted of (i) a closing cash payment of $600,000, plus (ii) the Promissory Note in favor of the Seller, plus (iii) the Convertible Note in favor of the Seller, plus (iv) contingent earn-out payments payable in the form of cash and/or the Company's Class B Common Stock for up to an additional $787,500 if Autosport achieves certain performance thresholds. In connection with the Autosport Acquisition, the Buyer also paid outstanding debt of Autosport of $235,000 and assumed debt of $257,933 pursuant to the Second Convertible Note. See Note 1 – Description of Business and Significant Accounting Policies for additional information on the Autosport Acquisition.

The preliminary allocation of the purchase price is based on the best information available to management. This allocation is provisional, as the Company is required to recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of February 3, 2019 that, if known, would have resulted in the recognition of those assets or liabilities as of that date. The Company may adjust the preliminary purchase price allocation after obtaining additional information regarding asset valuation, liabilities assumed and revisions of previous estimates. The following table summarizes the preliminary allocation of the purchase price based on the estimated fair value of the acquired assets and assumed liabilities of Autosport as of September 30, 2019:

Purchase price consideration:
Cash	$835,000
$1,536,000 convertible note	1,536,000
$500,000 promissory note	500,000
$257,933 Promissory note	257,933
	$3,128,933
Estimated fair value of assets:
Accounts receivable	3,177,660
Inventory	2,862,004
	6,039,664
Estimated fair value of liabilities assumed:
Accounts payable and other	5,858,601
Excess of assets over liabilities	181,063
Goodwill	2,947,870
	$3,128,933

Supplemental pro forma information

The results of operations of Autosport, Wholesale and Wholesale Express since the acquisition date are included in the accompanying Condensed Consolidated Financial Statements.

The following supplemental pro forma information presents the financial results as if the acquisition of Autosport, Wholesale and Wholesale Express was made as of January 1, 2018 for both the three and nine-months ended September 30, 2019 and 2018.

Pro-forma adjustments for the three-month and nine-month periods ended September 30, 2019 primarily include adjustments to reflect the: (i) amortization of stock compensation expense of $0 and $18,351, respectively, and (ii) interest expense on convertible and promissory notes of $0 and $20,174, respectively. Pro forma adjustments for the three-months and nine-month periods ended September 30, 2018 primarily include adjustments to reflect the: (i) amortization of stock compensation expense of $305,053 and $915,160, respectively, and (ii) interest expense on convertible and promissory notes of $84,228 and $189,099, respectively.

	Three-Months Ended September 30,		Nine-Months Ended September 30,
	2019	2018	2019	2018
Pro forma revenue	$220,320,323	$222,125,604	$719,996,595	$601,313,145
Pro forma net loss	$(8,871,781)	$(5,987,378)	$(30,186,709)	$(14,004,581)
Loss per share - basic and fully diluted	$(0.38)	$(0.29)	$(1.35)	$(0.73)
Weighted-average common shares and common stock equivalents outstanding basic and fully diluted	23,178,291	20,544,522	22,314,682	19,250,635

NOTE 5– PROPERTY AND EQUIPMENT, NET

The following table summarizes property and equipment, net as of September 30, 2019 and December 31, 2018:

	September 30, 2019	December 31, 2018
Vehicles	$326,506	$417,666
Furniture and equipment	474,546	474,546
Technology development and software	8,397,055	5,777,504
Leasehold improvements	170,701	136,386
Total property and equipment	9,368,808	6,806,102
Less: accumulated depreciation and amortization	2,895,331	1,628,225
Property and equipment, net	$6,473,477	$5,177,877

Amortization and depreciation on Property and Equipment is determined on a straight-line basis over the estimated useful lives ranging from 3 to 5 years.

