Business context and reporting period
The supplied filing is RumbleOn, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, filed February 27, 2018. It does not identify Ridenow Group, Inc. as the registrant. RumbleOn operated an online marketplace for buying and selling pre-owned vehicles, initially focused on motorcycles and powersports, with dealer software, financing referrals, and related products.
2017 was the company’s initial operating year for its marketplace; it acquired the NextGen technology platform in February and launched its e-commerce platform. Accordingly, comparisons with 2016, when vehicle and subscription revenue were zero, are not like-for-like growth comparisons.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $7.306 million | $0 |
| Cost of revenue | $7.028 million | $0 |
| Gross profit and gross margin | $278,109; 3.8% | Not applicable |
| Selling, general and administrative expense | $7.587 million | $211,493 |
| Operating loss | $(7.977) million | $(213,393) |
| Interest expense | $595,966 | $11,698 |
| Net loss | $(8.573) million | $(224,578) |
| Basic and diluted loss per share | $(0.86) | $(0.04) |
| Operating cash flow | $(9.623) million | $(19,976) |
| Investing cash flow | $(1.879) million | $(45,515) |
| Financing cash flow | $19.323 million | $1.412 million |
- Marketplace metrics: 678 vehicles sold, average selling price of $10,363, average days to sale of 38, 21 regional partners, and 97,877 average monthly unique users. Reported average gross margin per vehicle was $750.
- At year-end, cash was $9.171 million, inventory $2.835 million, and current assets $12.891 million. Current liabilities were $2.295 million, implying working capital of approximately $10.597 million.
- Total liabilities were $3.787 million, including $2.541 million in reported notes payable, net of debt discounts. The debt included a $1.333 million NextGen note, $667,000 of private placement notes, and $1.082 million of floor-plan advances; the senior secured notes were repaid after the October public offering.
- Stockholders’ equity was $14.366 million. The company reported cumulative operating losses of approximately $9.019 million at December 31, 2017.
Material changes and unusual items
- Revenue rose from zero in 2016 as the marketplace launched; 2017 sales comprised $7.020 million of vehicle revenue, $159,230 of other sales and revenue, and $126,602 of subscriptions.
- Operating expenses increased substantially with hiring, marketing, platform development, and public-company costs. Advertising and marketing expense was $1.731 million; compensation and related costs were $3.111 million.
- Financing included approximately $14.5 million of net proceeds from an October public offering and $2.63 million from 2017 private placements. The public offering also enabled repayment of $1.650 million principal on senior secured notes, plus accrued interest.
- The February NextGen acquisition had a stated purchase price of $4.750 million, comprising cash, stock, and a note. A fourth-quarter measurement-period adjustment increased acquired technology by $1.5 million and reduced goodwill by $1.39 million; reported goodwill at year-end was $1.850 million. The company reported no goodwill impairment.
- Interest expense included debt-discount amortization and a $196,076 charge associated with conversion of a related-party note. Reported net loss per share was $(0.86).
- After year-end, the company entered into an Ally inventory-financing facility with capacity up to $25 million, subject to availability and a 10% restricted-cash requirement. Its rate is set by the lender and the filing does not provide a clear value. The company also notified NextGear in February 2018 that it was terminating its $2 million credit line; no balance was outstanding when it did so.
Outlook, risks, and contingencies
Management said year-end liquidity was expected to fund operations for at least the next 12 months, while also anticipating continued operating losses and negative operating cash flow as it invested in inventory, marketing, technology, and infrastructure. The filing provides no quantified revenue, earnings, or margin guidance. Management expected average selling prices to decline as the product mix broadened to lower-priced powersports vehicles, with higher unit volume intended to offset this and gross-margin percentage expected to remain level or improve.
- Key risks include the short operating history and unproven business model, ongoing cash burn and potential need for additional capital, execution and scaling of the marketplace, customer acquisition costs, competition, seasonality and weather, and dependence on dealers, regional partners, third-party data, and financing providers.
- The business is subject to potentially differing state vehicle-dealer, brokering, advertising, and consumer-protection requirements, as well as federal advertising and antitrust rules. Data security, privacy, and website availability are additional risks.
- A related-party dealer accounted for $1.619 million, or 22.1%, of 2017 revenue and $449,119 of year-end accounts receivable. Its reported related cost of sales was $1.452 million. Related-party arrangements also included $914,099 paid to Halcyon for services and a $400,000 convertible note from the CEO to the dealer.
- Class A shares carry ten votes each. Management and directors collectively held approximately 74.5% of voting power as of February 2018, limiting other shareholders’ influence. The filing also noted substantial shares subject to lock-ups that could become eligible for resale in 2018.
- The company reported no material legal proceedings or known threatened or pending litigation at year-end. The independent auditor gave an unqualified opinion on the financial statements. Management assessed internal control over financial reporting as effective; the auditor did not attest to that assessment.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-K is for RumbleOn, Inc., not Ridenow Group, Inc.
- Reconcile the low reported gross margin with vehicle acquisition, reconditioning, transportation, sales-channel mix, and the reported $750 average gross margin per vehicle.
- Assess actual cash burn, inventory turnover, sales growth, and financing needs against management’s 12-month liquidity statement.
- Review the terms, availability, lender-set interest rate, collateral, and restricted-cash requirements of the post-year-end Ally facility.
- Evaluate the concentration and collectability of related-party dealer revenue and receivables, and the terms and governance of related-party payments and financing.
- Quantify potential dilution from outstanding equity awards, warrants, and future capital raises, and consider the high-vote Class A share structure and resale overhang.