Description of Business

Overview

RumbleOn, Inc. was incorporated in October 2013 under the laws of the State of Nevada. Unless the context requires otherwise, references in this report to “RumbleOn,” the “Company,” “we,” “us,” and “our” refer to RumbleOn and its consolidated subsidiaries.

We are a technology driven, motor vehicle company 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, including RumbleOn, 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. In August 2020, we launched the next generation of RumbleOn.com, bringing traditional brick and mortar powersports dealers across the country online. Then, in March 2021, we announced a definitive agreement to combine our e-commerce platform with the RideNow powersports group, the nation’s largest powersports retailer, as discussed further below. The combination of RumbleOn and RideNow will become the first omnichannel platform in powersports. This channel is a full-service platform that will revolutionize the customer experience. This omnichannel platform will offer the consumer the fastest, easiest, and most transparent transaction online or in store experience while providing customers the most comprehensive offering that includes: Buy, Sell or Trade without Leaving Your Home; Virtual Inventory Listings Online and In Store; Physical Retail and Service Locations; Proprietary Supply Aggregation; Apparel, Parts, Service and Accessories; Vehicle Transportation and Logistics; Online Cash Offers; and Proprietary Secondary Online Financing.

Basis of Presentation

The accompanying unaudited Condensed Consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The Condensed Consolidated financial statements include the accounts of RumbleOn Inc. and its subsidiaries, which are all wholly owned. In accordance with those rules and regulations, the Company has omitted certain information and notes required by U.S. GAAP for annual consolidated financial statements. In the opinion of management, the Condensed Consolidated financial statements contain all adjustments, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. The year-end condensed balance sheet data was derived from audited financial statements. These Condensed Consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2020. The results of operations for the three and six-month periods ended June 30, 2021 are not necessarily indicative of the results expected for the entire fiscal year. All intercompany accounts and material intercompany transactions have been eliminated.

Liquidity

We have incurred losses and negative cash flow from operations since inception through June 30, 2021. 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. See “Note 7 — Notes Payable and Lines of Credit,” “Note 8 - Convertible Notes,” and “Note 9 — 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 focused on preserving liquidity. Our primary liquidity sources are available cash and cash equivalents, amounts available under lines of credit, monetization of our retail loan portfolio, rationalizing costs and expenses, and proceeds from our April 8, 2021 equity offering of 1,048,998 shares of Class B common stock that generated net proceeds of $36,797,406; refer to Note 9 — Stockholders’ Equity. Management believes that current working capital, results of operations, and existing financing arrangements are sufficient to fund operations for at least the next twelve months.

Use of Estimates

The preparation of these unaudited Condensed Consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Certain accounting estimates involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period, which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience, and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates. In particular, the Covid-19 pandemic and the continuing adverse impacts to global economic conditions, as well as the Company’s operations, may impact future estimates including, but not limited to inventory valuations, fair value measurements, asset impairment charges and discount rate assumptions.

Recent Pronouncements

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and earlier adoption is permitted beginning in the first quarter of fiscal 2019. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates (“ASU 2019-10”). The purpose of this amendment is to create a two-tier rollout of major updates, staggering the effective dates between larger public companies and all other entities. This granted certain classes of companies, including Smaller Reporting Companies (“SRCs”), additional time to implement major FASB standards, including ASU 2016-13. Larger public companies will still have an effective date for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All other entities are permitted to defer adoption of ASU 2016-13, and its related amendments, until the earlier of fiscal periods beginning after December 15, 2022. Under the current SEC definitions, the Company meets the definition of an SRC as of the ASU 2019-10 issuance date and is adopting the deferral period for ASU 2016-13. Finance receivables originated in connection with the Company’s vehicle sales are held for sale and are subsequently sold. On June 30, 2021 and December 31, 2020, finance receivables held for sale were $8,641,945 and $2,117,809, respectively.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 for its fiscal year beginning January 1, 2021 and it did not have a material effect on its consolidated financial statements.

Accounts receivable, net consists of the following as of June 30, 2021 and December 31, 2020:

Inventory consists of the following as of June 30, 2021 and December 31, 2020:

The following table summarizes property and equipment, net of accumulated depreciation and amortization as of June 30, 2021 and December 31, 2020:

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

On June 30, 2021, capitalized technology development costs were $11,705,595 and capitalized software costs were 208,011. Total technology development costs incurred for the three and six months ended June 30, 2021 was $939,354 and $1,698,344, respectively, of which $510,341 and $905,303, respectively was capitalized and $429,013 and $793,041, respectively, was charged to expense in the accompanying Condensed Consolidated Statements of Operations. Depreciation expense for the three and six-month periods ended June 30, 2021, was $631,828 and 1,231,066, respectively, which included the amortization of capitalized technology development costs of $570,875 and 1,117,557, respectively. Total technology development costs incurred for the three and six-months ended June 30, 2020 was $554,551 and $1,465,761, respectively, of which $323,737 and $614,113, respectively was capitalized and $230,814 and $851,648, respectively, was charged to expense in the accompanying Condensed Consolidated Statements of Operations. Depreciation expense for the three and six-month periods ended June 30, 2020 was $508,322 and $1,031,317, respectively, which included the amortization of capitalized technology development costs of $451,634 and $889,576, respectively.