At September 30, 2019, capitalized technology development costs were $8,189,044, which includes $2,900,000 of software acquired in the NextGen transaction. Total technology development costs incurred for the three-month and nine-month periods ended September 30, 2019 were $1,420,405 and $4,371,267, respectively, of which $699,982 and $2,619,551, respectively, was capitalized and $720,423 and $1,751,716, respectively, was charged to expense in the accompanying Condensed Consolidated Statements of Operations. The amortization of capitalized technology development costs for the three-month and nine-month periods ended September 30, 2019 were $386,519 and $1,018,551, respectively. Depreciation on furniture and equipment for the three-month and nine-month periods ended September 30, 2019 was $87,152 and $264,782, respectively. Total technology development costs incurred for the three-month and nine-month periods ended September 30, 2018 were $1,012,970 and $2,125,868, respectively of which $778,592 and $1,396,662, respectively was capitalized and $234,378 and $729,206, respectively, was charged to expense in the accompanying Condensed Consolidated Statements of Operations. The amortization of capitalized technology development costs for the three-month and nine-month periods ended September 30, 2018 was $213,801 and $572,631, respectively. Depreciation on furniture and equipment for the three-month and nine-month periods ended September 30, 2018 was $33,868 and $98,632, respectively.

NOTE 6 – LEASES

As of September 30, 2019, the Company has entered into operating leases related to certain of its offices, facilities and equipment. The initial terms expire at various dates between 2019 and 2021. Many of the leases include renewal options ranging from one to ten years. The current portion of our operating lease liabilities as of September 30, 2019 is $533,759 and is included in accounts payable and accrued liabilities.

Operating lease expense is recognized on a straight-line basis over the lease term. Total operating lease expenses for the three-month and nine-month periods ended September 30, 2019 was $330,079 and $980,406, respectively.

Supplemental cash flow information related to operating leases was as follows:

	Nine Months Ended September 30, 2019
Cash payments for operating leases	$700,603
New operating lease assets obtained in exchange for operating lease liabilities	$375,455

 

The following table summarizes the future minimum payments for operating leases at December 31, 2018 due in each year ending December 31,

 

2019	$174,158
2020	581,965
2021	279,636
Thereafter	-
	$1,035,759

NOTE 7 – ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

The following table summarizes accounts payable and other accrued liabilities as of September 30, 2019 and December 31, 2018:

	September 30, 2019	December 31, 2018
Accounts payable	$7,838,037	$7,528,003
Operating lease liability-current portion	533,759	-
Accrued payroll	669,822	877,180
State and local taxes	232,582	1,073,649
Other accrued expenses	1,472,427	1,076,081
	$10,746,627	$10,554,913

 

NOTE 8 – NOTES PAYABLE

Notes payable consisted of the following as of September 30, 2019 and December 31, 2018:

	September 30, 2019	December 31, 2018
Notes payable-NextGen dated February 8, 2017. Interest is payable semi-annually at 6.5% through February 9, 2019 and 8.5% through maturity which is February 8, 2020.	$1,333,334	$1,333,334
Notes payable-private placement dated March 31, 2017. Interest is payable semi-annually at 6.5% through September 30, 2019 and 8.5% through maturity which is March 31, 2020. Unamortized debt discount of $146,167 and $334,998 as of September 30, 2019 and December 31, 2018, respectively.	667,000	667,000
Line of credit-floor plan dated February 16, 2018. Facility provides up to $25,000,000 of available credit secured by vehicle inventory and other assets. Interest rate at September 30, 2019 was 7.5%. Principal and interest are payable on demand.	8,120,249	8,866,894
Loan Agreement with Hercules Capital Inc. dated April 30, 2018 and as amended for tranche II on October 30, 2018. Tranche I- Interest only at 10.5% and is payable monthly through December 1, 2018. Principal and interest payments commence on June 1, 2019 through maturity which is May 1, 2021. Trance II-Interest payable monthly at 11.0%. Principal payable at maturity on October 1, 2021. Unamortized debt issuance costs of $1,547,412 as of December 31, 2018.	-	10,857,500
Line of credit-floor plan dated October 30, 2018. Secured by vehicle inventory and other assets. Interest rate at September 30, 2019 of 5.0%. Principal and interest are payable on demand.	43,591,982	47,505,607
Less: Debt discount	(146,167)	(1,882,410)
	$53,566,398	$67,347,925
Current portion	53,566,398	58,555,006
Long-term portion	$-	$8,792,919

