RUMBLEON, INC. Unless the context requires otherwise, references in this report to "RumbleOn ," the "Company," "we," "us," and "our" refer toRumbleOn and its consolidated subsidiaries. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our most recent Annual Report filed on Form 10-K, as well as our condensed consolidated financial statements and the accompanying notes included in Item 1 of this
Form 10-Q. Overview
We are a technology driven, motor vehicle dealer and e-commerce platform provider disrupting the vehicle supply chain using innovative technology that aggregates, processes and distributes inventory in a faster and more cost-efficient manner.
We operate an infrastructure-light platform that facilitates the ability of all participants in the supply chain, includingRumbleOn , other dealers and consumers to Buy-Sell-Trade-Finance-Transport pre-owned vehicles. Our goal is to transform the way VIN-specific pre-owned vehicles are bought and sold by providing users with the most comprehensive, efficient, timely and transparent transaction experiences. While our initial customer facing emphasis through most of 2018 was on motorcycles and other powersports vehicles, we continue to enhance our platform to accommodate nearly any VIN-specific vehicle including motorcycles, ATVs, boats, RVs, cars and trucks. Since our acquisition ofWholesale, Inc. ("Wholesale") inOctober 2018 , we have significantly increased our sales of cars and light trucks ("automotive"). Of the 7,420 vehicles we sold during the three-months endedMarch 31, 2020 , 4,603 (62.0%) were automotive and 2,817 (38.0%) were powersports vehicles. For the three-months endedMarch 31, 2019 , we sold 12,103 vehicles of which 8,805 (72.8%) were automotive and 3,298 (27.2%) were powersports vehicles.
COVID-19 Update
COVID-19 is having an impact on businesses nationwide, with local governments, businesses, and consumers increasingly limiting commercial activity and capital markets experiencing instability. The worldwide spread of the COVID-19 outbreak has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the outbreak is contained. This is impacting our business and the powersport and automotive industries as a whole. We have positioned our business today to be lean and flexible in this period of lower demand and higher uncertainty with the goal of preparing the Company for a strong recovery as the crisis is contained. To this end, we have temporarily reduced discretionary growth expenditures on new hiring, travel, facilities, and information technology investments. We have significantly reduced our staffing by laying off 169 associates during the first quarter of 2020, we have applied and received PPP loan funds of$5,176,845 , and adjusted purchasing levels to align with demand and market conditions, while closely monitoring key metrics to determine when and how quickly to adjust. We believe our 100% online business model allows us to quickly respond to market demand or changes in the businesses we operate as the COVID-19 pandemic continues. Our most important priority is the well-being of our employees and customers. We have taken several steps to provide a healthy working environment, including implementing work from home policies for employees who are able to work remotely, eliminating all non-essential travel and group meetings and implementing social distancing policies. For many customers, selling or buying a vehicle is an important component of their business or transportation needs. We believe our online model for buying and selling, which allows dealers and consumers to sell or buy a vehicle without ever coming into physical contact with another person, is the safest way to sell or buy a vehicle. Our touchless buying and selling processes allows dealers and consumers to sell or shop for a vehicle from their business or home, complete their transaction on their phone or laptop, and have the vehicle picked up or delivered without coming into physical contact with our personnel. Our financial statements reflect estimates and assumptions made by management that affect the carrying values of the Company's assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenue and expenses during the reporting period. The judgments, assumptions and estimates used by management are based on historical experience, management's experience, and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates, including as a result of the COVID-19 pandemic, which could have a material impact on the carrying values of the Company's assets and liabilities and the results of operations. We will continue to evaluate the nature and extent of the impact to our business and our results of operations and financial condition as conditions evolve as a result of the COVID-19 pandemic. Our operational and financial performance will depend on future developments related to the continuously evolving COVID-19 pandemic. Future developments include the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the development of treatments or vaccines, the resumption of widespread economic activity, and changes in consumer sentiment. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict the impact of the COVID-19 pandemic will have on our future operations. 21 Outlook In addition to the general business pressures resulting from the shelter-in-place orders and broader economic uncertainty, our business was further impacted from a tornado that struckNashville onMarch 3, 2020 . Business in January and February was strong, but the combination of these events reduced our March revenue by 51.7% as compared to February of this year. We experienced what we believe was the bottom of the downturn in mid-April, with the largest unit sales decline and our lowest level of inventory acquisition during the quarter. By the end of April conditions began improving slowly and ramping quicker as the month of May progressed. Total unit sales for the month of April were down 66% from January levels. The velocity of the rebound in May and thus far through June has been higher than expected and with the return of demand, our acquisition of inventory has accelerated. In May, unit sales increased more than 22% from April's lows, and based on initial June month-to-date results we are expecting at least a 26% increase in month-over-month unit sales in June as compared to April. Though we are still below the monthly unit volumes experienced in January and February, our preliminary results for the month of June show our highest gross margin on units sold in our history and significant operating income improvement from prior periods. We don't believe the June levels of gross margin will continue over the long term, and we expect vehicle margins will stabilize as demand levels. Nevertheless, we expect the new normal to be an impressive improvement in gross profit per unit going forward reflecting the progress we are making on our objective of a more disciplined approach to sales volume as we take prescriptive steps to achieve our goal
of accelerating profitability. Nashville Tornado OnMarch 3, 2020 , a severe tornado struck the greaterNashville area causing significant damage to the Company's facilities inNashville . The Company maintains insurance coverage for damage to its facilities and inventory, as well as business interruption insurance. The Company continues in the process of reviewing damages and coverages with its insurance carriers. The loss comprises three components: (1) inventory loss, currently assessed by the insurance carrier at approximately$13,000,000 ; (2) building and personal property loss, currently assessed by the insurance carrier at$3,801,203 ; and (3) loss of business income, for which the Company has coverage in the amount of$6,000,000 . All three components of the Company's loss claim have been submitted to its insurers. The Company's inventory claim is subject to a dispute with the carrier as to the policy limits applicable to the loss. The insurer has agreed to pay$2,778,000 on the building and personal property loss, reflecting limits of$2,783,000 net of a$5,000 deductible and has made an interim payment on the building and personal property loss of$2,269,507 to the landlord. Currently, there is minimally an outstanding balance of$508,493 which will be paid when replacement is finished, which is expected to be sometime during 2021. The loss of business income claim is ongoing and remains in the process of negotiation, however, the insurer has advanced$250,000 against the final settlement. The Company believes there will be a recovery of all three loss components, however no assurance can be given regarding the amounts, if any, that will be ultimately recovered or when any such recoveries will be made.
Acquisition of Autosport
OnFebruary 3, 2019 (the "Autosport Acquisition Date"), the Company completed the acquisition (the "Autosport Acquisition") of all of the equity interests ofAutosport USA, Inc. ("Autosport"), an independent pre-owned vehicle distributor, pursuant to a Stock Purchase Agreement, datedFebruary 1, 2019 (the "Stock Purchase Agreement"), by and amongRMBL Express, LLC (the "Buyer"), a wholly owned subsidiary of Company,Scott Bennie (the "Seller") and Autosport. The results of operations of Autosport are included in the Company's Condensed Consolidated financial statements for the three-months endedMarch 31, 2019 . For additional information, see Note 4 - "Acquisitions" in the accompanying Notes to the Condensed Consolidated Financial Statements.
Reportable Segments
Reportable segments are defined as components of an enterprise about which
discrete financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing operating performance. Our operations are organized by management into
operating segments by line of business. We have determined that we have three
reportable segments as defined in generally accepted accounting principles for
segment reporting: (1) powersports, (2) automotive and (3) vehicle logistics and
transportation. Our powersports and automotive segments consist of the
distribution of pre-owned vehicles. The powersports segment consists of the
distribution of principally motorcycles, while the automotive segment
distributes cars and trucks. Our vehicle logistics and transportation service
segment provides nationwide automotive transportation services primarily between
dealerships and auctions.
For the Three-months Ended March 31, 2020 For the
Three-months Ended
Revenue Revenue% Gross Profit GP% Revenue Revenue% Gross Profit GP%
Segment
Powersports 23,139,080 16.0% 2,580,794 11.2% 26,929,159 12.1% 2,979,603 11.1%
Automotive 114,198,079 79.1% 5,844,574 5.1% 190,907,188 85.5% 9,412,076 4.9%
Transportation 7,087,591 4.9% 1,999,532 28.2% 5,341,412 2.4% 1,599,390 29.9%
Gross profit
before impairment
loss 144,424,750 - 10,424,900 7.2% 223,177,759 - 13,991,069 -
Impairment loss
(1) - - (11,738,413) (8.1)% - - - -
144,424,750 100.0% (1,313,513) (0.9)% 223,177,759 100.0% 13,991,069 6.3%
(1)Impairment Loss resulting from the Nashville Tornado.
Seasonality
Absent the impact of COVID-19,the volume of vehicles sold will generally
fluctuate from quarter-to-quarter. This seasonality is caused by several factors
including weather, the timing of pre-owned vehicles available for sale from
selling consumers, the availability and quality of vehicles, holidays, and the
seasonality of the retail market for pre-owned vehicles. As a result, revenue
and operating expenses related to volume will fluctuate accordingly on a
quarterly basis. The fourth calendar quarter typically experiences lower used
vehicle auction accessibility as well as additional costs associated with the
holidays and winter weather.
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Investment in Growth
As a result of the COVID-19 pandemic we have temporarily reduced discretionary
growth expenditures, however, as the impact of COVID-19 abates over time, and
unit sales return to or exceed levels experienced in January and February of
2020, we will take a measured approach to resuming investment in inventory,
marketing, technology and infrastructure to support the growth of the business.
These anticipated investments are expected to increase our negative cash flow
from operations and operating losses at least in the near term, and our limited
operating history makes predictions of future operating results difficult to
ascertain. Our prospects must be considered in light of the risks, including the
impact of COVID-19, expenses and difficulties frequently encountered by
companies that are early in their development, particularly companies in new and
rapidly evolving markets. Such risks for us include an evolving business model,
advancement of technology and the management of growth. To address these risks,
we must, among other things, continue our development of relevant applications,
stay abreast of changes in the marketplace, as well as implement and
successfully execute our business and marketing strategy. There can be no
assurance that we will be successful in addressing such risks, and the failure
to do so can have a material adverse effect on our business prospects, financial
condition and results of operations.