The following is a summary of the changes in the carrying amount of goodwill and other indefinite-lived assets as of December 31, 2020 and the six-month periods ended June 30, 2021. Due to the significant decline in the Company’s stock price and the economic effect of Covid-19, the Company determined a triggering event for Goodwill impairment existed at March 31, 2020. As a result, the Company performed a quantitative impairment analysis for the Automotive segment. The Company’s impairment test indicated no impairment existed as the estimated fair value of the reporting unit exceeded its carrying value at March 31, 2020. Management determined no triggering event occurred during the quarter ended June 30, 2020 or for the six-months ended June 30, 2021.

The $45,515 of indefinite lived intangible asset is included in other assets in the Company’s Condensed Consolidated balance sheets.

The following table summarizes accounts payable and other accrued liabilities as of June 30, 2021 and December 31, 2020:

Notes payable and lines of credit consisted of the following as of June 30, 2021 and December 31, 2020:

Line of Credit-Floor Plan-NextGear

On October 30, 2018, we entered into a floor plan vehicle financing credit lines (collectively the “NextGear Credit Line”) with NextGear. As of June 30, 2021, the NextGear Credit Line provides that NextGear may advance up to $25,000,000 in financing to both Wholesale and AutoSport. Advances, if not demanded earlier, are due and payable for each vehicle financed as and when such vehicle is sold, or otherwise disposed of. The Company maintain $3,000,000 on deposit as restricted cash. Advances under the NextGear Credit Line bear interest at a per annum rate of 6.25% plus 4% on June 30, 2021. Interest expense on the NextGear Credit Line for the three and six-month periods ended June 30, 2021 was $524,880 and $828,801, respectively. Interest expense on the NextGear Credit Line for the three and six-month ended June 30, 2020, was $513,301 and $1,211,159, respectively.

Line of Credit-Floor Plan-Ally

On February 16, 2018, the Company, through its wholly-owned subsidiary RMBL MO, entered into an Inventory Financing and Security Agreement (the “Ally Facility”) with Ally Bank . The Ally Facility terminated in accordance with its terms in February 2020. Interest expense on the Credit Facility for the three and six-months ended June 30, 2020, was $(2,428) and $77,266, respectively.

Line of Credit- RumbleOn Finance Facility

On June 23, 2020, RumbleOn Finance, LLC, a wholly owned subsidiary of the Company (“RumbleOn Finance”), entered into a loan agreement providing for up to $2,500,000 in proceeds (the “ROF Facility”) with CL Rider Finance, L.P. (the “CL Rider”). In connection with the ROF facility, RumbleOn Finance pledged its assets to CL Rider to secure the ROF Facility and executed a promissory note in favor of the CL Rider pursuant to which the ROF Facility will accrue interest at an interest rate not lower than 7% per annum. The ROF Facility is payable on demand by CL Rider. Interest expense on the ROF Facility for the three and six-month periods ended June 30, 2021 was $41,258 and $70,686, respectively. Interest expenses on the ROF Facility for the three and six-months ended June 30, 2020, was $0 and $0, respectively.

Notes Payable

NextGen

On February 8, 2017, in connection with the acquisition of NextGen, the Company issued a subordinated secured promissory note in favor of NextGen (which note was subsequently assigned to Halcyon in February 2018) in the amount of $1,333,334. Interest accrues and will be paid semi-annually (i) at a rate of 6.5% annually from the closing date through the second anniversary of such date; (ii) at a rate of 8.5% annually from the second anniversary of the closing date through February 10, 2020; and (iii) 10.0% thereafter through the Maturity Date. The Company’s obligations under the NextGen Note are secured by substantially all the assets of NextGen Pro, pursuant to an Unconditional Guaranty Agreement (the “Guaranty Agreement”), by and among NextGen and NextGen Pro, and a related Security Agreement between the parties, each dated as of February 8, 2017. As discussed below, the note was exchanged for a new note in January 2020 which extended the maturity date of the note until January 31, 2021. Interest expense on the NextGen Note for the three and six-month periods ended June 30, 2021 was $0 and $7,534, respectively. Interest expenses on the NextGen Note for the three and six-months ended June 30, 2020, was $22,387 and $45,119, respectively.