 

Line of Credit-NextGear

On October 30, 2018, Wholesale, as borrower, entered into a floorplan vehicle financing credit line (the "NextGear Credit Line") with NextGear. The available credit under the NextGear Credit Line is $70,000,000. Advances under the NextGear Credit Line will bear interest at an initial per annum rate of 5.25%, based upon a 360-day year, and compounded daily, and the per annum interest rate will vary based on a base rate, plus the contract rate, which is currently negative 2.0%, until the outstanding liabilities to NextGear are paid in full. Interest expense on the line of credit-floor plan for the three-month and nine-month periods ended September 30, 2019 was $693,024 and $2,203,915, respectively.

Line of Credit-Ally 

On February 16, 2018, the Company, through its wholly-owned subsidiary RMBL MO entered into the Credit Facility with Ally and Ally Financial, Inc., a Delaware corporation ("Ally" together with Ally Bank, the "Lender"), pursuant to which the Lender may provide up to $25 million in financing, or such lesser sum which may be advanced to or on behalf of RMBL MO from time to time, as part of its floorplan vehicle financing program. Advances under the Credit Facility require that the Company maintain 10.0% of the advance amount as restricted cash. Advances under the Credit Facility will bear interest at a per annum rate designated from time to time by the Lender and will be determined using a 365/360 simple interest method of calculation, unless expressly prohibited by law. Advances under the Credit Facility, if not demanded earlier, are due and payable for each vehicle financed under the Credit Facility as and when such vehicle is sold, leased, consigned, gifted, exchanged, transferred, or otherwise disposed of. Interest under the Credit Facility is due and payable upon demand, but, in general, in no event later than 60 days from the date of request for payment. Upon any event of default (including, without limitation, RMBL MO's obligation to pay upon demand any outstanding liabilities of the Credit Facility), the Lender may, at its option and without notice to the RMBL MO, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to Lender and its affiliates by RMBL MO and its affiliates. The Credit Facility is secured by a grant of a security interest in the vehicle inventory and other assets of RMBL MO and payment is guaranteed by the Company pursuant to a guaranty in favor of the Lender and secured by the Company pursuant to a General Security Agreement. Interest expense on the Credit Facility for the three-month and nine-month periods ended September 30, 2019 was $157,343 and $416,017, respectively. Interest expense on the Credit Facility for the three-month and nine-month periods ended September 30, 2018 was $18,123 and $27,724, respectively.

Loan Agreement-Hercules Capital Inc.

On May 14, 2019, the Company made a payment to Hercules Capital Inc. ("Hercules") of $11,134,695, representing the principal, accrued and unpaid interest, fees, costs and expenses outstanding under its Loan and Security Agreement (the "Loan Agreement") with Hercules dated April 30, 2018 (the "Hercules Indebtedness"). Upon the payment, all outstanding indebtedness and obligations of the Company owed to Hercules under the Loan Agreement were paid in full, and the Loan Agreement has been terminated. The Company used a portion of the net proceeds from the Note Offering (described below) to pay the Hercules Indebtedness. In accordance with the guidance in ASC 470-50, Debt, the Company accounted for the extinguishment of the Hercules Loan Agreement as an extinguishment and recognized a loss on early extinguishment of debt of $1,499,250 for the nine-month period ended September 30, 2019 in the Condensed Consolidated Statements of Operations. The loss on early extinguishment consisted primarily of the prepayment penalty paid to Hercules and unamortized debt discounts including the remaining portion of warrant values and debt issuance costs.

