Ridenow Group, Inc. quarterly report, Q1 FY2017

Business context and reporting period

This is RumbleON, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017, filed May 15, 2017. The filing identifies the registrant as RumbleON, Inc. (formerly Smart Server, Inc.); it does not identify the company as “Ridenow Group, Inc.”

RumbleON was an early-stage business shifting from discontinued software development to an online marketplace for buying, selling, trading and financing pre-owned recreation vehicles, initially focusing on large motorcycles. It acquired substantially all of NextGen Dealer Solutions’ assets on February 8, 2017, including technology for dealer and marketplace operations. Management expected marketplace transactions to begin in the second quarter of 2017.

Financial performance and position

• Q1 2017 revenue was NextGen-related: $31,692 of dealer subscriptions and $7,197 of implementation and training fees. Cost of sales left $4,201 before other operating costs.
• Operating costs and expenses were $749,981, including $346,257 of professional fees, $230,942 of general and administrative expense, and $78,009 of technology development expense. Interest expense was $211,803; $196,076 related to the remaining discount on a related-party convertible note converted during the quarter.
• At March 31, cash was $4,024,315; current assets were $4,080,621 and current liabilities were $750,684. Total assets were $8,986,184 and total liabilities were $2,344,148.
• Notes payable had a $1,333,334 carrying amount on the balance sheet. The notes described include a $1,333,334 secured NextGen note and $667,000 of private-placement notes, the latter offset by a $667,000 debt discount. The NextGen note bears 6.5% interest initially, rising to 8.5%, and matures in 2020.
• Cash increased by $2,673,735, primarily because of equity and debt financing. Investing outflows included $750,000 cash paid for NextGen, $127,358 of capitalized technology development, and $42,775 of equipment.
• Stockholders’ equity was $6,642,036. The quarter-end share count was 1,000,000 Class A and 8,981,041 Class B shares; Class A shares have ten votes each and Class B shares one vote each.

Material changes versus the prior comparable period

• Revenue began in 2017, while the prior-year quarter reported none. The periods are not directly comparable: NextGen was acquired in February 2017 and its results are included only from acquisition onward.
• Net loss increased from $13,288 to $922,895, amid the business transition, acquisition-related and public-company costs, increased staffing and development spending, and the noncash convertible-note discount charge.
• Assets rose from $1,397,762 at December 31, 2016 to $8,986,184 at March 31, 2017, reflecting the acquisition and financing activity. Cash increased from $1,350,580 to $4,024,315.
• The company reported pro forma results as if NextGen had been acquired at the start of each comparison period: Q1 2017 revenue of $45,415 and net loss of $1,028,084; Q1 2016 revenue of $30,951 and net loss of $459,834.

Outlook, risks, contingencies and unusual items

• Management planned substantial investment in vehicle inventory, marketing, technology and infrastructure, and anticipated higher operating costs and negative cash flow in the near term. It gave no quantified revenue, earnings or cash-flow guidance.
• The filing includes a going-concern warning: management said that without additional funding the company might not be able to continue in business for the next 12 months. Continued operations depend on raising capital and eventually generating significant revenue and positive cash flow.
• The company completed a $2.48 million private placement of Class B shares at $4 per share and funded a second financing tranche involving shares and $667,000 of notes. It said proceeds would support website launch, inventory, platform development and working capital. An additional 37,500 shares were sold in May 2017.
• The NextGen acquisition’s $4.75 million preliminary purchase price included $750,000 cash, $2,666,666 in shares and a $1,333,334 note; the preliminary allocation included $3.24 million of goodwill. The allocation remained subject to revision.
• Related-party matters include the conversion of an officer-controlled entity’s note into 275,312 Class B shares; officers and directors purchased 175,000 shares in the March private placement; and the company paid $184,470 in Q1 to a development-services provider whose CEO also serves as a company director. A dealer used in program testing was financed by an officer and director.
• The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective as of March 31, 2017.

Important facts for investors to verify

• Confirm the issuer identity: the supplied filing is for RumbleON, Inc., not Ridenow Group, Inc.
• Review subsequent filings for whether the planned Q2 marketplace launch occurred, whether transaction volumes and revenue developed, and whether inventory purchases increased cash needs.
• Assess funding runway and financing availability against the explicit going-concern warning and planned growth spending.
• Verify the final NextGen purchase-price allocation, goodwill and technology asset valuations, and the accounting and cash cost of outstanding debt.
• Review related-party arrangements, the voting rights and ownership concentration associated with Class A shares, and the effect of outstanding and future equity awards on dilution.