Private Placement

On March 31, 2017, the Company completed funding of the second tranche of the 2016 Private Placement (as defined below). The investors were issued 58,096 shares of Class B Common Stock of the Company and promissory notes (the “Private Placement Notes”) in the amount of $667,000, in consideration of cancellation of loan agreements having an aggregate principal amount committed by the purchasers of $1,350,000. The Private Placement Notes mature on January 31, 2021. Interest accrues at a rate of 6.5% annually from the closing date through the second anniversary of such date; at a rate of 8.5% annually from the second anniversary of the closing date through June 30, 2020; and at a rate of 10% thereafter through the Maturity Date. Based on the relative fair values attributed to the Class B Common Stock and promissory notes issued in the 2016 Private Placement, the Company recorded a debt discount on the promissory notes of $667,000 with the corresponding amounts recorded as an addition to paid-in capital. The debt discount was fully amortized to interest expense at the scheduled maturity of the Private Placement Notes in January 2021 using the effective interest method. The effective interest rate at June 30, 2021 was 26.0%. Interest expense on the Private Placement Notes was $7,415 and $17,906, respectively for the three and six months ended June 30, 2021. Interest expense for the three and six-months ended June 30, 2020 was $16,684 and $108,576, respectively, which included debt discount amortization of $0 and $75,601, respectively. On January 31, 2021, a payment of $371,000 was made on the Private Placement Note and the remaining balance of $297,411 was extended through June 30, 2021. The Notes were paid in full on July 1, 2021.

Exchange of Notes Payable

Certain of the Company’s investors extended the maturity of currently outstanding promissory notes, and exchanged such notes for new notes (the “New Investor Notes”), pursuant to that certain Note Exchange Agreement, dated January 14, 2020 (the “Investor Note Exchange Agreement”), by and between the Company and each investor thereto (the “Investors”), including Halcyon, an entity affiliated with Kartik Kakarala, a former director of the Company, such New Investor Note for an aggregate principal amount of $833,333 (after taking account of a $500,000 pay down of the previously outstanding Halcyon note), Blue Flame Capital, LLC (“Blue Flame”), an entity affiliated with Denmar Dixon, a director of the Company, such New Investor Note for an aggregate principal amount of $99,114, and Mr. Dixon, individually, such New Investor Note for an aggregate principal amount of $272,563. The Halcyon and Blue Flame outstanding principal plus accrued interest were paid in full on January 31, 2021. The remaining outstanding principal plus accrued interests of the New Investor Notes was paid in full on July 1, 2021.

PPP Loans

On May 1, 2020, the Company, and its wholly owned subsidiaries Wholesale and Wholesale Express (together, the “Subsidiaries,” and with the Company, the “Borrowers”), each entered into loan agreements and related promissory notes (the “SBA Loan Documents”) to receive U.S. Small Business Administration Loans (the “SBA Loans”) pursuant to the Paycheck Protection Program (the “PPP”) established under the CARES Act, in the aggregate amount of $5,176,845 (the “Loan Proceeds”). The Borrowers received the Loan Proceeds on May 1, 2020, and under the SBA Loan Documents, the SBA Loans had an initial maturity date of April 30, 2022 and an annual interest rate of 1.0%. Payment of principal and interest, to be paid monthly, on the PPP Loans can be prepaid by the Company at any time and was originally deferred through October 30, 2020. On October 7, 2020, the Small Business Administration published guidance of its interpretation of the CARES ACT and of the Paycheck Protection Program Interim Final Rules that indicates, pursuant to the PPP Flexibility Act of 2020, the deferral period for borrower payments of principal, interest and fees on all PPP was extended 10 months after the borrower’s loan forgiveness period. Additionally, the SBA lender agreed to extend the maturity pursuant to the Interim Final Rules. As a result, monthly equal payments of principal and interest will begin September 1, 2021, with the last payment due April 1, 2025.

Pursuant to the terms of the SBA Loan Documents, the Borrowers can apply for and receive forgiveness for all, or a portion of the loans granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loans. Interest expense on the PPP Notes for the three and six months ended June 30, 2021, was $13,307 and $26,650, respectively. Interest expense on the PPP Notes for the three and six months ended June 30, 2020, was $7,708 and $7,708, respectively.

In July 2021, we applied to obtain forgiveness of the PPP Loans, however, the Company can provide no assurance that it will be able to obtain forgiveness of the PPP Loans in whole or in part.

Bridge Loan

In connection with the RideNow Transaction (as defined below) (See “Note 19 – Proposed Acquisition”) on March 12, 2021, the Company and its subsidiary, NextGen Pro, LLC (“NextGen Pro”), executed a secured promissory note with BRF Finance Co., LLC (“BRF Finance”), an affiliate of B. Riley Securities, Inc., pursuant to which BRF Finance has loaned the Company $2,500,000 (the “Bridge Loan”). The Bridge Loan matures on the earlier of September 30, 2021 or upon the issuance of debt or equity above a threshold. The Bridge Loan is secured by certain intellectual property assets held by NextGen Pro. Interest will accrue on the Bridge Loan until maturity (by acceleration or otherwise) at a rate of 12.0% annually. Interest expense on the Bridge Loan for the three and six-months ended June 30, 2021 was $77,113 and $93,780, respectively.