Notes Payable-Private Placement

 

On March 31, 2017, the Company completed funding of the second tranche of the 2016 Private Placement (as defined below). The investors were issued 1,161,920 shares of Class B Common Stock of the Company and promissory notes (the "Private Placement Notes") in the amount of $667,000, in consideration of cancellation of loan agreements having an aggregate principal amount committed by the purchasers of $1,350,000. Under the terms of the Private Placement Notes, interest shall accrue on the outstanding and unpaid principal amounts until paid in full. The Private Placement Notes mature on March 31, 2020. Interest accrues at a rate of 6.5% annually from the closing date through the second anniversary of such date and at a rate of 8.5% annually from the second anniversary of the closing date through the maturity date. Upon the occurrence of any event of default, the outstanding balance under the Private Placement Notes shall become immediately due and payable upon election of the holders. Based on the relative fair values attributed to the Class B Common Stock and promissory notes issued in the 2016 Private Placement, the Company recorded a debt discount on the promissory notes of $667,000 with the corresponding amounts recorded as an addition to paid-in capital. The debt discount is amortized to interest expense until the scheduled maturity of the Private Placement Notes in March 2020 using the effective interest method. Interest expense on the Private Placement Notes for the three-month and nine-month periods ended September 30, 2019 was $80,899 and $231,235, respectively, which included debt discount amortization of $66,608 and $188,831, respectively, for the three-month and nine-month periods ended September 30, 2019.

NOTE 9 – CONVERTIBLE NOTES

As of September 30, 2019, the outstanding convertible promissory notes net of debt discount and issue costs are summarized as follows:

	Face Amount	DebtDiscount	CarryingAmount
Convertible senior notes	$30,000,000	$10,924,782	$19,075,218
Convertible notes-Autosport
$1,536,000 unsecured note	1,536,000	379,104	1,156,896
$500,000 unsecured note	500,000	10,522	489,478
$257,933 unsecured note	257,933	24,476	233,457
	32,293,933	$11,338,884	20,955,049
Less: Current portion	(1,234,936)		(1,234,936)
Long-term portion	$31,058,997		$19,720,113

Convertible Senior Notes

On May 9, 2019, the Company entered into a purchase agreement (the "Purchase Agreement") with JMP Securities LLC ("JMP Securities") to issue and sell $30.0 million in aggregate principal amount of its 6.75% Convertible Senior Notes due 2024 (the "Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Note Offering").  The Company paid JMP Securities a fee of 7% of the gross proceeds in the Note Offering. The net proceeds for the Note Offering were approximately $27.3 million.

The Notes were issued on May 14, 2019 pursuant to an Indenture (the "Indenture") by and between the Company and Wilmington Trust, National Association, as trustee. The Purchase Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions. Under the terms of the Purchase Agreement, the Company has agreed to indemnify JMP Securities against certain liabilities. The Notes bear interest at 6.75% per annum, payable semiannually on May 1 and November 1 of each year, beginning on November 1, 2019. The Notes may bear additional interest under specified circumstances relating to the Company's failure to comply with its reporting obligations under the Indenture or if the Notes are not freely tradeable as required by the Indenture. The Notes will mature on May 1, 2024, unless earlier converted, redeemed or repurchased pursuant to their terms.

The initial conversion rate of the Notes is 173.9130 shares of Class B Common Stock, per $1,000 principal amount of the Notes, subject to adjustment (which is equivalent to an initial conversion price of approximately $5.75 per share, subject to adjustment). The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

The Notes are not redeemable by the Company prior to the May 6, 2022. The Company may redeem for cash all or any portion of the Notes, at its option, on or after May 6, 2022 if the last reported sale price of the Company's Class B Common Stock has been at least 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes. If redeemed, the Company will make an interest make-whole payment to the converting holder equal to the sum of the present values of the scheduled payments of interest that would have been made on the Notes to be converted had such Notes remained outstanding from the conversion date through the earlier of the date that is two years after the conversion date and June 15, 2022.