Liquidity
We have incurred losses and negative cash flow from operations since inception throughMarch 31, 2020 and expect to incur additional losses and negative cash flow in the future. As we continue to expand our business, build our brand name and awareness, and continue technology and software development efforts, we may need access to additional capital, including through debt and equity financing. Historically, we have raised additional capital to fund our expansion through equity issuances or debt instruments; refer to Note 8 - Notes Payable and Lines of Credit, Note 9 - Convertible Notes, and Note 10 - Stockholders Equity. Also, we have historically funded vehicle inventory purchases through our Line of Credit-Floor Plans. Due to the impact of COVID-19 on the economy, we have a strong focus on preserving liquidity. Our primary liquidity sources are available cash and cash equivalents, amounts available under the NextGear Credit Line (as defined below), proceeds from the Paycheck Protection Program loan, monetization of our retail loan portfolio and through rationalizing costs and expenses, including laying off 169 employees. Although we have experienced a decrease in revenue as a result of the impact of the COVID-19 pandemic, as ofJune 26, 2020 , the Company has approximately$9,700,000 of cash of which$5,500,000 is restricted, approximately$19,900,000 of remaining availability under the NextGear Credit Line and$1,200,000 of availability under the$1,500,000 RumbleOn Finance Facility. The Company expects to receive recovery of its insured losses, however no assurance can be given regarding the amounts, if any, that will be ultimately recovered or when such amounts, if any, will be recovered. The worldwide spread of the COVID-19 outbreak has resulted in a global slowdown of economic activity which decreased demand for a broad variety of goods and services, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the outbreak is contained. This is impacting the Company's business and the powersport and automotive industries as a whole. The Company has positioned its business today to be lean and flexible in this period of lower demand and higher uncertainty with the goal of preparing the Company for a strong recovery as the crisis is contained. The Company believes its online business model allows it to quickly respond to market demand or changes in the businesses it operates as the COVID-19 pandemic continues. The Company's condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which assumes the continuity of operations, the realization of assets and the satisfaction of liabilities as they come due in the normal course of business. Although the Company believes that it will be able to generate sufficient liquidity from the measures described above, its current circumstances including uncertainties due to COVID-19 pandemic raise substantial doubt about the Company's ability to operate as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Key Operation Metrics - Powersports and Automotive Segments
We regularly review a number of metrics, to evaluate our vehicle distribution
business, measure our progress, and make strategic decisions. Our key operating
metrics reflect what we believe will be the key drivers of our business,
including increasing brand awareness, maximizing the opportunity to source the
purchase of low cost pre-owned vehicles from consumers and dealers while
enhancing the selection of vehicles we make available to our customers. Our key
operating metrics also demonstrate our ability to translate these drivers into
sales and to monetize these retail sales through a variety of product offerings.
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Three Months Ended March 31,
2020 2019
Powersports:
Vehicles sold 2,817 3,298
Average days to sale 43 37
Total vehicle revenue $23,139,080 $26,929,159
Gross Profit $2,926,263 $3,165,796
Three Months Ended March 31,
2020 2019
Automotive(1):
Vehicles sold 4,603 8,805
Average days to sale 31 26
Total vehicle revenue
$6,348,968 $9,435,365
(1)
Excludes the Impairment Loss resulting from the Nashville Tornado and other insignificant indirect costs.
Vehicles Sold
We define vehicles sold as the number of pre-owned vehicles sold to consumers and dealers in each period, net of returns under our various return policies. We view vehicles sold as a key measure for several reasons. First, vehicles sold is the primary driver of our revenue and, indirectly, gross profit, since vehicle sales enable multiple complementary revenue streams, including financing, vehicle service contracts and trade-ins. Second, vehicles sold increases the base of available customers for referrals and repeat sales. Third, vehicles sold is an indicator of our ability to successfully scale our logistics, fulfillment, and customer service operations.
Our operations are designed to be scalable by working through an infrastructure and capital light model that is achievable by virtue of a synergistic relationship with regional partners. We utilize these regional partners to provide inspection, reconditioning and distribution services. These regional partners earn incremental revenue and enhance profitability through fees from inspection, reconditioning and distribution programs. As regional partners are added throughout theU.S. , the cost and time associated with distribution programs will be significantly reduced as the pickup and delivery of pre-owned vehicles will become more localized thus reducing shipping costs and the average days to sale for pre-owned vehicles.
Average Days to Sale
We define average days to sale as the average number of days between vehicle acquisition by us and delivery to a customer for all pre-owned vehicles sold in a period. However, this metric does not include any pre-owned vehicles that remain unsold at period end. We view average days to sale as a useful metric due to its impact on pre-owned vehicle average selling price.
Revenue
Revenue is primarily comprised of pre-owned vehicle sales. We sell pre-owned
vehicles through consumer and dealer sales channels. These multiple sales
channels provide us the opportunity to maximize profitability through increased
sales volume and lower average days to sale by selling to the channel where the
opportunity is the greatest at any given time based on customer demand, market
conditions or inventory availability. The number of pre-owned vehicles sold to
any given channel may vary from period to period based on customer demand,
market conditions and available inventory. Subject to the impact of COVID-19 on
our results, as discussed elsewhere in this MD&A, we expect pre-owned vehicle
sales to increase as we begin to utilize a combination of brand building as well
as direct response channels to efficiently source and scale our addressable
markets while expanding our suite of product offerings to consumers who may wish
to trade-in or to sell us their vehicle independent of a retail sale. Factors
primarily affecting pre-owned vehicle sales include the number of retail
pre-owned vehicles sold and the average selling price of these vehicles.
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Gross Profit
Gross profit is generated on pre-owned vehicle sales from the difference between
the vehicle selling price and our cost of revenue associated with acquiring the
vehicle and preparing it for sale. The aggregate dollar gross profit achieved
from the consumer and dealer sales channels are different. Pre-owned vehicles
sold to consumers through our website generally have the highest dollar gross
profit since the vehicle is sold directly to the consumer. Pre-owned vehicles
sold to dealers through our website are sold at a price below the retail price
offered to consumers, thus the dealer and RumbleOn are sharing the gross profit.
Pre-owned vehicles sold to dealers through auctions are sold at market. Factors
affecting gross profit 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 profits increasing or decreasing in any given channel.
Key Operations Metrics - Powersports
Three Months Ended March 31,
2020 2019
Key Operation Metrics:
Vehicles sold 2,817 3,298
Total Powersports Revenue
$2,926,263 $3,165,796 Gross Profit per vehicle$1,039 $960 Gross Margin 12.6% 11.8% Average selling price$8,214 $8,165 Consumer: Vehicles sold 280 283 Total Consumer Revenue$2,656,880 $2,147,022 Gross Profit$646,412 $480,583 Gross Profit per vehicle$2,309 $1,698 Gross Margin 24.3% 22.4% Average selling price$9,489 $7,587 Dealer: Vehicles sold 2,537 3,015 Total Dealer Revenue$20,482,200 $24,782,137 Gross Profit$2,279,850 $2,685,213 Gross Profit per vehicle$899 $891 Gross Margin 11.1% 10.8%
Average selling price
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Key Operations Metrics - Automotive(1)
Three Months Ended March 31,
2020 2019(2)
Key Operation Metrics:
Total vehicles sold 4,603 8,805
Total Automotive Revenue
$6,348,968 $9,435,365 Gross Profit per vehicle$1,379 $1,072 Gross Margin 5.6% 4.9% Average selling price$24,687 $21,682 Consumer: Vehicles sold 646 863 Total Consumer Revenue$17,584,737 $21,565,124 Gross Profit$2,108,722 $2,232,856 Gross Profit per vehicle$3,264 $2,587 Gross Margin 12.0% 10.4% Average selling price$27,221 $24,989 Dealer: Vehicles sold 3,957 7,942 Total Dealer Revenue$96,047,530 $169,342,064 Gross Profit$4,240,245 $7,202,509 Gross Profit per vehicle$1,072 $907 Gross Margin 4.4% 4.3% Average selling price$24,273 $21,322 (1)
Excludes the impairment loss resulting from the Nashville Tornado. (2) Inclusive only from the Autosport Acquisition Date.
Key Operation Metrics - Vehicle Logistics and Transportation Services Segment
We regularly review a number of metrics, to evaluate our vehicle logistics and
transportation business, measure our progress, and make strategic decisions. Our
key operating metrics reflect what we believe will be the key drivers of our
business, including increasing brand awareness, and maximizing the opportunity
to drive increased transportation and logistics unit volume. Our key operating
metrics also demonstrate our ability to translate these drivers into revenue and
profitability.
Three Months Ended March 31,
2020 2019
Revenue $8,990,181 $8,176,010
Vehicles Delivered 21,027 20,471
Gross Profit $1,999,532 $1,599,390
Gross Profit Per Vehicle Delivered $95 $78 Revenue
Revenue is derived from freight brokerage agreements with dealers, distributors,
or private party individuals to transport vehicles from a point of origin to a
designated destination. The transaction price is based on the consideration
specified in the customer's contract. The freight brokerage agreements are
fulfilled by independent third-party transporters who are obligated to meet our
performance obligations and standards. Generally, customers are billed either
upon shipment of the vehicle or on a monthly basis, and remit payment according
to approved payment terms. Revenue is recognized as risks and rewards of
transportation of the vehicle is transferred to the owner during delivery.
Wholesale Express is considered the principal in the delivery transactions since
it is primarily responsible for fulfilling the service. As a result, revenue is
recorded gross. In the normal course of operations, Wholesale Express also
provides transportation services to Wholesale.
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Vehicles Delivered
We define vehicles delivered as the number of vehicles delivered from a point of
origin to a designated destination under freight brokerage agreements with
dealers, distributors, or private party individuals. Vehicles delivered is the
primary driver of revenue and in turn profitability in the vehicle logistics and
transportation services segment.
Gross Profit
Gross profit is generated on the difference between the price received from a customer under a freight brokerage agreement for the transport of a vehicle from a point of origin to a designated destination minus our cost to contract an independent third-party transporter to fulfill our obligation under the freight brokerage agreement with the customer. We define gross profit per vehicle delivered as the aggregate gross profit in a given period divided by the number of pre-owned vehicles delivered in that period.
COMPONENTS OF RESULTS OF OPERATIONS
Revenue
Revenue for our powersports and automotive segments is derived from our online marketplace and auctions and primarily includes the sale of pre-owned vehicles to consumer and dealers. Revenue from our vehicle logistics and transportation service segment is derived by providing automotive transportation services between dealerships and auctions throughoutthe United States . The Company recognizes revenue 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.