As of June 30, 2021, the outstanding convertible promissory notes net of debt discount and issue costs are summarized as follows:

Convertible Senior Notes

On May 9, 2019, the Company entered into a purchase agreement (the “Purchase Agreement”) with JMP Securities LLC (“JMP Securities”) to issue and sell $30,000,000 in aggregate principal amount of its 6.75% Convertible Senior Notes due 2024 (the “Old Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) (the “2019 Note Offering”). On January 10, 2020, the Company entered into a Note Exchange and Subscription Agreement, as amended by a Joinder Agreement (together, the “New Note Agreement”), with the investors in the 2019 Note Offering, pursuant to which the Company agreed to complete (i) a note exchange pursuant to which $30,000,000 of the Old Notes would be cancelled in exchange for a new series of 6.75% Convertible Senior Notes due 2025 (the “New Notes,” and together with the Old Notes, the “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 (the “2020 Note Offering”). On January 14, 2020, the Company closed the 2020 Note Offering. The proceeds for the 2020 Note Offering after deducting for payment of accrued interest on the Old Notes and offering-related expenses were approximately $8,272,375.

The New Notes were issued on January 14, 2020 pursuant to an Indenture (the “New Indenture”), by and between the Company and the Trustee. The New Note Agreement includes customary representations, warranties and covenants by the Company and customary closing conditions. The New Notes bear interest at 6.75% per annum, payable semiannually on January 1 and July 1 of each year, beginning on July 1, 2020. The New Notes may bear additional interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the New Indenture or if the New Notes are not freely tradable as required by the New Indenture. The New Notes mature on January 1, 2025, unless earlier converted, redeemed or repurchased pursuant to their terms.

The initial conversion rate of the New Notes is 25 shares of Class B Common Stock per $1,000 principal amount of New Notes, which is equal to an initial conversion price of $40.00 per share. The conversion rate is subject to adjustment in certain events as set forth in the New Indenture but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the New Indenture), the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its New Notes in connection with such make-whole fundamental change. Before July 1, 2024, the New Notes will be convertible only under circumstances as described in the New Indenture. No adjustment to the conversion rate as a result of conversion or a make-whole fundamental change adjustment will result in a conversion rate greater than 62.0 shares per $1,000 in principal amount.

The New Indenture contains a “blocker provision” which provides that no holder (other than the depository with respect to the notes) or beneficial owner of a New Note shall have the right to receive shares of the Class B Common Stock upon conversion to the extent that, following receipt of such shares, such holder or beneficial owner would be the beneficial owner of more than 4.99% of the outstanding shares of the Class B Common Stock.

The New Notes are not redeemable by the Company before the January 14, 2023. The Company may redeem for cash all or any portion of the New Notes, at its option, on or after January 14, 2023 if the last reported sale price of the Class B Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the New Notes.

The New Notes rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the New Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of current or future subsidiaries of the Company (including trade payables).

The New Notes are subject to events of default typical for this type of instrument. If an event of default, other than an event of default in connection with certain events of bankruptcy, insolvency or reorganization of the Company or any significant subsidiary, occurs and is continuing, the Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding New Notes by notice to the Company and the Trustee, may declare 100.0% of the principal of and accrued and unpaid interest, if any, on all the New Notes then outstanding to be due and payable.

As of June 30, 2021, the conditions allowing holders of the New Notes to convert have not been met and therefore the New Notes are not yet convertible.

The Company accounted for the exchange of the Old Notes and the issuance of the New Notes in accordance with the conversion guidance in ASC 470-20 “Debt – Debt with Conversion and Other Option” (ASC 470-20) and determined that the exchange of the Old Notes for the New Notes required derecognition of the Old Notes given that the difference in the fair value of the embedded the conversion feature of the New Notes relative to the Old Notes was in excess of 10 percent of the Old Notes conversion feature fair value. In derecognizing the Old Notes, the Company recognized a gain of $188,164 equal to difference between the fair value of the Old Notes liability immediately prior to extinguishment and the carry amount of the liability component of the Old Notes, including any unamortized debt issuance costs. The remaining consideration of $2,593,163 was allocated to the reacquisition of the equity component and recognized as a reduction of stockholder’s equity.

The New Notes were accounted for in accordance with FASB ASC 470, Debt and ASC 815, Derivatives and Hedging, which required bifurcation of the liability and equity components. The Company determined the carrying amount of the liability component was $25,280,430 and represents the present value of the New Notes cash flows using an implied discount rate of 18.7%, which is a yield applicable to similar debt instruments that do not have the conversion feature. After allocation of the initial proceeds to the liability components, the remaining amount was allocated to the equity component and recorded as additional paid in capital. The Company recorded $13,529,141 in total debt discount related to the New Notes which included $59,571 of debt issuance costs. The Company allocates transaction costs related to the issuance of the New Notes to the liability and equity components using the same proportions as the initial carrying value of the New Notes. The $59,571 of transaction costs attributable to the debt component are being amortized to interest expense using the effective interest method over the term of the New Notes. Transaction costs attributable to the equity component were $40,669 and are netted with the equity component of the New Notes in stockholders’ equity. The equity component is not remeasured as long as it continues to meet the conditions for equity classification The Company further valued a derivative liability in connection with the interest make-whole provision at $11,454 on the issuance date based on a lattice model. This amount was recorded as a debt discount and is amortized to interest expense over the term of the New Notes using the effective interest rate. The value of the derivative liability increased to $137,488 as of June 30, 2020. The derivative liability is remeasured at each reporting date with an increase in value of $11,454 and $32,106 being recorded in change in derivative liability in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2021, respectively. The value of the derivative liability as of June 30, 2021 was $48,800.