In connection with the Note Offering, the Company entered into a registration rights agreement with JMP Securities, pursuant to which the Company has agreed to file with the SEC an automatic shelf registration statement, if the Company is eligible to do so and has not already done so, and, if the Company is not eligible for an automatic shelf registration statement, then in lieu of the foregoing the Company shall file a shelf registration statement for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Notes pursuant to Rule 415 or any similar rule that may be adopted by the Commission, and use its commercially reasonable efforts to cause the shelf registration statement to become or be declared effective under the Securities Act on the day that is 120 days after May 9, 2019.  The Company filed a Registration Statement on Form S-3, which was declared effective on August 30, 2019.

As of September 30, 2019, the conditions allowing holders of the Notes to convert have not been met and therefore the Notes are not yet convertible.

We account for the Notes in accordance with FASB ASC 470, Debt and ASC 815, Derivatives and Hedging, which required bifurcation of the liability and equity components. We determined the carrying amount of the liability component as the present value of its cash flows using an implied discount rate of 20.5%. The carrying amount of the equity component representing the conversion option was $8.5 million and was calculated by deducting the carrying value of the liability component from the principal amount of the Notes as a whole. This difference represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. We further valued a derivative liability in connection with the interest make-whole provision at $1,330,000 at issuance based on a Monte-Carlo Simulation using a volatility of 85% and a risk-free rate of 2.3%. This amount was recorded as a debt discount and is amortized to interest expense over the term of the Notes using the effective interest rate. The derivative liability is remeasured at each reporting date with the change in value of $630,000 and $820,000 being recorded in other income for the three-month and nine-month periods ended September 30, 2019. The value of the derivative liability as of September 30, 2019 is $510,000.

We allocate transaction costs related to the issuance of the Notes to the liability and equity components using the same proportions as the initial carrying value of the Notes. Transaction costs attributable to the debt component were $1,790,088 and are being amortized to interest expense using the effective interest method over the term of the Notes. Transaction costs attributable to the equity component were $754,375 as of September 30, 2019 and are netted with the equity component of the Notes in stockholders' equity. Transactions costs attributable to the derivative liability were $118,038 and were expensed during the nine-month period ended September 30, 2019.

 

The interest expense recognized related to the Notes was as follows:

	Three- Months Ended September 30, 2019	Nine- Months Ended September 30, 2019
Contractual interest expense	$506,250	$798,750
Amortization of debt discounts	495,778	695,306
Total	$1,002,028	$1,494,056

 

Convertible Notes-Autosport USA

On February 3, 2019, in connection with the Autosport Acquisition, the Company issued (i) the Promissory Note, and (ii) the Convertible Note in favor of the Seller. In connection with the Autosport Acquisition, the Buyer also assumed additional debt of $257,933 pursuant to the Second Convertible Note.

The Promissory Note has a term of fifteen months and will accrue interest at a simple rate of 5% per annum. Interest under the Promissory Note is payable upon maturity. Any interest and principal due under the Promissory Note is convertible, at the Buyer's option into shares of the Company's Class B Common Stock at a conversion price equal to the weighted average trading price of the Company's Class B Common Stock on the Nasdaq Stock Exchange for the twenty (20) consecutive trading days preceding the conversion date. The number of shares of the Company's Class B Common Stock issuable pursuant to the Promissory Note is indeterminate at this time.

The Convertible Note has a term of three years and will accrue interest at a rate of 6.5% per annum. Interest under the Convertible Note is payable monthly for the first 12 months, and thereafter monthly payments of amortized principal and interest will be due. Any interest and principal due under the Convertible Note is convertible into shares of the Company's Class B Common Stock at a conversion price of $5.75 per share, (i) at the Seller's option, or (ii) at the Buyer's option, on any day that (a) any portion of the principal of the Convertible Note remains unpaid and (b) the weighted average trading price of the Company's Class B Common Stock on Nasdaq for the twenty (20) consecutive trading days preceding such day has exceeded $7.00 per share. The maximum number of shares issuable pursuant to the Convertible Note is 319,221 shares of the Company's Class B Common Stock.