Pre-owned Vehicle Sales
We sell pre-owned vehicles through consumer and dealer sales channels. These
multiple sales channels provide us the opportunity to maximize profitability
through increased sales volume and lower average days to sale by selling to the
channel where the opportunity is the greatest at any given time based on
customer demand, market conditions or inventory availability. The number of
pre-owned vehicles sold to any given channel may vary from period to period
based on customer demand, market conditions and available inventory.
Pre-owned vehicle sales represent the aggregate sales of pre-owned vehicles to
consumers and dealers through our website or at auctions. We expect pre-owned
vehicle sales to increase as we begin to utilize a combination of brand building
as well as direct response channels to efficiently source and scale our
addressable markets while expanding our suite of product offerings to consumers
who may wish to trade-in or to sell us their vehicle independent of a retail
sale. Factors affecting pre-owned vehicle sales include the number of retail
pre-owned vehicles sold and the average selling price of these vehicles.
The number of pre-owned vehicles we sell depends on our volume of website
traffic, volume of cash offers made, our inventory levels and selection, the
effectiveness of our branding and marketing efforts, the quality of our customer
sales experience, our volume of referrals and repeat customers, the
competitiveness of our pricing, competition and general economic conditions. On
a quarterly basis, the number of pre-owned vehicles we sell is also affected by
seasonality, with demand for pre-owned vehicles reaching the high point in the
first half of each year, commensurate with the timing of tax refunds, and
diminishing through the rest of the year, with the lowest relative level of
pre-owned vehicle sales expected to occur in the fourth calendar quarter.
Seasonality trends have been impacted by the COVID-19 pandemic, which has
resulted in a significant decline in the pre-owned powersports and automotive
industry, including our business and results of operations.
Our average retail selling price depends on the mix of pre-owned vehicles we
acquire and hold in inventory, retail market prices in our markets, our average
days to sale, and our pricing strategy. We may choose to shift our inventory mix
to higher or lower cost pre-owned vehicles, or to opportunistically raise or
lower our prices relative to market to take advantage of supply or demand
imbalances, which could temporarily lead to average selling prices increasing or
decreasing.
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The number of pre-owned vehicles sold to dealers at auctions is determined based on a number of factors including: (i) filling auction sales channel market demand opportunities to maximize sales and gross margin; (ii) a need to balance the Company's overall inventory mix and quantity levels against days to sales targets; and (iii) a need to liquidate those pre-owned vehicles that do not meet the Company's quality standards to be sold through Rumbleon.com. The auction market has also been adversely impacted by the COVID-19 pandemic resulting from practices implemented to combat COVID-19, such as social distancing and shelter-in-place policies as well as the broader economic slowdown.
Vehicle
Vehicle logistics and transportation services revenue is generated primarily by entering into freight brokerage agreements with dealers, distributors, or private party individuals to transport vehicles from a point of origin to a designated destination. The transaction price is based on the consideration specified in the customer's contract. A performance obligation is created when the customer under a transportation contract submits a bill of lading for the transport of goods from origin to destination. These performance obligations are satisfied as the shipments move from origin to destination. The freight brokerage agreements are fulfilled by independent third-party transporters. While the Company is primarily responsible for fulfilling to customers, these transporters are obligated to meet our performance obligations and standards. Performance obligations are short-term, with transit days less than one week. Generally, customers are billed either upon shipment of the vehicle or on a monthly basis, and remit payment according to approved payment terms, generally not to exceed 30 days. Revenue is recognized as all risks and rewards of transportation of the vehicle are transferred to the owner during delivery.
Cost of Revenue - Pre-owned Vehicles Sales
Cost of pre-owned vehicle sales to consumers and dealers primarily consists of the cost to acquire pre-owned vehicles and the reconditioning and transportation costs associated with preparing these vehicles for resale. Vehicle acquisition costs are driven by the mix of vehicles we acquire, the source of those vehicles and supply and demand dynamics in the vehicle market. Reconditioning costs are billed by third-party providers and include parts, labor, and other repair expenses directly attributable to specific pre-owned vehicles. Transportation costs consist of costs incurred to transport the vehicles from the point of acquisition. Cost of pre-owned vehicle sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Cost of Revenue - Vehicle Logistics and Transportation Services
Cost of vehicle transportation and logistics services primarily include the costs of independent third-party transporters to deliver a vehicle from a point of origin to a designated destination.
Selling, General and Administrative Expense
Selling, general and administrative expenses include costs and expenses for compensation and benefits, advertising and marketing, development and operating our product procurement and distribution system, managing our logistics system, establishing our dealer partner arrangements, and other corporate overhead expenses, including expenses associated with technology development, legal, accounting, finance, and business development. Selling, general and administrative expenses also include the transportation cost associated with selling vehicles but excludes the cost of reconditioning, inspecting, and auction fees which are included in Cost of revenue. Subject to the impact of the COVID-19 pandemic and our efforts to preserve liquidity as described elsewhere in this MD&A, we expect selling, general and administrative expenses will continue to increase substantially in future periods as we execute and aggressively expand our business through increased marketing spending and the addition of management and support personnel to ensure we adequately develop and maintain operational, financial and management controls as well as our reporting systems and procedures, but we anticipate selling, general and administrative expenses will decline as a percentage of sales revenue.
Depreciation and Amortization
Depreciation and amortization is comprised of the: (i) amortization of capitalized and acquired technology development; and (ii) depreciation of vehicles, leasehold improvements, furniture and equipment. Depreciation and amortization will continue to increase as continued investments are made in connection with the expansion and growth of the business.
Interest Expense
Interest expense includes interest incurred on notes payable and other long-term
debt, which was used to fund startup costs and expenses, technology development,
inventory, our transportation fleet, property and equipment and the acquisition
of NextGen.
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Seasonality
The volume of vehicles sold will generally fluctuate from quarter-to-quarter.
This seasonality is caused by several factors including weather, the timing of
pre-owned vehicles available for sale from selling consumers, the availability
and quality of vehicles, holidays, and the seasonality of the retail market for
pre-owned vehicles. As a result, revenue and operating expenses related to
volume will fluctuate accordingly on a quarterly basis. The fourth calendar
quarter typically experiences lower used vehicle auction accessibility as well
as additional costs associated with the holidays and winter weather. Seasonality
trends have been impacted by the COVID-19 pandemic, which has resulted in a
significant decline in the pre-owned powersports and automotive industry,
including our business and results of operations.
RESULTS OF OPERATIONS
The following table provides our results of operations for the three-months endedMarch 31, 2020 and 2019, including key financial information relating to our business and operations. This financial information should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, no comparable information is discussed with respect to Autosport for periods before the Autosport Acquisition Date. For the Three Months ended March 31, 2020 Vehicle Logistics and Transportation Powersports Automotive(1) Services Elimination(2) Total Revenue: Pre-owned Vehicle Sales: Powersports$23,139,080 $- $- $-$23,139,080 Automotive - 114,198,079 - - 114,198,079 Transportation and Vehicle Logistics - - 8,990,181 (1,902,590) 7,087,591 Total Revenue 23,139,080 114,198,079 8,990,181 (1,902,590) 144,424,750 Cost of Revenue: Powersports 20,558,286 - - - 20,558,286 Automotive - 108,353,505 - - 108,353,505 Transportation - - 6,990,649 (1,902,590) 5,088,059 Impairment loss - 11,738,413 - - 11,738,413 Total Cost of Revenue 20,558,286 120,091,918 6,990,649 (1,902,590) 145,738,263 Gross Profit$2,580,794 $(5,893,839) $1,999,532 $-$(1,313,513) (1)
Inclusive only from the Autosport Acquisition Date. (2) Intercompany freight services from Wholesale Express are eliminated in the condensed consolidated financial statements.
For the Three Months ended March 31, 2019
Vehicle
Logistics and
Transportation
Powersports Automotive(1) Services Elimination(2) Total
Revenue:
Pre-owned Vehicle Sales:
Powersports $26,929,159 $- $- $- $26,929,159
Automotive - 190,907,188 - - 190,907,188
Transportation and Vehicle Logistics - - 8,176,010 (2,834,598) 5,341,412
Total Revenue 26,929,159 190,907,188 8,176,010 (2,834,598) 223,177,759
Cost of Revenue:
Powersports 23,949,556 - - - 23,949,556
Automotive - 181,495,112 - - 181,495,112
Transportation - - 6,576,620 (2,834,598) 3,742,022
Total Cost of Revenue 23,949,556 181,495,112 6,576,620 (2,834,598) 209,186,690
Gross Profit $2,979,603 $9,412,076 $1,599,390 $- $13,991,069
(1)Inclusive only from the Autosport Acquisition Date. (2) Intercompany freight services from Wholesale Express are eliminated in the condensed consolidated financial statements.
Powersports and Automotive Segments
The following table provides our results of operations for the three-months endedMarch 31, 2020 and 2019 for powersports and automotive segments, including key financial information relating to these segments. Our powersports and automotive segments consists of the distribution of powersports and automotive vehicles, as further described below. This financial information should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, no comparable information is discussed with respect to Autosport for periods before the Autosport Acquisition Date. 29 For the Three Months Ended March 31, 2020 2019 Revenue: Pre-owned Vehicle Sales: Powersports$23,139,080 $26,929,159 Automotive (1) 114,198,079 190,907,188 Total vehicle revenue 137,337,159 217,836,347 Cost of Revenue: Powersports 20,558,286 23,949,556 Automotive(1) 108,353,505 181,495,112
Impairment loss on vehicle inventory 11,738,413 - Total cost of revenue
140,650,204 205,444,668
Gross Profit (3,313,045) 12,391,679
Selling, General and Administrative 16,571,828 19,388,866
Depreciation and Amortization 521,144 380,374 Operating loss (20,406,017) (7,377,561) Interest expense (2,216,460) (1,445,133) Increase in derivative liability (116,815) -
Gain on early extinguishment of debt 188,664 -
Net loss before provision for income taxes (22,550,628) (8,822,694)
Benefit for income taxes - - Net loss$(22,550,628) $(8,822,694) (1)
Inclusive only from the Autosport Acquisition Date.