The interest expense recognized with respect to the Convertible Notes for the three and six-month periods ended June 30, 2021 and 2020 was as follows:

Convertible Notes-Autosport USA

On February 3, 2019, in connection with the Autosport Acquisition, the Company issued a: (i) $500,000 Promissory Note and (ii) $1,536,000 Convertible Note in favor of the Seller. In connection with the Autosport Acquisition, the Buyer also assumed additional debt of $257,933 pursuant to a Second Convertible Note. The Second Convertible Note had a term of one year and accrued interest at a simple rate of 5.0% per annum. The note was repaid in full during the three months ended March 31, 2020. Interest expense on the Convertible Note for the three and six-month periods ended June 30, 2020 was $0 and included $7,477, respectively and included debt amortization of $0 and $6,382, respectively.

The $500,000 Promissory Note had a term of fifteen months and accrued interest at a simple rate of 5.0% per annum. Interest under the Promissory Note was payable upon maturity. In June 2020, principal payments of $122,000 were made and the promissory note maturity date was extended to October 1, 2020. Any interest and principal due under the Promissory Note was convertible, at the Buyer’s option into shares of the Company’s Class B Common Stock at a conversion price equal to the weighted average trading price of the Company’s Class B Common Stock on The Nasdaq Stock Market for the twenty (20) consecutive trading days preceding the conversion date. The Buyer elected not to convert any principal or interest and the loan has been repaid in full in 2020. Interest expense for the Promissory Note for the three and six-month periods ended June 30, 2020 was $7,227 and $18,056, respectively, and included debt discount amortization of $1,495 and $6,092, respectively.

The $1,536,000 Convertible Note matures on January 31, 2022 accrues interest at a rate of 6.5% per annum. Interest under the Convertible Note is payable monthly for the first 12 months, and thereafter monthly payments of amortized principal and interest will be due. Any interest and principal due under the Convertible Note is convertible into shares of the Company’s Class B Common Stock at a conversion price of $115.00 per share, (i) at the Seller’s option, or (ii) at the Buyer’s option, on any day that (a) any portion of the principal of the Convertible Note remains unpaid and (b) the weighted average trading price of the Company’s Class B Common Stock on Nasdaq for the twenty (20) consecutive trading days preceding such day has exceeded $140.00 per share. The maximum number of shares issuable pursuant to the Convertible Note is 15,962 shares of the Company’s Class B Common Stock. Interest expense on the Convertible Note for the three and six-month periods ended June 30, 2021 was $57,688 and included $109,171, respectively, and included debt discount amortization of $46,279 and $83,071, respectively. Interest expense on the Convertible Note for the three and six-month periods ended June 30, 2020 was $42,300 and $93,860, respectively, and included debt discount amortization of $13,740 and $33,433, respectively.

Share-Based Compensation

On June 30, 2017, the Company’s shareholders approved a Stock Incentive Plan (as amended, the “Plan”) allowing for the issuance of restricted stock units (“RSUs”), stock options (“Options”), Performance Units, and other equity awards (collectively “Awards”) for our employees, consultants, directors, independent contractors, and certain prospective employees who have committed to become an employee (each an “Eligible Individual”). As of June 30, 2021, the number of shares authorized for issuance under the Plan was 700,000 shares of Class B Common Stock. In contemplation of the RideNow Transaction, on March 9, 2021, the Board of Directors (the “Board”) approved, subject to stockholder approval, an amendment to the Plan to increase the authorized shares to 2,700,000 shares of Class B Common Stock and to extend the term of the Plan for an additional ten years. To date, most RSU and Option awards are service/time based vested and typically vest over a three-year period with (i) 20.0% vesting during the first twelve months after grant date, (ii) 30.0% during the subsequent twelve months of the initial vesting, and (iii) the final 50.0% during the following twelve months. Going forward, service/time based RSUs or options will vest in equal quarterly installments over three years, provided that for the initial grant of RSUs or Options to an Eligible Individual, the first year vesting will vest in full on the first anniversary of the date of grant. Performance-based awards and market condition-based awards granted to date have vesting schedules that are typically dependent on achieving a particular objective within thirty (30) months.

The Company estimates the fair value of awards granted under the Plan on the date of grant. In the case of time or service based RSU awards, the fair value is the price of the Class B Common Stock on the date of the award. Performance Awards use the share prices of the Class B Common Stock but the Company, both at grant and each subsequent quarter, considers whether to apply a discount to the fair value in situations where the Company believes there is risk that the relevant performance metrics may not be met. Options are calculated using the Black-Scholes option valuation model while market-condition based awards are estimated using a Monte Carlo simulation model as these awards are tied to a market condition. Both the Black-Scholes and Monte-Carlo simulations utilize multiple input variables to determine the probability of the Company’s Class B stock price being at certain prices over certain time periods, resulting in an implied value to the holder; the 2020 market-condition based awards assumed expected volatility to be 125% and a risk-free interest rate of 1.0%. We generally expense the grant-date fair value of all awards on a straight-line basis over the vesting period.