The Second Convertible Note has a term of one year and will accrue interest at a simple rate of 5% per annum. Monthly payments of amortized principal and interest will be due under the Second Convertible Note. Any interest and principal due under the Second Convertible Note is convertible into shares of the Company's Class B Common Stock at a conversion price of $5.75 per share, (i) at the Seller's option, or (ii) at the Buyer's option, on any day that (a) any portion of the principal of the Second Convertible Note remains unpaid and (b) the weighted average trading price of the Company's Class B Common Stock on Nasdaq for the twenty (20) consecutive trading days preceding such day has exceeded $7.00 per share. The maximum number of shares issuable pursuant to the Second Convertible Note is 47,101 shares of the Company's Class B Common Stock.

NOTE 10 – STOCKHOLDERS' EQUITY

On January 9, 2017, the Company's Board of Directors approved, subject to stockholder approval, the adoption of the Plan. On June 30, 2017, the Plan was approved by the Company's stockholders at the 2017 Annual Meeting of Stockholders. Also, amendments to the Plan were approved by the Company's Board of Directors and stockholders during 2018 and 2019. The purposes of the Plan are to attract, retain, reward and motivate talented, motivated and loyal employees and other service providers ("Eligible Individuals") by providing them with an opportunity to acquire or increase a proprietary interest in the Company and to incentivize them to expend maximum effort for the growth and success of the Company, so as to strengthen the mutuality of the interests between such persons and the stockholders of the Company. The Plan allows the Company to grant a variety of stock-based and cash-based awards (“Awards”) to Eligible Individuals. The Plan, as amended, authorizes 4,000,000 shares of Class B Common Stock to be covered by such awards and as of September 30, 2019 Awards covering 852,438 shares remain available for issuance under the Plan. As of September 30, 2019, Awards covering 590,917 shares had vested and 438,300 of the underlying shares had been delivered. As of September 30, 2019, Awards under the Plan covering 2,556,646 remain outstanding and unvested, comprised of 2,447,456 RSUs and 109,190 stock options (“Options”). The Awards generally vest over a three-year period as follows: (i) 20% at the end of the 13th month following the grant date; (ii) 30% pro-rata monthly during the following twelve months, and (iii) 50% pro-rata during the following twelve months. The fair value of the RSUs is based on the stock price on the grant date while the fair value of the Options is based on Black-Scholes valuation as of the grant date and includes a 30% discount for lack of marketability. The fair value of the Awards is amortized ratably over the period from the grant date through the vesting. Included in the outstanding Awards are 985,000 RSUs subject to the achievement of certain revenue, profitability and stock price thresholds through September 2020. At the time of each Award grant, the Company estimates forfeiture rates based on the historic employee behavior under similar stock-based compensation plans; thereafter and through final vesting, on a Quarterly basis the Company evaluates both the likelihood of meeting performance criteria for subject Awards and the aggregate Award amortization recognized to date versus the vested amount and makes adjustments as may be required. Compensation expense recognized for all Awards for the three-month and nine-month periods ended September 30, 2019 is $689,130 and $2,335,242, respectively. As of September 30, 2019, the Company has approximately $5,892,263 in unrecognized stock-based compensation, which the Company expects to recognize over a weighted-average period of approximately 1.0 years. Compensation expense recognized for Awards during the three-month and nine-month periods ended September 30, 2018 was $417,689 and $1,093,784, respectively.

 On February 11, 2019, the Company completed an underwritten public offering of 1,276,500 shares of its Class B Common Stock at a price of $5.55 per share for net proceeds to the Company of approximately $6.5 million. The completed offering included 166,500 shares of Class B Common Stock issued upon the underwriter's exercise in full of its over-allotment option.

 On May 9, 2019, the Company entered into a Securities Purchase Agreement with certain accredited investors (the "Investors") pursuant to which the Company agreed to sell in a private placement (the "Private Placement") an aggregate of 1,900,000 shares of its Class B Common Stock, at a purchase price of $5.00 per share. JMP Securities served as the placement agent for the Private Placement. The Company paid JMP Securities a fee of 7% of the gross proceeds in the Private Placement. The Private Placement closed on May 17, 2019. The net proceeds for the Private Placement were approximately $8.6 million