Three-Months Ended
Total revenue decreased by$80,499,188 to$137,337,159 for the three-months endedMarch 31, 2020 compared to$217,836,347 for the same period of 2019. The decrease in sales was primarily due to a decrease in the total number of pre-owned vehicles sold to 7,420 for the three-months endedMarch 31, 2020 as compared to 12,103 for the same period of 2019, which was partially offset by an increase in the average selling price per unit sold to$8,214 from$8,165 for powersports and$24,687 from$21,682 for automotive. The decrease in vehicles sold and increase in average selling price per unit in our powersports and automotive segments was a result of: (i) continued implementation of our previously disclosed disciplined approach to sales volume as we take prescriptive steps to accelerate profitability; (ii) theadverse impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; (iii) the significant damage to the Company's operating facilities and automotive inventory held for sale inNashville as a result of theMarch 3, 2020 tornado; and (iv) reduced per vehicle advertising expenditures. As the impact of COVID-19 abates over time, we anticipate that unit sales will return to or exceed levels experienced in January and February of 2020 as we increase penetration in existing markets and launch new markets, however we can provide no assurance as to when and how quickly COVID-19 impacts will abate. 30 Total cost of revenue decreased$64,794,464 to$140,650,915 for the three-months endedMarch 31, 2020 compared to$205,444,668 for the same period of 2019. The decrease was primarily due to the decrease in the number of pre-owned vehicles sold for the three-months endedMarch 31, 2020 as compared to the same period of 2019 offset by a$12,808,618 adjustments to reflect the write down of vehicle inventory to the lower of cost or net realizable value atMarch 31, 2020 resulting from the the significant damage to the Company's operating facilities and automotive inventory held for sale inNashville as a result of theMarch 3, 2020 tornado and the negative impact on our sales channels from COVID-19 and related effects of sheltering-in-place and significantly reduced commercial activity. The decrease in total vehicles sold in our powersports and automotive segments was a result of: (i) continued implementation of our more disciplined approach to sales volume; (ii) the adverse impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; and (iii) the significant damage to the Company's operating facilities and automotive inventory held for sale inNashville as a result of theMarch 3, 2020 tornado. Powersports total cost of revenue decreased by$3,391,270 to$20,558,286 for the three-month period endedMarch 31, 2020 compared to$23,949,556 for the same period in 2019. Automotive total cost of revenue decreased by$73,141,607 to$108,353,505 for the three-month period endedMarch 31, 2020 compared to$181,495,112 for the same period in 2019.
Powersports
The following table provides the results of operations for the three-months endedMarch 31, 2020 and 2019 for our powersports business segment, including key financial information relating to the powersports business. This financial information should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. For the Three-Months Ended March 31, 2020 2019 Powersports Vehicle revenue: Consumer$2,656,880 $2,147,022 Dealer 20,482,200 24,782,137 Total vehicle revenue$23,139,080 $26,929,159 Vehicle gross Profit: Consumer$646,412 $480,583 Dealer 2,279,850 2,685,213 Total vehicle gross profit$2,926,262 $3,165,796 Vehicles sold: Consumer 280 283 Dealer 2,537 3,015 Total vehicles sold 2,817 3,298 Gross profit per vehicle: Consumer$2,309 $1,698 Dealer$899 $891 Total$1,039 $960 Gross margin per vehicle: Consumer 24.3% 22.4% Dealer 11.1% 10.8% Total 12.6% 11.8% Average vehicle selling price: Consumer$9,489 $7,587 Dealer$8,073 $8,220 Total$8,214 $8,165 31 Powersports Vehicle Revenue Total powersports vehicle revenue decreased by$3,790,079 to$23,139,080 for the three-months endedMarch 31, 2020 compared to$26,929,159 for the same period of 2019. The decline in powersports revenue was primarily due to the decrease in the number of pre-owned vehicles sold to 2,817 for the three-months endedMarch 31, 2020 compared to 3,298 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to$8,214 for the three-months endedMarch 31, 2020 from$8,165 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit was a result of: (i) our more disciplined approach to sales volume as we take prescriptive steps to accelerate profitability; (ii) the adverse impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; and (iii) reduced per vehicle advertising expenditures. As the impact of COVID-19 abates over time, we anticipate that unit sales will return to or exceed levels experienced in January and February of 2020 as we increase penetration in existing markets and launch new markets, however we can provide no assurance as to when and how quickly COVID-19 impacts will abate.
Powersports Cost of Revenue
Powersport cost of vehicle revenue decreased by$3,391,270 to$20,558,286 for the three-months endedMarch 31, 2020 and consisted of (i) 2,817 pre-owned vehicles at an average acquisition cost of$6,830 ; (ii) reconditioning cost of$215,139 ; (iii) transportation costs of$757,683 ; (iv) other cost of sales of$345,469 not attributed to a specific vehicle sold during the quarter; which included$340,268 of adjustments to reflect the write down of vehicle inventory to the lower of cost or net realizable value atMarch 31, 2020 resulting from the negative impact on our sales channels from COVID-19 and related effects of sheltering-in-place and significantly reduced commercial activity. For the three-month period endedMarch 31, 2019 , the$23,949,556 cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of$22,939,333 from the sale of 3,298 pre-owned vehicles to consumers and dealers that had an average acquisition cost of$6,956 ; (ii) reconditioning costs of$239,678 ; and (iii) transportation costs of$584,352 ; and (iv) other cost of sales of$186,193 not attributable to a specific vehicle sold during the quarter. Powersports Gross Profit
Powersport vehicle gross profit decreased by$398,898 to$2,580,794 for the three-month period endedMarch 31, 2020 compared to$2,979,603 for the same period in 2019. The decrease was primarily due to a decrease in the number of vehicles sold partially offset by an increase in gross profit per unit sold to$1,039 or a gross margin of 12.6% compared to$960 , or a gross margin of 11.8% for the same period in 2019. While we did experience a negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity, the increase in gross profit and the increase in: (i) gross profit per unit; and (ii) gross margin per unit for the three months endedMarch 31, 2020 as compared to the same period of 2019 was a result of: (i) our more disciplined approach to sales volume; and (ii) a shift in inventory mix available for sale resulting in higher average sales prices. 32 Automotive
The following table provides the results of operations for the three-months endedMarch 31, 2020 and 2019 for the automotive segment, including key financial information relating to the automotive business. Our automotive distribution business was added on the Acquisition Date in connection with the acquisitions of Wholesale and Autosport. This financial information should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, no comparable information is discussed with respect to Autosport for periods before the Autosport Acquisition Date. For the Three-Months Ended March 31, 2020 2019(1) Automotive Vehicle revenue: Consumer$18,150,549 $21,565,124 Dealer 96,047,530 169,342,064 Total vehicle revenue 114,198,079 190,907,188 Gross Profit(2): Consumer$2,469,250 $2,232,856 Dealer 3,375,325 7,202,509
Total vehicle gross profit
Vehicles sold: Consumer 646 863 Dealer 3,957 7,942 Total vehicles sold 4,603 8,805 Gross profit per vehicle: Consumer$3,822 $2,587 Dealer$853 $907 Total$1,270 $1,072 Gross margin per vehicle: Consumer 13.6% 10.4% Dealer 3.5% 4.3% Total 5.1% 4.9% Average selling price: Consumer$28,097 $24,989 Dealer$24,273 $21,322 Total$24,809 $21,682 (1)
Inclusive only from the Autosport Acquisition Date. (2) Excluding the Impairment Loss resulting from the Nashville Tornado.
Automotive Revenue
Total automotive revenue decreased by$76,709,109 to$114,198,079 for the three-months endedMarch 31, 2020 compared to$190,907,188 for the same period of 2019. The decline in automotive revenue was primarily due to the decrease in the number of vehicles sold to 4,603 for the three-months endedMarch 31, 2020 compared to 8,805 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to$24,809 for the three-months endedMarch 31, 2020 from$21,682 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit was a result of: (i) our more disciplined approach to sales volume; (ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; (iii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale inNashville as a result of theMarch 3, 2020 tornado; and (iv) reduction in per vehicle advertising expenditures. As the impact of COVID-19 abates over time, we anticipate that unit sales will return to or exceed levels experienced in January and February of 2020 as we increase penetration in existing markets and launch new markets, however we can provide no assurance as to when and how quickly COVID-19 impacts will abate. 33 Total automotive revenue from the sale to consumers decreased by$3,414,575 to$18,150,549 for the three-months endedMarch 31, 2020 compared to$21,565,124 for the same period of 2019. The decline in automotive revenue was primarily due to the decrease in the number of vehicles sold to 646 for the three-months endedMarch 31, 2020 compared to 863 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to$28,097 for the three-months endedMarch 31, 2020 from$24,989 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit was a result of: (i) our more disciplined approach to sales volume; (ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; (iii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale inNashville as a result of theMarch 3, 2020 tornado; (iv) reduction in per vehicle advertising expenditures; and (v) a shift in inventory mix available for sale resulting in higher average sales prices. Total automotive revenue from the sale to dealers decreased by$73,294,534 to$96,047,530 for the three-months endedMarch 31, 2020 compared to$169,342,064 for the same period of 2019. The decline in automotive revenue was primarily due to the decrease in the number of vehicles sold to 3,957 for the three-months endedMarch 31, 2020 compared to 7,942 for the same period of 2019, which was partially offset by an increase in the average selling price per vehicle to$24,273 for the three-months endedMarch 31, 2020 from$21,322 for the same period of 2019. The decrease in vehicles sold and increase in average selling price per unit was a result of: (i) our more disciplined approach to sales volume; (ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; (iii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale inNashville as a result of theMarch 3, 2020 tornado; and (iv) reduction in per vehicle advertising expenditures.