As of June 30, 2021, the total unrecognized compensation expense related to outstanding equity awards was approximately $2,357,183, which the Company expects to recognize over a weighted-average period of approximately 10.6 months. Total unrecognized equity-based compensation expense will be adjusted for actual forfeitures.

January 2020 Public Offering

On January 14, 2020, pursuant to an underwritten public offering, the Company issued 900,000 shares of Class B Common Stock at a public price of $11.40 per share (the “2020 Public Offering”). On January 16, 2020, the Company received notice of the Underwriters’ intent to exercise the over-allotment option in full (the “Over-allotment Exercise”). On January 17, 2020, the Company issued an additional 135,000 shares of Class B Common Stock and 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, net proceeds from the 2020 Public Offering, after deducting the 8.0% underwriter’s commission and $75,000 for underwriter expenses, were $10,780,080. Certain of the Company’s officers and directors participated in the 2020 Public Offering.

The Company used the net proceeds of the 2020 Public Offering for working capital and general corporate purposes, which included further technology development, increased spending on marketing and advertising and capital expenditures necessary to grow the business.

Reverse Stock Split

On May 18, 2020, the Company filed a Certificate of Change to the Company’s Articles of Incorporation with the Secretary of State of the State 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 at 12:01 a.m., Eastern Time, on May 20, 2020. No fractional shares were issued as a result of the Reverse Stock Split. There was a 7,131 fractional share adjustment as a result of rounding up to the nearest whole share in connection with the Reverse Stock Split. The authorized preferred stock of the Company was not impacted by the Reverse Stock Split. The Company has retrospectively adjusted the per share and share amounts included in this Quarterly Report on Form 10-Q for the Reverse Stock Split.

April 2021 Public Offering

On April 8, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley Securities, Inc., as representative to the several underwriters named on Schedule A to the Underwriting Agreement (the “Underwriters”), relating to the Company’s public offering (the “Offering”) of 1,048,998 shares of Class B Common Stock (the “Firm Shares”) and an additional 157,349 shares of Class B Common Stock (the “Additional Shares,” and together with Firm Shares, the “Shares”).

The Underwriters agreed to purchase the Firm Shares at a price of $38.00 per share. The Firm Shares were offered, issued, and sold pursuant to a prospectus supplement and accompanying prospectus filed with the SEC pursuant to an effective shelf registration statement filed with the SEC on Form S-3 (File No. 333-234340) under the Securities Act, and an effective registration statement filed with the SEC on Form S-3MEF (File. No. 333-255139) under the Securities Act.

On April 13, 2021, the Company issued the Firm Shares and closed the Offering at a public price of $38.00 per share for net proceeds to the Company of $36,797,406 after deducting the underwriting discount and offering fees and expenses payable by the Company.

The Underwriting Agreement included customary representations, warranties, and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to the agreement and were subject to limitations agreed upon by the contracting parties.

The Company intends to use the net proceeds of the Offering for working capital and general corporate purposes. Pending these uses, the Company may invest the net proceeds in short-term interest-bearing investment grade instruments.

The following table summarizes the detail of selling, general and administrative expense for the three-months ended June 30, 2021 and 2020:

On March 3, 2020, a severe tornado struck the greater Nashville area (the “Nashville Tornado”) 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 loss was comprised of three components: (1) inventory loss, assessed by the insurance carrier at approximately $13,000,000; (2) building and personal property loss, primarily impacting our leased facilities, assessed by the insurance carrier at $2,783,000; 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; however, the insurer advanced $5,615,268 in July 2020 and $3,134,732 in July 2021. Therefore, the total payments received thus far against the final settlement are $8,750,000. 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 interim payments on the building and personal property loss of $2,625,787. 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.

As a result of the damage caused by the Nashville Tornado, the Company concluded that the utility of the inventory damaged by the storm was 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-and six months ended June 30, 2020, the Company recorded an impairment loss on inventory of $11,738,413 comprised of $4,453,775 for vehicles that were a total loss and $7,284,638 in loss in value for vehicles partially damaged and subject to repair. The impairment loss is reported in cost of revenue in the June 30, 2020 Condensed Consolidated statements of operations. Additionally, $177,626 of the net book value of the property and equipment destroyed by the Nashville Tornado was expensed.

The following table includes supplemental cash flow information, including noncash investing and financing activity for the six-months ended June 30, 2021 and 2020:

The following table provides a reconciliation of cash and restricted cash reported within the accompanying Condensed Consolidated balance sheets that sum to the total of the same amounts shown in the accompanying Condensed Consolidated statements of cash flows as of June 30:

CARES Act

In June 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the Covid-19 pandemic. The Company does not expect the provisions of the legislation to have a significant impact on the effective tax rate or income tax payable and deferred income tax positions of the Company. 

No current provision for Federal income taxes was recorded for the three and six-months ended June 30, 2021 and 2020 due to the Company’s operating losses. The Company has provided a full valuation allowance on the net deferred tax assets. In assessing the recovery of the net deferred tax assets, management considers whether it is more likely than not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income, and tax planning strategies in making this assessment.

The Company computes basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for participating securities. Under the two-class method, basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighed-average number of shares of common stock outstanding during the period. The diluted net loss per share attributable to common stockholders is computed giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, 328,101 of RSUs, 2,751 of stock options, 16,530 of warrants to purchase shares of Class B Common Stock and 982,107 shares of Class B Common Stock issuable in connection with convertible debt are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as the effect is antidilutive.

The Company applies the two-class method of calculating earnings per share, but as the rights of the Series B Non-Voting Convertible Preferred Stock and Class A and Class B Common Stock are identical, except in respect of voting, basic and diluted earnings per share are the same for all classes. Weighted average number of shares outstanding of Class A Common Stock, Class B Common Stock, and Series B Preferred for the three and six months ended at June 30, 2021 were 50,000, 3,242,616, and 0, and 50,000, 2,775,665 and 0, respectively.

As of December 31, 2020, the Company had promissory notes of $370,556 and accrued interest of $9,370 due to Blue Flame Capital, LLC (“Blue Flame”), an entity controlled by a Denmar Dixon, a director of the Company. The promissory notes were issued in connection with the completion of the 2016 Private Placement on March 31, 2017 and exchanged in January 2020 for New Investor Notes. The Blue Flame Notes plus accrued interest were paid in full on January 31, 2021. Interest expense on the promissory notes for the three and six months ended June 30, 2021, was $3,158 and $91,844, respectively, which included debt discount amortization of $0 and $42,001, respectively. Interest expense on the promissory notes for the three and six months ended June 30, 2020, was $9,269 and $51,052, respectively, and included debt discount amortization of $0 and $42,001, respectively. The interest was charged to interest expense in the Condensed Consolidated Statements of Operations.

See “Note 7 – Notes Payable and Lines of Credit” for a discussion of the NextGen Note.

Lease Commitments

We determine whether an arrangement is a lease at inception and whether such leases are operating or financing leases. For each lease agreement, the Company determines its lease term as the non-cancellable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. We use these options in determining our right-of-use assets and lease liabilities. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determine the present value of the lease payments.

Operating lease expense is recognized on a straight-line basis over the lease term. Total operating lease expenses for the three and six-months ended June 30, 2021 were $626,944 and $1,179,645, respectively. Total operating lease expenses for the three and six-months ended June 30, 2020 were $336,874 and $863,919, respectively. The current portion of the Company’s operating lease liabilities as of June 30, 2021 is $1,750,126 and is included in accounts payable and accrued liabilities. The long-term portion of the Company’s operating lease liabilities as of June 30, 2021 is $3,519,475 and is included in other liabilities.

The weighted-average remaining lease term and discount rate for the Company’s operating leases are as follows:

Supplemental cash flow information related to operating leases for the three-months ended June 30, 2021 was as follows:

The following table summarizes the future minimum payments for operating leases at June 30, 2021 due in each year ending December 31,

Legal Matters

From time to time, the Company is involved in various claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, as of June 30, 2021 and December 31, 2020, the Company does not believe that the ultimate resolution of any legal actions, either individually or in the aggregate, will have a material adverse effect on its financial position, results of operations, liquidity, and capital resources.

Future litigation may be necessary to defend the Company by determining the scope, enforceability and validity of third-party proprietary rights or to establish its own proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.

The Company is dependent on third-party providers of wholesale vehicle auctions. The Company is dependent on their ability to provide services on a timely basis and at favorable pricing terms. The loss of these principal providers or a significant reduction in service availability could have a material adverse effect on the Company. The Company believes that its relationships with these providers are satisfactory.

Business 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 principally of motorcycles and other powersports vehicles, while the automotive segment distributes cars and trucks. Our vehicle logistics and transportation service segment provides nationwide automotive transportation services between dealerships and auctions. Our vehicle logistics and transportation service reportable segment has been determined to represent one operating segment and reporting unit.

The following table summarizes revenue, operating income (loss), depreciation and amortization and interest expense which are the measure by which management allocates resources to its segments to each of our reportable segments.

RideNow Definitive Agreement

On March 12, 2021, the Company announced a definitive agreement to combine with the RideNow dealership group, the nation’s largest powersports retailer, to create the only omnichannel customer experience in powersports and the largest publicly traded powersports dealership platform (the “RideNow Transaction”). Under the terms of the definitive agreement, the Company will combine with up to 46 entities operating under the RideNow brand for a total consideration of up to $575.4 million, consisting of $400.4 million of cash and approximately 5.8 million shares of our Class B Common Stock. The Company will finance the cash consideration through a combination of up to $280.0 million of debt and the remainder through the issuance of new equity. The Company has entered into a commitment letter with Oaktree Capital Management, L.P. (“Oaktree”) to provide for the debt financing, subject to certain conditions (the “Oaktree Financing”). The number of shares to be issued to RideNow is subject to increase as described in the definitive agreement. The RideNow Transaction is subject to successful completion of the debt and equity financing, manufacturer approval, other federal and state regulatory approvals, and other customary closing conditions as described in the definitive agreement. The Company expects to close the RideNow Transaction during the third quarter of 2021.