Automotive Cost of Revenue
Total automotive cost of vehicle revenue decreased by$61,379,905 to$120,091,918 for the three-months endedMarch 31, 2020 compared to$181,495,112 for the same period of 2019. The decrease was primarily due to a decrease in vehicles sold, partially offset by an increase in the unit cost per unit of vehicles sold for the three-month period endedMarch 31, 2020 compared to the same period of 2019, and net realizable value adjustments toMarch 31, 2020 inventory of$12,616,955 to reflect: (i) impairment loss on inventory of$11,738,413 comprised of$4,453,775 for vehicles that were a total loss and$7,284,638 for loss in value of vehicles partially damaged and subject to repair; and (ii)$878,542 for the write down of vehicle inventory to the lower of cost or net realizable value atMarch 31, 2020 resulting from the negative impact on our sales channels from COVID-19 and related effects of sheltering-in-place and significantly reduced commercial activity. Total automotive cost of vehicle revenue for the three-months endedMarch 31, 2020 consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of$105,000,816 from the sale of 4,603 pre-owned vehicles at an average acquisition cost of$22,811 ; (ii) reconditioning cost of$627,752 ; (iii) transportation costs of$1,654,731 ; (iv) other cost of sales of$12,808,618 , which included$12,616,955 of net realizable value adjustments to theMarch 31, 2020 inventory to reflect: (i) impairment loss on inventory of$11,738,413 comprised of$4,453,775 for vehicles that were a total loss and$7,284,638 for loss in value of vehicles partially damaged and subject to repair; and (ii)$878,542 adjustments to reflect the write down of vehicle inventory. For the three-month period endedMarch 31, 2019 , the$181,495,112 cost of vehicle revenue consisted of: (i) the acquisition cost of vehicles sold to consumers and dealers of$178,001,101 from the sale of 8,805 pre-owned vehicles to consumers and dealers that had an average acquisition cost of$20,216 ; (ii) reconditioning costs of$966,542 ; (iii) transportation costs of$2,504,180 ; and (iv) other cost of sales of$23,289 . The cost of vehicle revenue from unit sales to consumers decreased by$3,856,253 to$15,476,015 for the three-month period endedMarch 31, 2020 compared to$19,332,268 for the same period of 2019. The decrease was primarily due to an decrease in both the number of and the unit cost of vehicles sold for the three-month period endedMarch 31, 2020 compared to the same period of 2019, and a net realizable value adjustments toMarch 31, 2020 inventory to reflect the: (i) impairment loss on inventory for vehicles that were a total loss and for loss in value of vehicles partially damaged and subject to repair; and (ii) write down of vehicle inventory to the lower of cost or net realizable value atMarch 31, 2020 resulting from the negative impact on our sales channels from COVID-19 and related effects of sheltering-in-place and significantly reduced commercial activity. Total cost of vehicle revenue for units sold to consumers for the three-months endedMarch 31, 2020 consisted of: (i) the acquisition cost of vehicles sold to consumers of$15,034,392 from the sale of 646 pre-owned vehicles at an average acquisition cost of$23,273 ; (ii) reconditioning cost of$174,984 ; (iii) transportation costs of$266,639 ; and (iv) other cost of sales of$0 . For the three-month period endedMarch 31, 2019 the$19,332,268 cost of vehicle revenue sold to consumers consisted of: (i) the acquisition cost of vehicles sold to consumers of$17,968,692 from the sale of 8,805 pre-owned vehicles to consumers that had an average acquisition cost of$21,871 ; (ii) reconditioning costs of$173,602 ; (iii) transportation costs of$283,131 ; and (iv) other cost of sales of$0 . 34 The cost of vehicle revenue from unit sales to dealers decreased by$70,332,270 to$91,807,285 for the three-month period endedMarch 31, 2020 compared to$162,139,555 for the same period of 2019. The decrease was primarily due to an decrease in both the number of and the unit cost of vehicles sold for the three-month period endedMarch 31, 2020 compared to the same period of 2019 and a net realizable value adjustments to theMarch 31, 2020 inventory to reflect the: (i) impairment loss on inventory for vehicles that were a total loss and for loss in value of vehicles partially damaged and subject to repair; and (ii) write down of vehicle inventory to the lower of cost or net realizable value atMarch 31, 2020 resulting from the negative impact on our sales channels from COVID-19 and related effects of sheltering-in-place and significantly reduced commercial activity. Total cost of vehicle revenue sold to dealers for the three-months endedMarch 31, 2020 consisted of: (i) the acquisition cost of vehicles sold to dealers of$89,966,425 from the sale of 4,603 pre-owned vehicles at an average acquisition cost of$22,736 ; (ii) reconditioning cost of$452,768 ; (iii) transportation costs of$1,388,092 ; and (iv) other cost of sales of$1,070,205 , which included$878,542 of adjustments to reflect the write down of vehicle inventory to the lower of net realizable value atMarch 31, 2020 , resulting from the negative impact on our sales channels from COVID-19 and related effects of sheltering-in-place and significantly reduced commercial activity. For the three-month period endedMarch 31, 2019 the$162,139,555 cost of vehicle revenue for units sold to dealers consisted of: (i) the acquisition cost of vehicles sold to consumers of$159,117,768 from the sale of 7,942 pre-owned vehicles to consumers that had an average acquisition cost of$20,035 ; (ii) reconditioning costs of$792,940 ; (iii) transportation costs of$2,228,847 ; and (iv) other cost of sales of$23,289 .
Automotive Gross Profit
Excluding the$11,738,413 impairment loss discussed above, total automotive vehicle gross profit decreased by$3,567,502 to$5,844,574for the three-month period endedMarch 31, 2020 compared to$9,412,076for the same period in 2019. The decrease was primarily due to a decrease in the number of vehicles sold partially offset by an increase in gross profit per unit sold of$308 or a gross margin of 5.6% compared to$1,072 , or a gross margin of 4.9% for the same period in 2019. The decrease in gross profit and the increase in: (i) gross profit per unit; and (ii) gross margin per unit for the three months endedMarch 31, 2020 as compared to the same period of 2019 was a result of: (i) our more disciplined approach to sales volume;(ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; and (iii) a shift in inventory mix available for sale resulting in higher average sales prices. Total automotive vehicle gross profit from sales to consumers increased by$250,015 to$2,482 ,871for the three-month period endedMarch 31, 2020 compared to$2,232,856for the same period in 2019. The increase was primarily due to an increase in gross profit per unit sold of$677 or a gross margin of 12.0% compared to$2,587 , or a gross margin of 10.4% for the same period in 2019. The increase in total gross profit from the sale to consumers was offset by a decline in the number of units sold for the three-months endedMarch 31, 2020 as compared to the same period in 2019. The increase in gross profit, gross margin per unit and decrease in unit sales for the three months endedMarch 31, 2020 as compared to the same period of 2019 was a result of: (i) our more disciplined approach to sales volume; (ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; (iii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale inNashville as a result of theMarch 3, 2020 tornado; and (iv) a shift in inventory mix available for sale resulting in higher average sales prices. Total automotive vehicle gross profit from sales to dealers decreased by$3,817,516 to$3,361 ,704for the three-month period endedMarch 31, 2020 compared to$7,179,220for the same period in 2019. The decrease was in part due to a decrease in the number of vehicles sold partially offset by an increase in gross profit per unit sold of$165 or a gross margin of 4.4% compared to$907 , or a gross margin of 4.3% for the same period in 2019. In addition, other cost of sales included$878,542 of adjustments to reflect the write down of vehicle inventory to the lower of cost or net realizable value atMarch 31, 2020 , resulting from the negative impact on our sales channels from COVID-19 and related effects of sheltering-in-place and significantly reduced commercial activity. The decrease in gross profit and the increase in: (i) gross profit per unit; and (ii) gross margin per unit for the three months endedMarch 31, 2020 as compared to the same period of 2019 was a result of: (i) our more disciplined approach to sales volume; (ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; (iii) a reduction in unit sales resulting from the significant damage to the Company's operating facilities and inventory held for sale inNashville as a result of theMarch 3, 2020 tornado; and (iv) a shift in inventory mix available for sale resulting in higher average sales prices. 35
Vehicle Logistics and Transportation Services Segment
The following table provides our results of operations for the three-months endedMarch 31, 2020 and 2019 for our vehicle logistics and transportation services segment, including key financial information relating to this segment. This financial information should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and Notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. For the Three-Months EndedMarch 31, 2020 2019
Vehicle
Total revenue$8,990,181 $8,176,010 Cost of revenue 6,990,649 6,576,620 Gross profit 1,999,532 1,599,390 Selling, general and administrative 1,340,598 1,051,150 Depreciation and Amortization 1,851 1,851 Operating income 657,083 546,389 Interest Expense 296 - Net Income before income tax$656,787 $546,389 Vehicles delivered 21,027 20,471 Revenue per delivery$428 $399 Gross profit per delivery$95 $78 Gross margin per delivery 22.2% 19.5%
Vehicle Logistics and Transportation Services Revenue
Total revenue increased by$814,171 to$8,990,181 for the three-months endedMarch 31, 2020 compared to$8,176,010 for the same period of 2019. The increase in total revenue for the three-month period endedMarch 31, 2020 resulted from the transport of 21,027 vehicles at an average revenue per vehicle delivered of$428 compared to revenue from the transport of 20,471 vehicles at an average revenue per vehicle delivered of$399 for the same period of 2019. The increase in vehicles transported and increase in average revenue per vehicle delivered was a result of: (i) our more disciplined approach to sales volume as we take prescriptive steps to accelerate profitability; (ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; and (iii) increased emphasis on sales through implementation of sales performance improvement plans. Following COVID-19, we anticipate that unit sales will return to or exceed levels experienced in January and February of 2020 as we increase penetration in existing markets and launch new markets, however we can provide no assurance as to when and how quickly COVID-19 impacts will abate. In the normal course of operations, the Company utilizes transportation services of Wholesale Express. For the three-months endedMarch 31, 2020 and 2019 intercompany freight services provided by Express to the Company were$1,902,590 and$2,834,598 , respectively and was eliminated in the condensed consolidated financial statements.
Vehicle Logistics and Transportation Services Cost of Revenue
Total cost of revenue increased by$414,029 to$6,990,649 for the three-months endedMarch 31, 2020 compared to$6,576,620 for the same period of 2019. The increase in total cost of revenue for the three-month period endedMarch 31, 2020 resulted from the transport of 21,027 vehicles at an average cost per vehicle delivered of$333 compared to the cost to transport 20,008 vehicles at an average cost per vehicle delivered of$321 for the same period of 2019. The increase in vehicles transported and increase in cost per vehicle delivered was a result of: (i) our more disciplined approach to sales volume as we take prescriptive steps to accelerate profitability; (ii) the negative impact inMarch 2020 of COVID-19 resulting from sheltering-in-place and significantly reduced commercial activity; and (iii) additional costs and expenses associated providing expanding logistic and transportation services to new markets. 36 Included in cost of revenue for the three months endedMarch 31, 2020 and 2019 31, 2019 was freight services purchases by the Company from Wholesale Express of$1,902,590 and$2,834,598 , respectively and was eliminated in the condensed consolidated financial statements.
Vehicle Logistics and Transport Services Gross Profit
Total gross profit for the three-months endedMarch 31, 2020 was$1,999,533 or$95 per unit transported as compared to$1,599,390 or$78 per unit for the same period in 2019. All amounts related to transport services provided by Wholesale Express to the Company have been eliminated upon consolidation.
Selling, General and Administrative
For the Three-Months Ended
March 31,
2020 2019
Selling general and administrative:
Compensation and related costs $8,180,100 $7,054,263
Advertising and marketing 2,948,155 5,491,572
Professional fees 842,703 650,444
Technology development 622,144 492,713
General and administrative 5,463,324 6,751,024
$18,056,426 $20,440,016
Selling, general and administrative expenses decreased by $2,383,590 to
$18,056,426 for the three-months ended March 31, 2020 compared to $20,440,016
for the same period of 2019. The decrease was a result of: (i) our continued
approach to taking prescriptive steps to accelerate profitability, which
resulted in the sale of fewer vehicles and a corresponding reduction in related
selling expenses and marketing spend for the three-month ended March 31, 2020 as
compared to the same period of 2019;(ii) a reduction in automotive vehicle sales
resulting from the significant damage to the Company's operating facilities and
inventory held for sale in Nashville as a result of the March 3, 2020
tornado;(iii) the negative impact in March 2020 of COVID-19 resulting from
sheltering-in-place and significantly reduced commercial activity, resulting in
a temporary reduction in discretionary growth expenditures on new hiring,
travel, facilities, and information technology investments. In addition we
reduced our staffing and applied and adjusted purchasing levels to align with
demand and market conditions.
Compensation and related costs increased by $738,887 to $7,793,150 for the
three-months ended March 31, 2020 compared to $7,054,263 for the same period of
2019. The increase is primarily due to additional headcount associated with our
finance group. The company had 258 employees at March 31, 2020 as compared to
241 employees on March 31, 2019 .
In response to the impact of COVID-19 on our business, in early April 2020 we
significantly reduced our staffing by laying off 169 associates in an effort to
position our business to be lean and flexible in this period of lower demand and
higher uncertainty with the goal of preparing the Company for a strong recovery
as the crisis is contained. As the impact of COVID-19 abates over time, and unit
sales return to or exceed levels experienced in January and February of 2020 we
will take a measured approach to increasing our headcount, which will result in
an increase in selling and marketing expenses in absolute dollar terms but a
decrease in these expenses as a percentage of total revenue. However we can
provide no assurance as to when and how quickly COVID-19 impacts will abate.
Advertising and marketing decreased by $2,543,417 to $2,948,155 for the
three-months ended March 31, 2020 compared to $5,491,572 for the same period of
2019. The decrease was a result of: (i) our continued approach to taking
prescriptive steps to accelerate profitability, which resulted in the sale of
fewer vehicles and a corresponding reduction in related selling expenses and
marketing spend for the three-month ended March 31, 2020 as compared to the same
period of 2019; (ii) a reduction in automotive vehicle sales resulting from the
significant damage to the Company's operating facilities and inventory held for
sale in Nashville as a result of the March 3, 2020 tornado; (iii) the negative
impact in March 2020 of COVID-19 resulting from sheltering-in-place and
significantly reduced commercial activity, resulting in a temporary reduction in
discretionary marketing expenditures. As the impact of COVID-19 abates over
time, and unit sales return to or exceed levels experienced in January and
February of 2020 we will take a measured approach to increasing our marketing
spend, which will result in an increase in marketing expenses in absolute dollar
terms but a decrease in marketing expense as a percentage of total revenue.
However we can provide no assurance as to when and how quickly COVID-19 impacts
will abate.
37
As we continue to gain share in our addressable market, we expect advertising
and marketing spending will continue to increase in absolute dollar terms but
will decrease as a percentage of total revenue.
Professional fees increased by $192,259 to $842,703 for the three-months ended
March 31, 2020 compared to $650,444 for the same period of 2019. The increase
was primarily a result of professional fees and costs incurred in connection
with our insurance claims and other matters attributed to the Nashville Tornado,
and legal, accounting and other professional fees and expenses incurred in
connection with the activities associated with the expansion of the business.
Fees and expenses were incurred for: (i) equity financings; (ii) debt
financings; (iii) general corporate matters; (iv) the preparation of quarterly
and annual financial statements; and (v) the preparation and filing of
regulatory reports required of the Company for public reporting purposes For
additional information, see Note 4 - "Acquisitions," Note 8 - "Notes Payable and
Lines of Credit," Note 9 -"Convertible Notes," and Note 11 - "Stockholders'
Equity," in the accompanying Notes to the Condensed Consolidated Financial
Statements.
Technology development expenses increased $129,431 to $622,144 for the
three-months ended March 31, 2020 compared to $492,713 for the same period of
2019. The increase was a result of a significant increase in headcount and
third-party contractors to meet an increase level of technology development
projects and initiatives. Total technology costs and expenses incurred for
three-months ended March 31, 2020 were $911,210 of which $290,376 was
capitalized. Total technology costs and expenses incurred for the three-months
ended March 31, 2019 were $1,372,542 of which $879,829 was capitalized. For the
three-months ended March 31, 2020 , a third-party contractor billed $241,757 of
the total technology development costs as compared to $717,719 for the same
period of 2019. The amortization of capitalized technology development costs for
the three-months ended March 31, 2020 was $437,943 as compared to $291,746 for
the same period of 2019. In response to the impact of COVID-19 on our business
in early April 2020 we temporarily reduced discretionary growth expenditures
which included information technology investments. As the impact of COVID-19
abates over time, and unit sales return to or exceed levels experienced in
January and February of 2020 we will take a measured approach to increasing our
technology development expenses as we continue to upgrade and enhance our
technology infrastructure, invest in our products, expand the functionality of
our platform and provide new product offerings. We also expect technology
development expenses to continue to be affected by variations in the amount of
capitalized internally developed technology. However we can provide no assurance
as to when and how quickly COVID-19 impacts will abate.
General and administrative expenses decreased by $1,287,701 to $5,463,324 for
the three-months ended March 31, 2020 compared to $6,751,024 for the same period
of 2019. The decrease was primarily a result of the sale of fewer vehicle for
the three-months ended March 31, 2020 as compared to the same period of 2019,
which resulted in a reduction of $801,886 in auction and floor plan fees for the
three-months ended March 31, 2020 as compared to the same period of 2019. The
decrease in vehicle sales was primarily a result of our continued approach to
taking prescriptive steps to accelerate profitability, the impact of the ongoing
COVID-19 pandemic, and the significant damage to the Company's operating
facilities and inventory held for sale in Nashville as a result of the March 3,
2020 tornado. In addition, travel and other related business expenses, including
office supplies decreased $761,241 and rent and lease expense increased $275,425
for the three-months ended March 31, 2020 as compared to the same period of
2019. As the impact of COVID-19 abates over time, and unit sales return to or
exceed levels experienced in January and February of 2020 we will take a
measured approach to increasing general and administrative spending, which will
result in an increase in in general and administrative expenses in absolute
dollar terms but decrease as a percentage of total revenue. However we can
provide no assurance as to when and how quickly COVID-19 impacts will abate.
Depreciation and Amortization
Depreciation and amortization increased by$140,770 to$522,995 for the three-months endedMarch 31, 2020 compared to$382,225 for the same period of 2019. The increase in depreciation and amortization is a result of the cumulative investments made in connection with the expansion and growth of the business which for the three-months endedMarch 31, 2020 included capitalized technology acquisition and development costs of$290,376 . For the three-months endedMarch 31, 2020 , amortization of capitalized technology development was$437,943 as compared to$291,746 for the same period of 2019. Depreciation and amortization on vehicle, furniture, equipment and leasehold improvements was$85,052 as compared to$90,479 for the same period of 2019.
Interest Expense
Interest expense increased by$771,624 to$2,216,757 for the three-months endedMarch 31, 2020 compared to$1,445,133 for the same period of 2019. Interest expense consists of interest on the: (i)Hercules Loan ; (ii) Private Placement Notes; (iii) the subordinated secured promissory note issued to NextGen (the "NextGen Note"); (iv) the Credit Facility and the NextGear Credit Line (each as defined below) (together, the "Line of Credit-Floor Plans"); (v) Notes;and (vi) the notes issued in connection with the Autosport Acquisition (the "Convertible Notes-Autosport"). The increase resulted from: (i) interest on a higher level of debt outstanding; (ii) the amortization of the beneficial conversion feature on the Private Placement Notes; (iii) the amortization of the debt issuance costs on Notes and Convertible Notes-Autosport; and (iv) amortization of transaction costs on the Notes. Interest expense on the Private Placement Notes for the three-months endedMarch 31, 2020 was$91,893 and included$75,601 of debt discount amortization as compared to interest expense of$73,328 which included$59,348 of debt discount amortization for the same period of 2019. Interest expense on the NextGen Note for the three-months endedMarch 31, 2020 was$21,927 as compared to$21,370 for the same period of 2019. Interest expense on the Line of Credit-Floor Plans for the three-months endedMarch 31, 2020 was$777,552 as compared to$827,199 for the same period of 2019. For the three months endedMarch 31, 2020 , interest expense on convertible notes was$51,560 and included$19,693 of debt discount amortization as compared to interest expense of$39,745 which included$20,380 of debt discount amortization for the same period of 2019. There was no interest expense on the Hercules loan for the three-months endedMarch 31, 2020 . For the three-months endedMarch 31, 2019 interest expense on the Hercules loan was$483,491 and included$131,997 of debt issuance cost amortization. OnMay 14, 2019 , the Company made a payment to Hercules Capital Inc. ("Hercules") of$11,134,696 , representing the principal, accrued and unpaid interest, fees, costs and expenses outstanding under its Loan and Security Agreement (the "Loan Agreement") with Hercules. In accordance with the guidance in ASC 470-50, Debt, the Company accounted for the extinguishment of the Hercules Loan Agreement as an extinguishment and recognized a loss on early extinguishment of debt of$1,499,250 for the year endedDecember 31, 2019 in the Consolidated Statements of Operations included in the Company's Form 10-K for the year endedDecember 31, 2019 . 38
Loss Contingencies and Insurance Recoveries