Warrant

In connection with the Commitment Letter, in lieu of a commitment fee, the Company has agreed to issue to Oaktree a warrant to purchase a number of shares of Class B Common Stock at an exercise price per share to be determined either at Closing or at termination of the Commitment Letter (the “Warrant”). If issued at Closing, the Warrant will be for that number of shares equal to $40,000,000 divided by the lowest price per share at which equity is issued in connection with financing the RideNow Transaction, whose price shall also be the exercise price. If issued in connection with a termination of the Commitment Letter, the Warrant will be issued to purchase that number of shares equal to five (5%) of the Company’s fully diluted market capitalization at the close of business on the day after a termination of the Commitment Letter is publicly announced divided by the weighted average price of the Company’s Class B Common Stock for the five days immediately preceding such date, which price shall also be the exercise price. The Warrant is immediately exercisable upon the Closing or five days after the termination of the Commitment Letter and expires eighteen (18) months after the Closing or termination of the Commitment Letter.

The Company has accounted for the Warrant agreement as a liability with the initial offset as a deferred financing charge as the Warrant was issued in lieu of a commitment fee connected to the proposed financing of the RideNow Transaction. If the Transaction and related financing is closed, the deferred financing charge will be reclassified as a debt discount to the Credit Facility. The initial warrant liability and deferred financing charge recognized was $10,950,000 The agreement to issue the Warrant is an equity linked contract considered not indexed to its own stock and does not meet the equity classification guidance. The warrant liability is subject to remeasurement at each balance sheet date and any change in fair value is recognized as a component of change in derivative liability in the Condensed Consolidated Statement of Operations. For the three months ended June 30, 2021, the fair value of the warrant liability was increased $2,224,216 to $13,174,216. The Company will continue to adjust the liability for changes in fair value of the Warrant until the earlier of the exercise or expiration of the Warrant or until it meets equity classification. The fair value of the Warrant was estimated using a Monte Carlo simulation based on a combination of level 1 and level 3 inputs. There was no gain or loss recorded related to the Warrant liability during the three-months ended March 31, 2021 as there was no significant change in the fair value between March 12, 2021 to March 31, 2021.  The recognition of the warrant liability and deferred financing charge are non-cash items.

Sale of loan finance portfolio

On July 2, 2021, the Company’s wholly-owned consumer finance subsidiary sold to a third-party its right, title and interest in a portfolio of consumer loans for $6,814,390, which represented 98% of the unpaid balances of all loans so sold.  Pursuant to the sale, all servicing rights were to be transferred to the buyer. 

Amendments to the Oaktree Warrant

On July 15, 2021, the Company and Oaktree amended the Oaktree Warrant to clarify that the share price at which the Company sold shares in the April 2021 Public Offering may be used in determining the initial price per share at which the Warrant may be exercised.

Amendments to the RideNow Agreement

On July 20, 2021 the Company entered into a Second Amendment to RideNow Agreement that extended the outside date for completing the Transaction to September 12, 2021. Such right of termination was previously July 30, 2021.  The Amendment also modified the allocation of equity compensation to Sellers employees post-closing.

Special Meeting of Shareholders

On July 30, 2021, the Company held its Special Meeting of Stockholders (“Special Meeting”) at which the Company’s stockholders approved the following matters: (i) the issuance of shares of RumbleOn Class B Common Stock in connection with the business combination of the Company and RideNow; (ii) the amendment of RumbleOn’s Articles of Incorporation to increase the number of shares of authorized Class B Common Stock from 4,950,000 to 100,000,000 shares; (iii) the amendment of RumbleOn’s 2017 Equity Incentive Plan to increase the number of shares of Class B Common Stock issuable thereunder from 700,000 to 2,700,000 shares and to extend the Incentive Plan for an additional ten years, and (iv) the approval of an adjournment of the Special Meeting, if necessary, to solicit additional proxies in favor of the foregoing proposal. At the Special Meeting, the stockholders voted to approve each of the proposals.

Amendment to Articles of Incorporation

On March 9, 2021, the Board of Directors approved, subject to stockholder approval, an amendment to the Company’s Articles of Incorporation to increase the authorized number of shares of Class B Common Stock to 100,000,000 (the “Authorized Stock Amendment”). At the Special Meeting, the Company’s stockholders approved the Authorized Stock Amendment. On August 3, 2021, the Company filed a Certificate of Amendment with the Nevada Secretary of State to effect the Authorized Stock Amendment. A copy of the Certificate of Amendment is attached as Exhibit 3.1 and incorporated herein by reference.

Receipt of Insurance Proceeds

In connection with the loss sustained by the Company in the Nashville Tornado, as described in Note 11 – Loss Contingencies and Insurance Recoveries, the insurer advanced the Company $3,134,732 in July 2021.