OnMarch 3, 2020 , a severe tornado struck the greaterNashville area causing significant damage to the Company's facilities including contents and inventory held for sale. The Company maintains insurance coverage for damage to its facilities and inventory, as well as business interruption insurance. The Company continues in the process of reviewing damages and coverages with its insurance carriers. The loss comprises three components: (1) inventory loss, currently assessed by the insurance carrier at approximately$13,000,000 ; (2) building and personal property loss, primarily impacting our leased facilities, currently assessed by the insurance carrier at$3,369,087 ; and (3) loss of business income, for which the company has coverage in the amount of$6,000,000 . All three components of the Company's loss claim have been submitted to its insurers. The Company's inventory claim is subject to a dispute with the carrier as to the policy limits applicable to the loss. The building insurer has agreed the total building and personal property loss is valued at$3,801,203 . The insurer has agreed to pay$2,778,000 on the building and personal property loss, reflecting limits of$2,783,000 net of a$5,000 deductible. The insurer has made an interim payment on the building and personal property loss of$2,269,507 . Currently, there is minimally an outstanding balance of$508,493 which will be paid when replacement is finished, which is expected to be sometime during of 2020. The loss of business income claim is ongoing and remains in the process of negotiation, however, the insurer has advanced$250,000 against the final settlement. The Company believes there will be a recovery of all three loss components, however no assurance can be given regarding the amounts, if any, that will be ultimately recovered. As a result of the damage caused by the tornado the Company has concluded that the utility of the inventory damaged by the storm is impaired as a result of physical damage sustained. Whether the impairment is caused by physical destruction or an adverse change in the utility of the inventory, entities should assess whether an inventory impairment or write-off is required in accordance with ASC 330-10-35-1 through 35-11, which address adjustments of inventory balances to the lower of cost or market and requires that when there is evidence that the utility of goods will be less than cost, the difference is recognized as a loss of the current period. For the three-months endedMarch 31, 2020 the Company has recorded an impairment loss on inventory of$11,738,413 comprised of$4,453,775 for vehicles that are a total loss and$7,284,638 in loss in value for vehicle partially damaged and subject to repair. The impairment loss is reported in cost of revenue in theMarch 31, 2020 condensed consolidated statements of operations. The Company has not recorded any recoveries that are expected to be received from the insurance carrier since the final amount and timing of the recovery has not been determined. Any such recovery would be reported as a separate component of income from continuing operations in the period in which such recovery is recognizable or when any
such recoveries will be made. Derivative Liability In connection with the issuance of the Old Notes, a derivative liability was recorded at issuance with an interest make-whole provision of$1,330,000 . The derivative liability is remeasured at each reporting date with any change in value being recorded in the Statement of Operations; as ofDecember 31, 2019 , the derivative liability was valued at$27,500 . OnJanuary 14, 2020 , the Company completed the 2020 Note Offering whereby the$30,000 ,000of Old Notes were cancelled and exchanged for$30,000 ,000New Notes. Also, in the 2020 Note Offering, the Company sold an additional$8,875,000 of New Notes yielding the Company net proceeds of$8,272,375 . Pursuant to ASC 470 the Company accounted for the exchange as a note extinguishment where$27,500 remaining liability was written off and the Company recorded a new$20,673 Make Whole Derivative Liability as calculated under the Lattice Model. The Make Whole Derivative is evaluated at the end of each reporting period and adjustment to value are reflected on the Statement of Operations, value of the derivative liability as ofMarch 31, 2020 is$137,488 . The lattice model used using a "with-and-without method," where the value of the convertible senior notes including the embedded derivative, is defined as the "with", and the value of the convertible senior notes excluding the embedded derivative, is defined as the "without"; the inputs used include a range of prices around the Company's stock price on the date of valuation ($0.73 onJanuary 14, 2020 and$0.23 onMarch 31, 2020 ), as well as the Note conversion rate, maturity date,U.S. Treasury risk-free interest rates over the entire 10-year yield curve, and estimated stock price volatility (55% onJanuary 14, 2020 and 95% onMarch 31, 2020 ).
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income as a measure of operating performance or cash flows or as a measure of liquidity. Non-GAAP financial measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior toU.S. GAAP. 39 Adjusted EBITDA is defined as net loss adjusted to add back interest expense including debt extinguishment and depreciation and amortization, and certain charges and expenses, such as non-cash compensation costs, acquisition related costs, derivative income, financing activities, litigation expenses, severance, new business development costs, technology implementation costs and expenses, and facility closure and lease termination costs, as these charges and expenses are not considered a part of our core business operations and are not an indicator of ongoing, future company performance. Adjusted EBITDA is one of the primary metrics used by management to evaluate the financial performance of our business. We present Adjusted EBITDA because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results, because it excludes, among other things, certain results of decisions that are outside the control of management, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure and capital investments. The following tables reconcile Adjusted EBITDA to net loss for the periods presented: Three Months EndedMarch 31, 2020 2019 Net loss$(22,038,342) $(8,276,305)
Add back: Interest expense (including debt extinguishment) 2,028,593 1,445,133 Depreciation and amortization
522,995 382,225
Increase in derivative liability 116,815 -
EBITDA (19,369,939) (6,448,947)
Adjustments
Impairment loss on automotive inventory 11,738,413 - Non-cash-stock-based compensation 846,370 689,121 Litigation expenses 277,995 24,446 Technology implementation costs and expenses - 215,643 Other non-recurring costs - 845,248 Adjusted EBITDA$(6,507,161) $(4,674,489)
Liquidity and Capital Resources
We generate cash from the sale of used retail vehicles, the sale of wholesale vehicles, and providing vehicle logistics and transportation services for used vehicles. We generate additional cash flows through our financing activities including our short-term revolving inventory floor plan facilities, the issuance of long-term notes, and new issuances of equity. Historically, cash generated from financing activities has funded growth and expansion and strategic initiatives and we expect this to continue in the future. Our ability to service our debt and fund working capital, capital expenditures, and business development efforts will depend on our ability to generate cash from operating and financing activities, which is subject to our future operating performance, as well as to general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our future capital requirements will depend on many factors, including our rate of revenue growth, our expansion of our various lines of business and the timing and extent of our spending to support our technology and software development efforts. We had the following liquidity resources available as ofMarch 31, 2020 andDecember 31, 2019 : March 31, 2020 December 31, 2019 Cash and cash equivalents$2,484,169 $49,660 Restricted cash (1) 5,502,322 6,676,622 Total cash, cash equivalents, and restricted cash 7,986,491 6,726,282 Availability under short-term revolving facilities 8,702,952 35,839,030 Committed liquidity resources available$16,689,443 $42,565,652 (1)
Amounts included in restricted cash represent the deposits required under the Company's short-term revolving facilities.
OnJanuary 14, 2020 , the Company closed a public offering at a public price of$11.40 per share (the "2020 Public Offering"). OnJanuary 16, 2020 , the Company received notice of the Underwriters' intent to exercise the over-allotment option in full (the "Over-allotment Exercise"). OnJanuary 17, 2020 , the Company closed the Over-allotment Exercise. The Over-allotment Exercise increased the aggregate number of shares sold in the 2020 Public Offering to 1,035,000. Including the Over-allotment Exercise, proceeds from the 2020 Public Offering, after deducting the 7.0% underwriter's commission and$75,000 for underwriter expenses, were$10,898,070 . 40 Also onJanuary 10, 2020 , the Company entered into a Note Exchange and Subscription Agreement, as amended by the Joinder Agreement, with the investors in the 2019 Note Offering (as defined below), pursuant to which the Company agreed to complete (i) a note exchange pursuant to which$30,000,000 of the Old Notes (as defined below) would be cancelled in exchange for a new series of 6.75% Convertible Senior Notes due 2025 (the "New Notes"), and (ii) the issuance of additional New Notes in a private placement in reliance on the exemption from registration provided by Rule 506 of Regulation D of the Securities Act as a sale not involving any public offering. OnJanuary 14, 2020 , the Company closed the 2020 Note Offering. The proceeds for the 2020 Note Offering, after deducting for the payment of accrued interest and offering-related expenses, but exclusive of company costs were$8,272,375 . As ofMarch 31, 2020 , andDecember 31, 2019 , excluding operating lease liabilities and the derivative liability, the outstanding principal amount of indebtedness was$90,039,174 and$82,585,522 , respectively, summarized in the table below. See Note 8 - Notes Payable and Lines of Credit, Note 9 -Convertible Notes, and Note 11 - Stockholders' Equity to our condensed consolidated financial statements included above. March 31, 2020 December 31, 2019 Asset-Based Financing: Inventory$61,297,048 $59,160,970 Convertible senior notes 39,583,334 31,333,334 Senior unsecured notes 2,641,175 2,568,843 Total debt 103,521,557 93,063,147
Less: unamortized discount and debt issuance costs (13,482,383) (10,477,625) Total debt, net
$90,039,174 $82,585,522
The following table sets forth a summary of our cash flows for the three-months
ended
Three-Months Ended
March 31,
2020 2019
Net cash used in operating activities
$1,260,209 $(4,866,777)
Operating Activities
Net cash used in operating activities increased$12,990,519 to$19,467,259 for the three-months endedMarch 31, 2020 , as compared to the same period in 2019. The increase in net cash used is primarily due to a$13,762,037 increase in our net loss offset by a$12,558,739 increase in non-cash expense items less a decrease in net operating assets and liabilties of$11,787,221 . The increase in the net loss for the three-months endedMarch 31, 2020 was primarily a result of a net realizable value adjustments toMarch 31, 2020 inventory of$12,616,955 to reflect a non-cash impairment loss on damaged and totaled inventory and a write down of vehicle inventory to the lower of cost or net realizable value atMarch 31, 2020 . Investing Activities
Net cash used in investing activities decreased$1,251,467 to$422,742 for the three-months endedMarch 31, 2020 , as compared to the same period in 2019. The decrease in cash used for investment activities was primarily due to a decrease of$835,000 in cash used for acquisitions, and a decrease in costs incurred for technology development of$589,453 and increased property and equipment purchases of$132,366 .
Financing Activities
Net cash provided by financing activities increased$17,866,038 to$21,150,210 for the three-months endedMarch 31, 2020 , as compared to the same period in 2019. This increase is primarily a result of the net proceeds of$8,272,375 received from the exchange of the$30,000,000 of Old Notes for the$30,000,000 of New Notes and the issuance of an additional$8,750,000 of New Notes, and the 2020 Public Offering of 1,035,000 shares of the Company's Class B stock that resulted in net proceeds to the company of$10,780,080 . The proceeds from these transactions were used to continue the development of the Company's business and for working capital purposes. 41
Off-Balance Sheet Arrangements
As ofMarch 31, 2020 , we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors. Subsequent Events Reverse Stock Split
OnMay 18, 2020 , the Company filed a Certificate of Change to the Company's Articles of Incorporation with the Secretary of State of theState of Nevada to effect a one-for-twenty reverse stock split of its issued and outstanding Class A Common Stock and Class B Common Stock (the "Reverse Stock Split"). The Reverse Stock Split was effective at12:01 a.m., Eastern Time , onMay 20, 2020 . No fractional shares were issued as a result of the Reverse Stock Split. Any fractional shares that would have resulted from the Reverse Stock Split were rounded up to the nearest whole share. The authorized preferred stock of the Company was not impacted by the Reverse Stock Split. Following the Reverse Stock Split, the Company has outstanding 50,000 shares of Class A Common Stock and approximately 2,162,696 shares of Class B Common Stock. OnMay 20, 2020 , the Company's Class B Common Stock commenced trading on the Nasdaq Capital Market on a split-adjusted basis. The Company has retrospectively adjusted the 2019 condensed consolidated financial statements for loss per share and share amounts as a result of the Reverse Stock Split.
PPP Loan
OnMay 1, 2020 , the Company, and its wholly owned subsidiariesWholesale, Inc. andWholesale Express, LLC (together, the "Subsidiaries," and with the Company, the "Borrowers"), each entered into loan agreements and related promissory notes (the "SBA Loan Documents") to receiveU.S. Small Business Administration Loans (the "SBA Loans") pursuant to the Paycheck Protection Program (the "PPP") established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), in the aggregate amount of$5,176,845 (the "Loan Proceeds"). The Borrowers received the Loan Proceeds onMay 1, 2020 . Under the SBA Loan Documents, the SBA Loans have a fixed interest rate of 1.0%, repayment begins six months from the date of disbursement of each SBA Loan, and the SBA Loans mature two years from the date of first disbursement. There is no prepayment penalty. Pursuant to the terms of the SBA Loan Documents, the Borrowers may apply for forgiveness of the amount due on the SBA Loans in an amount equal to the sum of the following costs incurred by the Borrowers during the eight-week period (or any other period that may be authorized by theU.S. Small Business Administration ) beginning on the date of first disbursement of the SBA Loans: payroll costs, any payment of interest on a covered mortgage obligation, payment on a covered rent obligation, and any covered utility payment. The amount of SBA Loan forgiveness shall be calculated in accordance with the requirements of the PPP, including the provisions of Section 1106 of the CARES Act, although no more than 40% of the amount forgiven can be attributable to non-payroll costs. No assurance is provided that forgiveness for any portion of the SBA Loans will be obtained. The promissory notes evidencing the SBA Loans contain customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory notes. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrowers, and/or filing suit and obtaining judgment against the Borrowers.
Form 10-Q Extension
OnMay 14, 2020 , the Company filed a Current Report on Form 8-K to announce that the Company's operations and business continued to experience disruption due to the unprecedented conditions surrounding the coronavirus (COVID-19) pandemic spreading throughoutthe United States , and management was unable to timely review and prepare the Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . As a result, the Company indicated its intent to delay the filing of the Quarterly Report in reliance on theSEC March 25, 2020 Order (which extended and superseded a prior order issued onMarch 4, 2020 ), pursuant to the Order, which allows for the delay of certain filings required under the Exchange Act. The Company relied on the Order for the filing of this Form 10-Q.
Critical Accounting Policies and Estimates
Refer to Note 1 - Description of Business and Significant Accounting Policies, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for accounting pronouncements and material changes to our critical accounting policies sinceDecember 31, 2019 . There have been no other material changes to our critical accounting policies and use of estimates from those described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent Annual Report on Form 10-K. 42
Forward-Looking and Cautionary Statements
This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as "anticipate," "believe," "envision," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," "ongoing," "contemplate," and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding: ?
We have a limited operating history and we cannot assure you we will achieve or maintain profitability;
? Our annual and quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline; ?
The initial development and progress of our business to date may not be indicative of our future growth prospects and, if we continue to grow rapidly, we may not be able to manage our growth effectively;
?
There is substantial doubt about our ability to continue as a going concern;
? We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If capital is not available on terms acceptable to us or at all, we may not be able to develop and grow our business as anticipated and our business, operating results and financial condition may be harmed; ?
We may fail to maintain our listing on
?
The success of our business relies heavily on our marketing and branding
efforts, especially with respect to the
?
The failure to develop and maintain our brand could harm our ability to grow unique visitor traffic and to expand our regional partner network;
? We rely on Internet search engines to drive traffic to our website, and if we fail to appear prominently in the search results, our traffic would decline, and our business would be adversely affected; ? A significant disruption in service on our website or of our mobile applications could damage our reputation and result in a loss of consumers, which could harm our business, brand, operating results, and financial condition; ? We may be unable to maintain or grow relationships with information data providers or may experience interruptions in the data feeds they provide, which may limit the information that we are able to provide to our users and regional partners as well as adversely affect the timeliness of such information and may impair our ability to attract or retain consumers and our regional partners and to timely invoice all parties; ? If we are unable to provide a compelling vehicle buying experience to our users, the number of transactions between our users,RumbleOn and dealers will decline, and our revenue and results of operations will suffer harm; ?
If key industry participants, including powersports and recreation vehicle dealers and regional auctions, perceive us in a negative light or our relationships with them suffer harm, our ability to operate and grow our business and our financial performance may be damaged;
? The growth of our business relies significantly on our ability to increase the number of regional partners in our network such that we are able to increase the number of transactions between our users and regional partners. Failure to do so would limit our growth; ?
Our ability to grow our complementary product offerings may be limited, which could negatively impact our development, growth, revenue and financial performance;
43
?We rely on third-party financing providers to finance a portion of our customers' vehicle purchases;
?
Our sales of powersports/recreation vehicles may be adversely impacted by increased supply of and/or declining prices for pre-owned vehicles and excess supply of new vehicles;
?
We rely on a number of third parties to perform certain operating and administrative functions for the Company;
?
We participate in a highly competitive market, and pressure from existing and new companies may adversely affect our business and operating results;
?
Seasonality or weather trends may cause fluctuations in our unique visitors, revenue and operating results;
? We collect, process, store, share, disclose and use personal information and other data, and our actual or perceived failure to protect such information and data could damage our reputation and brand and harm our business and operating results; ?
Failure to adequately protect our intellectual property could harm our business and operating results;
?
We may in the future be subject to intellectual property disputes, which are costly to defend and could harm our business and operating results;
? We operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations. Failure to comply with these laws and regulations could have a material adverse effect on our business, results of operations and financial condition; ? We provide transportation services and rely on external logistics to transport vehicles. Thus, we are subject to business risks and costs associated with the transportation industry. Many of these risks and costs are out of our control, and any of them could have a material adverse effect on our business, financial condition and results of operations; ?
We depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed;
?
We may acquire other companies or technologies, which could divert our management's attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results;
?
The recent outbreak of COVID-19 will likely have a significant negative impact on our business, sales, results of operations, financial condition, and liquidity;
?
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 may be unable to successfully integrate the Wholesale Entities' business and realize the anticipated benefits of the Acquisitions;
?
Our business relationships, those of the Wholesale Entities or the combined company may be subject to disruption due to uncertainty associated with 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;
?
The Wholesale Entities may have liabilities that are not known, probable or estimable at this time;
?
As a result of the Acquisitions, we and the Wholesale Entities may be unable to retain key employees;
?
The trading price for our Class B Common Stock may be volatile and could be subject to wide fluctuations in per share price;
44
?
Our principal stockholders and management own a significant percentage of our
stock and an even greater percentage of the Company's voting power and will be
able to exert significant control over matters subject to stockholder approval;
?
If securities or industry analysts do not publish research or reports about our
business, or if they issue an adverse or misleading opinion regarding our stock,
our stock price and trading volume could decline;
?
Because our Class B Common Stock may be deemed a low-priced "penny" stock, an investment in our Class B Common Stock should be considered high risk and subject to marketability restrictions;
?
We do not currently or for the foreseeable future intend to pay dividends on our common stock;
? We are subject to reduced reporting requirements so long as we are considered a "smaller reporting company" and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors; ? If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock; ?
Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline;
?
Although the Notes are referred to as convertible senior Notes, the Notes are effectively subordinated to any of our future secured debt and structurally subordinated to any liabilities of our subsidiaries;
? The Notes are our obligations only and a substantial portion of our operations are conducted through, and a substantial portion of our consolidated assets are held by, our subsidiaries; ?
Operating our business requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay the Notes and any other debt;
?
Recent and future regulatory actions and other events may adversely affect the trading price and liquidity of the Notes;
?
The trading price for our Class B Common Stock may be volatile and could be subject to wide fluctuations in per share price which could adversely impact the trading price of the Notes;
?
We may incur substantially more debt in the future or take other actions which would intensify the risks discussed in these risk factors;
? We may not have the ability to raise the funds necessary to settle the Notes in cash on a conversion, to repurchase the Notes on a fundamental change, or to repay the Notes at maturity. In addition, the terms of our future debt may contain limitations on our ability to pay cash on conversion or repurchase of the Notes; ?
Redemption may adversely affect the return on the Notes;
?
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results;
?
Conversion of the Notes may dilute the ownership interest of our stockholders or may otherwise depress the market price of our Class B Common Stock;
?
Future sales of our Class B Common Stock or equity-linked securities in the public market could lower the market price for our Class B Common Stock and adversely impact the trading price of the Notes;
45
?Holders of Notes are not entitled to any rights with respect to our Class B Common Stock, but they will be subject to all changes made with respect to them to the extent our conversion obligation includes shares of our ClassB Common Stock; ?
The conditional conversion feature of the Notes could result in holders receiving less than the value of our Class B Common Stock into which the Notes would otherwise be convertible;
? On conversion of the Notes, holders may receive less valuable consideration than expected because the value of our Class B Common Stock may decline after holders exercise their conversion rights but before we settle our conversion obligation; ?
The increase in the conversion rate for Notes converted in connection with a make-whole fundamental change or a notice of redemption may not adequately compensate holders for any lost value of their Notes as a result of such transaction or redemption;
?
The conversion rate of the Notes may not be adjusted for dilutive events;
?
Some significant restructuring transactions may not constitute a fundamental change, in which case we would not be obligated to offer to repurchase the Notes;
?
Certain provisions in the indenture governing the Notes may delay or make it more expensive for a third party to acquire us;
? Holders of Notes are not entitled to receive any shares of our ClassB Common Stock otherwise deliverable upon conversion of the Notes to the extent that such receipt would cause such holders to become, directly or indirectly, a beneficial owner of shares of our Class B Common Stock in excess of 4.99% of the total number of the shares of our Class B Common Stock then issued and outstanding; ?
We cannot assure you that an active trading market will develop for the Notes;
?
Any adverse rating of the Notes may cause their trading price to fall; and
?
Other statements regarding our future operations, financial condition and prospects, and business strategies.
Item 3.
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